Navigation path
Setting up as a company
The law regards a company as a distinct legal entity separate from its shareholders or officers. Like any individual person (a natural entity), a company (a corporate entity) can own property and can sue and be sued. In Australia, companies are more regulated than other business structures.
The most common types of companies are:
- public companies (denoted by Limited or Ltd after their name)-these are usually formed to raise or borrow public money through listing the company's shares for trading on a stock exchange. Public companies require at least one shareholder (or member) and three directors. All companies are governed by the Australian Securities and Investments Commission (ASIC), and public companies are also subject to the rules of the Australian Stock Exchange.
- proprietary companies (denoted by Pty Ltd after their name)-these do not and cannot raise money from the general public through share issues. They only require one director and one shareholder (or member).
Small businesses structured as companies usually operate as proprietary companies rather than public companies.
Advantages of a company
Limited liability
One of the biggest advantages of the company structure is that the legal liability of your company's shareholders is limited to their share capital (that is, how much money they pay for their shares in the company). This means that, in most cases, the personal assets of shareholders cannot be seized to pay company debts. Rather, only the assets of the company can be used to pay the company's debts. However, company directors may still be liable for any debts, liabilities and legal actions held against their company in certain circumstances, such as when the directors have allowed the company to continue trading when insolvent.
Pay less tax
Companies may also pay less tax than other business structures such as sole traders or partnerships. Companies are taxed on their profits at the company tax rate, which may be lower than the marginal tax rates of its individual shareholders. When shareholders receive company dividends that the company has already paid tax on, they will often receive tax credits through the company imputation tax system. This means that the tax paid by the company is already taken out and shareholders' dividends are given credits for the tax already paid by the company. Tax implications are discussed later in this fact sheet.
Continuity
A company structure can ensure continuity of management and ownership in the event of the death or disability of key people in the business because shares in companies may be transferred.
Control
You can use a company structure to effectively separate the management and ownership aspects of the business. For example, the managers of the business can be appointed directors of the business. The owners of the business are its shareholders.
Australia wide
Under the Corporations Act 2001 (Commonwealth), once your company is registered in one state it's free to trade in all states, provided your Australian Business Number is on all business stationery.
Disadvantages of a company
Operating costs
There are ongoing costs of compliance with the Corporations Act. These include costs of preparing and submitting annual statements, keeping ASIC informed of any changes to the company's structure, officeholders or operations, and any fees for accounting and legal services. Company administration can also require the directors, and more particularly the company secretary, to spend a lot of time attending to company paperwork.
Responsibilities of directors
The directors of the company have certain legal obligations. If directors fail to meet these obligations they may be held personally liable for the debts of the company.
There are other advantages and disadvantages to using a company structure for your business. They depend on the specific nature of your business and other aspects of your financial affairs.
Are there any special laws for companies?
Yes, companies are uniformly governed by the Corporations Act which has strict rules relating to company structures, operations, the activities of officeholders (such as directors) and annual reporting.
How do I form a company?
To form a company you will need the services of your legal and accounting advisers. You will have to lodge a form with ASIC listing your proposed company name, the names of the company's officeholders (that is, the director/s and the company secretary), together with supporting documentation and a lodging fee. Following this, you are also required to keep a register of your company's officeholders and internal documentation at your business premises.
Tax implications for a company
There are a number of potential tax implications to consider if you are thinking of setting up as a company, including:
- asset protection benefit
- capital gains tax
- income tax
- distribution of capital and income
- establishment and ongoing costs.
There are other tax implications that depend on the specific nature of the business. Contact the Australian Taxation Office for further information.
Who can help
For more personalised guidance about the best structure for your business, we recommend you consult your legal and tax advisers.
Further information about forming a company is available by calling ASIC's information service on 1300 300 630 or (07) 3867 4900.
You can also receive general information about companies and the Corporations Act by contacting the Australian Institute of Company Directors (AICD on telephone 1300 739 119 or (07) 3222 5500.
SmartLicence is the Queensland Government's information service where clients can access information on Australian Business Numbers (ABN), GST and company registration forms. Call the Business Hotline on 1300 363 711 (interstate/overseas callers +61 7 3001 6359).
