In Short
- Asset Protection: Incorporating a company creates a separate legal entity, safeguarding personal assets from business liabilities.
- Tax Benefits: Companies may access favourable tax rates and deductions, potentially reducing overall tax obligations.
- Capital Raising: A company structure can attract investors more readily, facilitating business growth and expansion.
Tips for Businesses
Consider incorporating your business when expansion leads to increased contracts and higher-value dealings. This transition can offer enhanced asset protection, tax advantages, and improved capital-raising opportunities, supporting sustainable growth.
For startups, the decision to incorporate a company is a strategic move that can have significant implications for growth, liability, and overall business operations. This article discusses:
- why you should consider setting up a company;
- how to incorporate or set up a company;
- when you should think about incorporating a company; and
- key considerations when changing business structures from a sole trader to a company.
Why Should I Choose a Company Structure?
Companies are one of the most common business structures. Unlike a sole trader (where one individual owns and runs the entire business), a company involves creating an entirely separate legal entity. This means that the company you set up can:
- enter into contracts;
- employ staff; and
- own assets, including intellectual property.
The following table outlines the different types of companies you can create.
| Company Type | Description |
| Public companies | These are usually large companies whose shares are publicly listed on a recognised stock exchange. |
| Private companies | These companies do not trade their shares on a publicly recognised stock exchange but can do so privately. |
| Companies limited by shares | These companies have shareholders whose legal responsibility for the company’s liabilities is limited to the amount they paid for the shares |
| Companies limited by guarantee | These companies typically have members who agree on the amount of the company’s liabilities they are legally responsible for if the company is wound up. This is typically in the form of a membership fee. Not-for-profit and charitable organisations typically use this type of company structure. |
The most common type of company business owners set up is a private company limited by shares. This type of company has shareholders who own the business and is controlled by its shareholders and directors. As a business owner, there are a number of reasons for setting up a company, such as:
- asset protection;
- tax benefits; and
- capital raising abilities.
1. Asset Protection
One of the primary advantages of incorporating a company is to protect your personal assets. Shareholders’ personal assets are generally protected from the company’s debts, limiting their financial risk to the amount invested in the company. However, business structures such as sole traders and partnerships do not provide the equivalent level of protection you would have if you incorporated a company.
Starting a new business is risky, and you cannot guarantee that the business will succeed. You do not know whether customers will purchase your product, whether you will have issues with a supplier or whether the economy will decline. By setting up a company, you can separate your personal assets from your business’ liabilities.
However, if you operate as a sole trader and the business is sued, you could be personally responsible for the business’s liabilities, and your personal assets may be exposed. Trading as a sole trader can have a higher risk. Consider the use of a company structure to increase the protection of your personal assets.
2. Tax Considerations
Another key advantage of incorporation is the taxation benefits. Companies pay different tax rates to individuals, and incorporating a company may help reduce the tax liability the business incurs.
For a sole trader, you are taxed at the individual tax rate, which entails using your own tax file number (TFN) and reporting all the business income in your individual tax return.
As companies are separate legal entities, they will have their own TFN and be responsible for their tax obligations. The incorporation of a company can streamline tax benefits and reduce the liabilities of operating without a company.
3. Raising Money and Shareholders
If you wish to own a business with other parties, a company structure allows you to:
- easily bring on new owners (by issuing new shares); and
- transfer ownership if you need to (by selling the shares).
Further, if your company needs extra cash to get off the ground, investors or business partners may be willing to provide cash in exchange for shares in your company.
For investors, a company’s business structure is more attractive, as they are investing in the business as a whole. The assets, intellectual property, and money-making operations of the business are located in the company. Investors are less likely to invest in sole traders as they do not receive shares in the company and may not receive any distribution of profits through dividends. In the future, when you are looking to sell your business, investors may be interested in purchasing an incorporated company as it is an established, separate legal entity with limited liability.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Changing From a Sole Trader to a Company Structure
Ideally, you would incorporate a company before starting your business. Incorporating a company is the process of registering a company with the Australian Securities & Investments Commission (ASIC). This provides you with the benefits and protections of operating under a company structure from day one and avoids any issues arising from the process of changing your business structure to a company.
In reality, many business owners hold off on incorporation due to the cost and compliance burdens of setting up a company. They may start as sole traders while their business is small and carries low risk or while refining their business idea and later transitioning into a company structure.
