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Deciding to incorporate a company is an exciting point in your business’ life. Many businesses hold off on incorporating a company due to cost and compliance requirements. This article will discuss:

Why Should I Choose a Company Structure?

Companies are one of the most popular and commercially understood business structures. Unlike operating as a sole trader, a company is a separate legal entity. This means that the company you set up can:

  • enter into contracts;
  • employ staff; and
  • own assets, including intellectual property.

There are different types of companies, including:

  • public companies: these are companies whose shares are listed on the stock exchange;
  • private companies: these companies do not trade their shares on the stock exchange but can do so privately;
  • companies limited by shares: these companies have shareholders whose legal responsibility for the company’s debts is limited to the amount they paid for the shares; and
  • companies limited by guarantee: these companies typically have members who agree on the amount they are legally responsible for if the company goes bankrupt. 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 that business owners set up is a private company limited by shares. This type of company has shareholders that own the business and is controlled by its shareholders and directors. As a business owner, there are three key reasons this is important to you.

1. Asset Protection

Starting a new business is a risky affair. You do not know whether customers will purchase your product, whether you will have issues with a supplier or when the next GFC will come along. By setting up a company, you can separate your personal assets from your business.

For example, if a client sues your business and you have a company structure, your company will be legally responsible. Your client cannot come after your personal assets. However, if you operate as a sole trader, then you will be personally responsible and personal assets such as your house may be vulnerable to the lawsuit.

2. Tax Considerations

Companies are taxed at a flat rate. Companies generating less than $50 million a year in revenue are taxed at a rate of 27.5%. Those generating more are taxed at a rate of 30%. This is attractive for business owners as the tax rate will not increase as revenue increases.

3. Raising Money and Shareholders

If you wish to own a business with other parties, a company structure allows you to:

  • own portions of the business (through owning shares);
  • 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.

Changing From a Sole Trader to a Company Structure

In an ideal world, 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 of being a company 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 they are refining their business idea.

For a small business, the time may come to shift from a sole trader to a company structure when you:

  • begin to employ staff;
  • engage with larger clients; or
  • want to bring on other owners or investors.

If your business is in its early stages and producing valuable intellectual property, it is a good idea to set up a company before you enter into any contracts. These could be, for example, contracts with developers, suppliers or your 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.

How Do I Incorporate a Company?

You can choose to set up a company yourself through ASIC, or you can ask a lawyer or accountant to help you. The main steps to incorporate a company are as follows.

1. Choose a Company Name

You will need to choose a name not already taken by another company. Typically, this will end in ‘Pty Ltd’ or ‘proprietary limited’.

2. Decide Who Will Be Involved

You will need to think about who the shareholders, director(s) and secretary will be. They must be over the age of 18 and provide their consent.

3. Choose the Structure of Your Company

You will need to consider whether your company will have a constitution or be bound by the replaceable rules. The company constitution is your company’s governing document. The replaceable rules are set by corporations law and will apply to your company if you choose not to have a company constitution. If your company will have more than one shareholder, it is best practice to have a shareholders agreement drafted to govern the relationship between the shareholders.

4. Choose the Location of Your Business

Choose what the state you will incorporate your company in 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 consent should be obtained. You will also need to provide your company’s principal place of business.

5. Incorporate Your Company on ASIC

You can register your company through ASIC by completing Form 201. The fee to register a company is a one-off $488, and a $263 annual fee. Once you have incorporated your company, ASIC will give you 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.

Once you incorporate the company, you will need to register for:

  • an Australian Business Number (ABN) if your company is carrying on a business;
  • a Tax File Number (TFN) if your company is going to be making money;
  • Goods and Services Tax (GST) if your company’s GST turnover (gross income minus GST) is greater than $75,000 each year; and
  • Pay As You Go withholding tax (PAYG) if you intend to employ someone.

Five Practical Tips When Changing Business Structures

  1. set up the company and a new bank account;
  2. amend all your contracts to reflect your new company name. For example, website terms and conditions, employment contracts and supplier contracts;
  3. advise your clients and suppliers that you have new entity details, bank details and that you have updated your contracts;
  4. update your insurance provider; and
  5. transfer your existing business assets to the company. It is important you transfer any assets your business owns to the new company. This includes trade marks and other intellectual property. Sometimes when you transfer assets of value, there are tax consequences. Getting tax advice from your lawyer or accountant is prudent in this situation.

Key Takeaways

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 contracts such as with employees or larger clients. When changing structures, it is important that you transfer all necessary assets into the company’s name and that you consider the tax consequences. If you are ready to incorporate a company, you can do so with ASIC by following the procedures required. If you would like assistance incorporating a company or changing business structures, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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