But what would your business look like? What are the pros and cons? And how do you know you are ready? You might be thinking, well, it’s only me and my partner or friend, but the time has come to employ someone. Or maybe someone realises the business you started is growing fast and they want to invest. Do you give them shares? How does all this even work? If you are already feeling overwhelmed, don’t be, because the process is as simple as trading in the bike for a car! This as an opportunity for your business continue growing, so consider two things:
- How much money are you making?
To justify the expenses of setting up a company or incorporating, you need to be making (gross business revenue, not profit) more than $75,000, which means you get the entity registered for GST and an ABN. - If something goes wrong in your current structure, are your assets protected?
Put simply, conducting a business through a company can shield you and your personal assets from the debts of the company, as your personal liability. The larger the business grows, the larger the risk to personal assets, and the more they need to be protected.
What Does it Mean Legally?
From a legal point of view, the company is not you. You can be a shareholder and director, but the company is not you. It acts in its own name, and — just like you — can earn income, pay expenses and be sued.
What About Tax?
A company pays tax at the corporate rate, which is currently 30%. However, there has been speculations that this could drop. Sole traders pay tax depending on their personal marginal rate. This is because income earned through a business operated by a sole trader is assessable income in the hands of the sole trader.
What are the Fees?
There are a number of costs associated with incorporating a company, including an ASIC registration fee of $444 and an ASIC annual review fee of $231 per year. You would then have accounting and advice costs on top of that.
How Do I Incorporate?
- Registration: You may have registered your business name and trading name, however, this is not a legal entity. You need to register that and the company name with the ASIC. If you want your company to trade under a different name, you’re also required to register the trading name as a business name. Of course, that means making sure the company has an ACN, an ABN and a TFN – all of this can be done at asic.gov.au and ato.gov.au.
- Structure: Setting up a company can be done online or with an accountant. You’d usually have “Pty Ltd”, or “Proprietary Limited” at the end of the name. This means the company cannot have more than 50 shareholders and is restricted in the number of overall shares: hence the name. It does mean you issue stock — the unit of ownership in the company. The easiest way is to declare you have 1000 shares of stock for $1 and divide it between the founders or parties investing. The shareholders’ names and units are put on the application, the funds go into the bank account and off we go!
- Directors: Next, you have to establish the directors, who by name are responsible for the corporate actions of the company and are generally the key decision makers in running the business. Asset protection for the directors is where incorporating has an advantage over operating as a sole trader. As directors are part of a Ltd (Limited Company), that means the assets at risk are limited to company assets. This differs significantly from a sole trader, which is not limited. If a sole trader cannot repay or satisfy a debt, then creditors can sue the sole trader to recover it. If successful, the creditors potentially have access to the sole trader’s assets, which could include the family home! As you can imagine, the risk of personal bankruptcy is much higher for a sole trader.
What are the Disadvantages?
The disadvantage to incorporating is the increased paperwork and cost. Right now, we have a government proposing to ‘cut red tape’, but at present, small incorporated businesses have to do BAS, PAYG (if they have employees), pay superannuation, track leave, allow sick leave and file tax returns!
A Final Word
Incorporating does mean more administration, more expense and more attention to detail. But it could also mean asset protection and, if the company is based in Australia, it will also mean a tax rate of 30 cents on the dollar of taxable income. From the 2017-2018 financial year, a base rate of 27.5% was applicable to companies with a turnover less than $25 million.
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