When establishing your business in Australia, you have various structure options to consider, one of which is the company business structure.
Your choice of structure hinges on factors such as your business’s nature, the number of owners, liability concerns, and tax ramifications.
Below is a straightforward overview of how a Corporate or Company business structure operates in Australia.
What is a Company
A corporation is an independent legal entity registered with the Australian Securities and Investments Commission (ASIC). It provides limited liability to its shareholders, safeguarding their personal assets from business debts or liabilities. Governed by the Corporations Act 2001, companies are obligated to adhere to a range of reporting and regulatory standards.
Ownership
In a private company, ownership is determined by its shareholders, who can be individuals, other companies, or trusts holding shares in the company. Ownership is contingent upon the number and type of shares held by each shareholder, and it may evolve over time through share transactions or the issuance of new shares.
Companies offer a flexible structure for introducing new business partners or shareholders, especially when these individuals are not directly related to the company’s founders.
Shares may be issued with various “Classes,” defining shareholders’ rights. For instance, certain share classes grant dividend access but not voting privileges.
Responsibility
The primary responsibility for a company rests with its director(s). They are tasked with making decisions on behalf of the company while prioritizing its best interests, even if these interests conflict with personal agendas. Directors bear the legal responsibility for the company’s actions and adherence to regulations.
If directors operate outside the scope of the Corporations Act, such as knowingly incurring debts the company cannot repay (i.e., trading while insolvent), they can be held personally accountable for these debts. Likewise, directors may also face personal liability for certain tax obligations like GST, PAYGW, and Superannuation Guarantee.
Hence, it’s crucial for directors to stay informed about the company’s financial status and performance at all times.
Even if someone isn’t officially appointed as a director but acts in a directorial capacity, such as providing directives to appointed directors, they may be deemed a ‘shadow director’ and be subject to the same duties and liabilities as an official director.
How a company structure is taxed in Australia
Most small businesses operating as companies in Australia fall under the category of ‘base rate entities’, subject to a tax rate of 25%. Conversely, larger listed companies or those primarily engaged in investments typically face a tax rate of 30%.
Taxable Income: A company’s taxable income is determined by subtracting allowable deductions from its assessable income. Assessable income encompasses revenue from business operations, investments, and other sources, while deductions include expenses related to running the business.
Capital Gains Tax: Companies are liable for capital gains tax (CGT) upon disposing of assets. The net capital gain is incorporated into the company’s assessable income and taxed at the applicable company tax rate. Unlike individuals and trusts, companies do not receive a discount on capital gains.
How can you access the funds from a company structure
When operating your business through a company, it’s crucial to remember that the company’s resources are distinct from your own.
Accessing funds from a company can be done through several methods:
- Salary or Wages: You can receive a salary as an employee of the company. This is a common approach for company owners or directors to compensate themselves for their contributions to the business.
- Dividends: As a shareholder of the company, you may opt to receive funds through dividends. Dividends are payments disbursed from the company’s profits to its shareholders. The decision to declare and distribute dividends is made by the company’s directors, contingent upon available profits, cash flow, and any legal constraints. Dividends can be franked or unfranked.
- Shareholder Loans: Shareholders have the option to withdraw money from the company through a loan agreement. Such agreements outline the loan terms, minimum repayment amounts, interest rates, and other pertinent details. To mitigate additional taxation, the terms and interest requirements of these loans must comply with relevant tax legislation.
Ongoing obligations of a company business structure
Running a company entails various obligations, including:
- Compliance with the Corporations Act: Companies must adhere to the regulations outlined in the Corporations Act, which governs their operations and responsibilities.
- Maintenance of Accounts and Financial Records: Companies are required to maintain accurate financial records, which must be retained for a minimum of seven years.
- Ensuring Accuracy of ASIC Information: It’s essential to ensure that the information provided to the Australian Securities and Investments Commission (ASIC) is accurate at all times. Any updates or changes must be reported within specified timeframes, typically within 28 days.
- Payment of Annual ASIC Registration Fee: Companies are obligated to pay an annual registration fee to ASIC to maintain their registration and legal status.
