What is a Company?

Lots of people confuse having a business, with having a company. So what exactly is a company, and how do they work for small and medium businesses?
5 min | Nathan Watt

Lots of people confuse having a business, with having a company. So what exactly is a company, and how do they work for small and medium businesses?

In Australia we have 4 types of legal structures to operate a business in; sole trader, partnership, trust and company.

And within that we have two main types of companies, Private Companies, and Public Companies.

Private companies are used when there are a small number of shareholders and you’re not looking for members of the public to become owners or to raise capital from a large number of people.

Private companies have the suffix Pty Ltd. Public companies are just Limited.

What Does Pty Ltd Mean?

Pty Ltd is an abbreviation of “Proprietary Limited”. Pty Ltd meaning the liability of the proprietors (owners/shareholders) is limited to the amount they have paid for their shares.

This ensures that shareholders are not at risk for any further losses if the company becomes insolvent.

It’s common practice to have shares with $1 paid up capital. This would mean where a shareholder had 1 share, and the company went into administration or liquidation, they have no requirement to pay any more money. All they have lost is $1.

Advantages Of A Company Structure

There are a number of advantages of using a company structure, including;

Income Tax

Companies have different tax rates than individuals do. The current tax rate for small and medium sized companies operating a business is 27.5%.

For companies that are not operating a business (i.e owing investments), their tax rate is 30%. These are flat tax rates – no matter how much profit they make, they pay the same rate of tax.

Compare this to the marginal tax rate of individuals who can pay tax at high as 47%. This adds up to a lot less you need to pay to the tax man provided you don’t take the cash out of a company.

Retaining Profits

Along with the tax benefit is the ability to retain profits. That means you don’t have to distribute the profits to shareholders via a dividend, unlike a trust which must distribute it’s profit (or pay a heaps of tax)

The directors get to choose if they will pay dividends based on the company objectives, and cash flow. This means they pay tax at 27.5% of the profit, then can reinvest the rest back into growing the business. By doing this the profit and value of the business will grow quicker than if you had to distribute the profit every year like you do with a trust.

And the shareholders who receive a dividend get a credit for the tax the company has already paid so they don’t suffer double taxation.

Limited Liability For Shareholders

As discussed previously, the shareholders limit their financial exposure to the amount they contributed for the shares. This could be as little as $1. Compare this to operating as a sole trader who puts all their personal assets on the line and you can see why this is a huge advantage of a company. But be warned, having a company doesn’t mean everything is protected at all times. Company directors can be held personally liable for some debts of the company.

Registering a Pty Ltd Company

Ultimately, choosing your business’ structure is no simple matter. You should consult with an advisor like us, to discuss which structure is right for you.

If you have done that due diligence and you’re sure that registering a Proprietary Limited Company is the right move for your business, here’s some more information that would be helpful to you.

Understand ACN and ABN

When you establish a company, it will be issued an Australian Company Number, or ACN. This is not the same as your ABN, or Australian Business Number.

You will need both and they are registered separately. An Australian Company Number is assigned to each and every company. It is the way to identify the company on the ASIC data base. Every company has one.

An ABN is registered only if the company is eligible (i.e it will be running a business).

The company is a separate legal entity. It can sue, and be sued. It can own businesses, investments, property, enter into contracts, open bank accounts and employ staff.

Registering Your Company

To proceed with registering your company, you can lodge a form direct with ASIC. This method is the cheapest – but it comes with the downside of being a fairly tedious process for the uninitiated.

Additionally the company won’t have a constitution (the rules of how a company will operate and what powers its directors and shareholders have), instead it will operate under the replaceable rules. These are stock stand rules found in the Corporations Act, that don’t provide any customisation and can be cumbersome and ineffective. For single director/single shareholder companies you must have a constitution.

So rather than going it alone in setting up a company, you can use a PSP (Private Service Provider) to help you register your company.

This could be your solicitor, or a business accountant like us, or another business that gives ASIC services. They’ll typically charge a fee on top of what ASIC charges, so this method will cost you more but you generally get a turn-key company ready to go with registrations for GST, TFN, ABN, and PAYG Withholding ready for you to take to the bank and open an account.

Finding Success In Australia

If you have decided that a company is right for your business, don’t get discouraged by spending some money on using a professional to set it up correctly. Spending a relatively little amount now, can save you a lot down the track. So if you need help in deciding which structure is right to start your business in Australia, contact us here.

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