For business owners whose primary goal is to scale, setting up a new business as a company can be the ideal choice of structure.
There are numerous advantages that a company business structure provides owners with:
- The flexibility to expand
- The resources to bring on new partners
- The ability to take advantage of a capped taxation rate
- The comfort of a reduced level of personal liability
But a prudent owner must bear in mind that there are disadvantages to a company business structure to consider.
This article dives into the pros and cons of structuring your business as a company, providing you with the information you need to determine if it is the right choice for your business.
Liston Newton Advisory is here to help business owners safely navigate the ups and downs of setting up a new company.
The pros and cons of a company business structure
There are several risks and benefits to structuring your business as a company. These can be found in the table below.
[table]
[thead][tr][th]Pros[/th]
[th]Cons[/th][/tr][/thead][tbody][tr]
[td]Enables flexible business expansion[/td]
[td]Higher set-up and ongoing costs when compared to other structures[/td]
[/tr][tr]
[td]Tax rate capped at 25%[/td]
[td]Greater regulatory compliance[/td]
[/tr][tr]
[td]Well-defined governance agreements[/td]
[td]Requires a higher level of business understanding and responsibility[/td]
[/tr][tr]
[td]Limited liability and increased personal asset protection[/td]
[td]Limited tax concessions[/td]
[/tr][tr]
[td]Unlimited lifespan[/td]
[td] - [/td][/tr][tr]
[td]A range of Government grants and incentives available[/td]
[td] - [/td][/tr][/tbody][/table]
Advantages of a company structure
1. Built for business expansion
The company business structure enables easy additions of new shareholders, investors, and co-owners. Additional shares can be issues to new shareholders easily. A company structure is also flexible in how it moves, and ownership can be transferred, and the company sold, with minimal hassle.
When it comes to wealth generation, companies are subject to the flat company tax rate, and their tax is capped at a rate 25%. This means that that sustained growth isn’t hampered by onerous tax rates, and allows the business to be more tax-effective.
2. Well-defined governance agreements
Under a company business structure, a well written constitution and shareholder agreement can clearly outline all governance rules, exit protocols, and dispute processes. This provides a strong support structure to make business decisions confidently, and ensures all shareholders are on the same page.
3. Limited liability and reduced personal risk
A company structure is separate from your personal assets, and is considered an independent legal entity. It’s run by company directors, and owned by shareholders. This works to limit your personal liability, as the company entity bears all liability.
In the event of financial difficulty or legal action, shareholders are only liable for debts that the company has incurred to the sum of the amount that’s unpaid on their shares. The company itself takes on the rest of this liability. This makes a company’s liability limitations an attractive option for shareholders and investors looking for a low-risk investment.
4. Unlimited lifespan
A company can effectively continue on indefinitely, making money, until it is dissolved. This makes it the ideal structure for long-term wealth generation.
5. Government support
One of the positives associated with owning a company is the level of government support available. This can take the form of schemes and grants designed to see companies succeed.
For example, the Government’s R&D incentive enables companies to claim a refundable tax offset of up to 48.5%. The Innovation Incentive Concession was recently introduced as well, which offers tax incentives for early stage innovation companies. This provides a tax offset that’s equal to the amount paid for the innovation investment, and is an attractive incentive for investors.
Disadvantages of a company structure
1. Higher fees
A company business structure involves more complex management than other business structures, so there are higher set-up and administration costs, and ongoing annual fees.
- Company business owners can expect to pay $538 to register for an Australian Company Name.
- ASIC charge an Annual Review Fee, generally around $290 for a proprietary company, or $1,346 for a public company. These also incur late payment fees.
- Given the complexity of running a company, there are also associated fees for services like annual tax accounting, which can range anywhere from $1,500 upwards.
These fees can hit hard for businesses not generating as much income as hoped.
2. Reduced control of the business
Operating under a company business structure can mean less personal control of the business if other directors and shareholders are involved, as all company shareholders are required to agree on business decisions. A company owner has to take into account competing shareholder interests, and the potential for further loss of control to future shareholders.
So if full personal control is something you want from a business, then a company business structure may not be for you.
