Different Business Structures: Part 2: Company

A proprietary limited (Pty Ltd) company is a separate legal entity that can enter into contracts, incur debts, and be sued in its own name. It’s a popular choice for small to medium-sized businesses in Australia because of its flexibility and asset protection.

Who Owns and Runs the Company?

The shareholders own the company, while the directors are responsible for its day-to-day operations. Directors and employees can also be shareholders.

Under the Corporations Act 2001 (administered by ASIC), a company can operate with just one director and one shareholder.

Key Features of a Pty Ltd Company

• Separate legal identity

• Limited liability for shareholders

• Governed by ASIC and the Corporations Act

• Must lodge annual ASIC statements and tax returns

• Company profits taxed at a flat 30% (or 25% for base rate entities)

Note: While a company limits personal liability, many banks and suppliers will still require directors to personally guarantee debts.

Advantages of a Company

• Flat Tax Rate: 30% company tax rate (or 25% if eligible)

• Access to CGT Small Business Concessions

• Dividend Imputation: Franking credits help reduce personal tax

• FBT Salary Packaging available

• Profits can be retained within the company for reinvestment

• Losses can be transferred within the same corporate group

• Separate Legal Entity: Offers a higher degree of asset protection

• Widely Understood Structure: Common and credible in the business world

• Easier to Raise Capital: Equity investment is straightforward

Disadvantages of a Company

• No CGT 50% Discount on capital gains

• Division 7A applies to loans made to shareholders and their associates

• Reduced CGT Concessions when distributing proceeds

• No Streaming of Franked/Unfranked Dividends

• Associate Wages Must Be Reasonable under Section 109

• Losses Are Trapped unless transferred within a group

• Complex Rules around tax loss carry-forward

• Higher Setup and Maintenance Costs than sole trader or partnership

• Director Liability still applies in certain cases (e.g. unpaid super, insolvent trading)

• Corporations Law Compliance can be burdensome

Is a Company Right for You?

A company structure is often best suited to businesses:

• expecting significant growth,

• needing external investors, or

• wanting better asset protection.

However, the costs and legal responsibilities are higher, so it’s crucial to get the right advice before making the switch.

Need Help Choosing the Right Structure?

Dolman Bateman has over 40 years of experience helping businesses grow with the right legal and tax structures. Contact us today for tailored advice.

Meeting with Gavin Bateman

Book Now

Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.