Business Structures 101 – Companies

There are several different types of business structure: including sole traders, companies (also known as corporations), trusts, and partnerships. When commencing a business, you should consider the most appropriate type of business structure to put in place. Different business structures have different advantages and disadvantages.

This article looks specifically at companies, including how to set one up and the pros and cons of a company structure, with a focus on the perspective of the company owners (also called shareholders or members).

Key Features of a Company

A company is a separate legal entity that is capable of holding assets in its own name and is liable for its own obligations.

A company is owned by shareholders. The liability of shareholders is usually limited to the amount that they paid for their shares. This means that shareholders can limit their personal liability and are generally not liable for the debts of the company.

Directors (also referred to as officers) manage the day-to-day business affairs of the company. The Directors don’t have to also be shareholders. Because of this, there are a number of duties and obligations for company directors including an obligation that a director must act in the best interests of the company.

In Australia, the most common forms of corporate business structures are:

  • A private company (identified with the abbreviation ‘Pty Ltd’, which stands for Proprietary Limited): this is a company which does not sell its shares to the public and cannot raise money from the general public through a share issue.
  • A public company (often identified by the abbreviation ‘Ltd’): this is a company whose shares can be owned by any members of the public, with the company’s shares usually listed for trade on a stock exchange.

Companies are regulated by the Australian Securities Investment Commission (ASIC) and governed by the Corporations Act 2001 (Cth) (“Corporations Act”).

How to Set up a Company

An Australian company must be registered with ASIC. When ASIC registers a company, the company will be given an Australian Company Number (ACN). The application must nominate a principal place of business and registered office for the company (where important notices are sent).

Prior to lodging an application for registration, you should consider:

  • The proposed company name. You should check to confirm the proposed name is available. If no name is specified in the application, the company will simply be referred to by its ACN.
  • What rules will apply to govern the company? This defaults to the replaceable rules in the Corporations Act unless the company decides to adopt a constitution or use a combination of the two.
  • Who will be the shareholders and directors of the company?
  • Whether a shareholders agreement is required.

A company needs its own Tax File Number, which can be obtained online from the Australian Taxation Office (ATO) and an annual tax return must be filed.

A company must be registered for GST if its annual turnover is $75,000 or more. An Australian Business Number (ABN) is required to register for GST and can be obtained online through ASIC.

Pros and Cons

The advantages of using corporate business structures include the following:

  • liability for shareholders is limited;
  • easier to raise finance for expansion (especially for public companies);
  • ownership can be easily transferred (by selling the shares); and
  • taxation rates can be favourable.

The disadvantages include the following:

  • expensive to form, maintain and wind up;
  • reporting requirements can be complex (especially for public companies);
  • directors and shareholders (usually) must publicly disclose personal information; and
  • owners cannot offset company losses against their personal taxable income.

Conclusion

There are many situations where corporate business structures might be suitable, including where unrelated parties want to commence a business venture together, where there is a degree of risk and limited liability is wanted, or where there is a desire to list the company on the stock exchange.

Establishment of a company and ongoing administrative and compliance costs associated with the Corporations Act can be high. An accountant or lawyer can help you understand the cost and risks of a company and explain whether a company structure would be suitable for your business.

If you or someone you know wants more information or needs help or advice, please contact us.