If your business is in its early stages and owns or is developing valuable intellectual property, it is a good idea to set up a company before you enter into any contracts. These could be contracts with developers, suppliers, or clients. This is important from a risk management perspective as it prevents you from being personally responsible for those contracts. Instead, your business is legally responsible for fulfilling its obligations under them.
Continue reading this article below the formHow Do I Incorporate a Company?
You can choose to set up a company yourself through ASIC or ask a lawyer or accountant for help. The main steps to incorporate a company are as follows.
1. Choose a Company Name
You will need to choose a name that has not already been taken by another company. Typically, this will end in ‘Pty Ltd’ or ‘proprietary limited’. To assess whether a company name has already been taken by another business, it is best practice to search for your desired company name on ASIC Connect and ABN Lookup. This will provide you with an adequate starting point for deciding whether the company name is available for you to use.
2. Decide Who Will Be Involved
You will need to consider who the shareholders, director(s) and secretary will be. They must be over the age of 18 and provide their consent. At least one director must ordinarily live in Australia.
After incorporation, you may decide to change the details of your internal company structure. You can update this by notifying ASIC, as covered below.
3. Choose the Structure of Your Company
You must consider whether your company will have a constitution or follow the “default” replaceable rules under the Corporations Act. The company constitution is your company’s governing document for your company’s internal management. The replaceable rules under the Corporations Act will automatically apply to your company if you choose not to implement a company constitution.
It is advisable for you to adopt a company constitution as it is a governing document created to be tailored to your company’s specific needs. The replaceable rules are general rules that may give rise to powers that you do not necessarily want to be included in your company’s governance. You can easily modify the company constitution if there are changes you wish to implement.
If your company will have more than one shareholder, it is best practice to implement a shareholders agreement to govern the relationship between the shareholders and your company. If there are inconsistencies between your company’s constitution and shareholders agreement, you may add a clause that states that the shareholders agreement will prevail.
4. Choose the Location of Your Business
Choose the state where you will incorporate your company and your registered business address. Your company must have a registered business address. This could be where you will ordinarily run your business or another address. If it is at another address, such as your accountant’s, then you will need to obtain consent. You will also need to provide your company’s principal place of business (this is the location from which your business primarily operates).
5. Incorporate Your Company on ASIC
You can register your company through ASIC by completing and lodging a Form 201. A once-off registration fee and an annual fee will apply.
Once you have incorporated your company, ASIC will issue you with an ACN (Australian Company Number) and a certificate of registration. It is your responsibility to make sure your company details are up to date with ASIC and that you maintain company records.
For example, the common types of information you must keep updated with ASIC to avoid late fees include changes to your company details (ASIC Form 484) or a change of your company name (ASIC Form 205A). For example, the following changes will require ASIC to be updated:
- change of address, whether it is a shareholder address, director address or company address;
- appoint or cease company officeholder;
- change of name of officeholders or members;
- change to members’ register;
- change to share structure;
- change of details of the ultimate holding company; or
- change to special purpose company status.
Practical Tips When Changing Business Structures
- set up a new bank account in the name of the Company with your desired financial institution;
- transfer all your contracts under the name of your new company. It is important to consider whether these contracts require you to obtain the consent of the other party before transferring them;
- advise your clients and suppliers that you have new entity details and bank details and that you have updated your contracts;
- update your insurance provider; and
- transfer your existing business assets to the company. It is important that you transfer any assets your business owns to the new company, including trademarks and other intellectual property. Sometimes when you transfer assets of value, there are tax consequences. Getting tax advice from your lawyer or accountant is recommended in this situation.
Key Takeaways
Incorporating a company is a significant step that can contribute to your business’s long-term success and sustainability. Understanding the why, when, and how of incorporation empowers business owners to make informed decisions aligned with their strategic objectives. Choosing to set up a company has many benefits. Signs that it is time to incorporate a company include when your business is expanding or if you are entering into more or higher value contracts with employees, suppliers and customers. When changing business structures, it is important that you transfer all necessary assets into the company’s name and that you consider whether there are tax consequences in doing so.
For assistance incorporating a company or changing business structures, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Unlike a sole trader (where one individual owns and runs the entire business), a company involves creating an entirely separate legal entity.
You will need to consider who the shareholders, director(s) and secretary will be. They must be over the age of 18 and provide their consent. At least one director must ordinarily live in Australia.
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