3. Higher level of business understanding required
Operating a company requires more in-depth reporting and governance responsibilities than other business structures.
As they’re regulated by ASIC, both the company and its Directors receive additional reporting obligations. Regular financial reporting is required, and the company’s annual tax return involves stricter organisation than other structures.
When setting up a company, there is also the need to undertake activities associated with organising and setting up governance structures, company officeholder positions, the structure of company shares, and the company’s legal obligations.
4. Limited tax concessions
While companies can apply for Government grants and schemes, a company isn’t eligible to receive capital gains concessions, so does not receive the 50% CGT discount upon sale.
Public or private: the two basic types of company structure
With the pros and cons of choosing a company structure over a non-company structure clearly defined, we can now turn to a secondary question: what type of company structure is best suited to your business? Broadly speaking, your options are to create a public company or a private company.
What is a public company?
A public company, or public-traded company, is listed on the exchange market so the public can invest in it. Companies go public via an initial public offering (IPO).
What is a private company?
A private company is not open to public investment. Rather, its shares may be bought by the staff of the company, as well as friends and family.
Private companies are divided further into small private companies and large private companies to better define the financial reporting requirements they must make. These two categories are further divided into limited and unlimited private companies, which define the personal financial liabilities of each shareholder.
Detailed definitions of these public and private companies are outside the scope of this article. However, we may still compare the advantages of a private company to a public one.
Advantages and disadvantages of public and private companies
[table][thead][tr][th][/th]
[th]Public companies[/th]
[th]Private companies[/th]
[/tr][/thead][tbody][tr]
[td]Advantages[/td]
[td]Easy to raise capital via public investment[/td]
[td]Agile decision making without stockholders to answer to[/td]
[/tr][tr][td] [/td]
[td]New R&D opportunities through public and government investment[/td]
[td]No anxiety over stock-price fluctuations[/td]
[/tr][tr][td] [/td]
[td]Business acquisitions become a possibility[/td]
[td]Fewer regulations than public companies[/td]
[/tr][tr][td] [/td]
[td]Reduced risk of insolvency[/td]
[td] [/td][/tr][tr]
[td]Disadvantages[/td]
[td]Must answer to shareholders, limiting decision-making agility[/td]
[td]No access to public funding[/td]
[/tr][tr][td] [/td]
[td]Various government regulations to align with[/td]
[td]Private investors tend to demand more direct involvement in company direction[/td]
[/tr][tr][td] [/td]
[td]Obligated to provide regular director’s reports and financial reports[/td]
[td]Limited managerial resources limit overall growth opportunities[/td]
[/tr][tr][td] [/td]
[td]Going public can be expensive and time-consuming[/td]
[td]Opaque business health reporting may repel future investors[/td]
[/tr][/tbody][/table]
Who should consider a company business structure
There are several situations in which the benefits of forming a company structure outweigh the risks:
- It's the best choice for businesses aimed at high growth.
- For businesses with multiple employees, a company business structure ensures their PAYG needs are taken care of.
- Company structure enables future expansion for businesses that plan on scaling to multiple locations, or franchise options.
- Company structure offers management flexibility for businesses with multiple owners.
- It also offers the potential for more owners and shareholders to come on board in the future.
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When a company business structure is not the best option
While it can gear businesses for growth, sometimes the disadvantages of a company structure are too great:
- It’s not recommended for businesses who don’t foresee much growth. This doesn’t mean they’re not profitable—but a company structure does not include the tax-free threshold, which means the business profits will be taxed at the flat 25% amount throughout their entire earning journey.
- It's not recommended for sole practitioners who are their own business. For business individuals where they embody their business, like writers, teachers, craftspeople, or artists, it doesn’t make much financial sense to set up a company structure.
- It may not be suitable for a family business. A family trust structure may be more appropriate. This enables the income generated by the business to be divided among the family in a tax-effective manner, and ensures the business is kept firmly within your family unit.
The final word on setting up a company
A company structure is the ideal option for businesses looking to achieve high growth for the long term, build a scalable business, and take advantage of reduced personal liability.
When setting up a business under a company structure, it’s important to seek the right advice, to ensure it really is the best option for your situation.
