When launching a new business, we cannot overstate the importance of understanding the different structures available to you. Doing so enables you to choose a business structure that best manages your risks, protects your assets, limits your liability, manages your tax obligations and gives you a strong platform for future growth.
In this series of articles on business structures, we are looking at the various structures through which you can run a business – sole trader, partnership, company and trust. We are also exploring the advantages and disadvantages of each. Already, we have looked at running a business as a sole trader and partnership as well as the advantages of running your business through a company. We will now move on to consider the disadvantages of running your business through this structure.
What is a Company?
As we have discussed, a company is the most common business structure for start-ups and SMEs. It is a legal entity in itself that is separate from its shareholders and directors. Shareholders, each with limited liability, own the company and directors run it.
What are the Disadvantages?
There are, however, shortcomings to running your business through a company structure. These are summarised below.
Companies can be expensive to establish, maintain and wind up.
2. Legal Obligations
The Australian Securities and Investment Commission (ASIC) which administers the Corporations Act 2001 and other legislation, governs how companies operate. Companies must comply with this legislation.
3. Director’s Duties
Under the Act, directors have the following duties to:
- Act in good faith;
- Exercise powers and duties with care and diligence;
- Not improperly use his or her position to gain an advantage;
- Not to trade while insolvent; and
- Keep books and records.
If directors breach their duties, they may be held personally liable for the company’s debts.
4. Tax Reporting
Companies have greater tax reporting requirements than sole traders and partnerships and they can be more complex.
5. Lack of Confidentiality
A company’s financial affairs are public.
There are several disadvantages relating to tax such as:
- Corporation tax rates will apply and personal tax-free thresholds are not available to companies;
- Companies are not eligible for the 50% discount on capitals gains made on the disposal of assets held by the company;
- Shareholders pay tax on their dividends at their marginal rate; and
- There is no scope for tax planning.
7. Asset Protection
If the company holds all of the business’ valuable assets and intellectual property, and somebody sues the company, they are at risk. For this reason, businesses commonly adopt a two-tier company structure.
- A holding company owns all of the business’ valuable assets and intellectual property, along with 100% of the shares in an operating company; and
- An operating company that is the trading entity and subject to litigation and liability.
As discussed in our earlier article, there are a number of advantages to running your business through a company, namely shareholders having limited personal liability and personal asset protection. However, there are disadvantages to running your business through a company, particularly the associated costs and formalities and the lack of protection for your business’ assets.
LegalVision’s business structuring specialists would be delighted to assist you with setting up or changing your business structure and walk you through which structure best suits your business needs. Questions? Please get in touch on 1300 544 755.