We understand that it is stressful starting and operating your own business. How do you, as a business owner, know which structure will be best for the management and progression of your business? There are a number of different ‘business structures’, including sole traders, partnerships, companies and even trusts. This article focuses on the advantages and disadvantages of operating under a company structure.

What are the types of companies?

A company is comprised of shareholders (also known as members) who own the company, and officeholders (directors) who are responsible for the running and management of the company. It is possible to be both a member and a director, and in fact many sole-directorship companies are formulated this way.

Companies can be classified as private companies or public companies. Private companies (or proprietary limited companies – being those with “Pty Ltd”, “Pty. Ltd.”, “Pty Limited” or some variation of same listed after the company name) are either companies limited by shares or unlimited with share capital. They must also have no more than 50 shareholders that are not employees. There are also restrictions on fundraising activities that can be undertaken by a proprietary company, in that a company of this type cannot undertake fundraising activities that would require disclosure to investors (such as through a prospectus). A proprietary company can similarly not offer its shares to the public.

Public companies are companies with more than 50 non-employee shareholders. The main difference between proprietary and public companies is hat public companies can raise funds by offering shares to the general public. These activities require disclosure documents (such as a prospectus) be issued to potential investors when offering shares to the public.

As small businesses are almost always operated by a proprietary company, we will not consider the regulation of public companies further.

What are the advantages of operating within a company structure?

The key advantage of incorporating a company to operate your business is the limitation on liability that individuals are awarded. Incorporation of a company creates a ‘legal person’, capable of entering into legal arrangements (contracting with third parties), owning real and personal property, and incurring liabilities (such as debts). This means that the people managing the company, the directors, are not personally liable for contracts or liabilities entered into or incurred by the business. Similarly, a company can sue or be sued.

This limitation on liability is not without exception. Many third parties will require personal guarantees from company directors before entering into contracts with companies (in particular new or smaller companies) which will make a director liable for compliance with the arrangement or payment of the liability.

Similarly, personal liability can arise where a director incurs debts negligently or recklessly, and against the best interests of a company. These restrictions are in place to ensure that directors cannot abuse their power, nor make needlessly risky business decisions under the belief that the company will bear all liability should he venture turn pear-shaped. However, the limitation of liability can be very useful where directors are undertaking a potentially risky business venture and should separate their liability from their personal assets through strategic use of the corporate veil.

Members are only liable for the debts of the company to the extent that there are any unpaid amounts on their shares, and their only potential loss is the value invested in their shareholdings.

Tax on income received by a company is a 30% flat rate. Further, franked dividends can be issued to members who may be entitled to claim a refund of excess imputation credits (after application to income tax liability).

What are the disadvantages of operating within a company structure?

Despite these advantages, there are some disadvantages to operating a company structure. A company can be complex to administer in compliance with relevant legislation. The Corporations Act 2001 (Cth) provides standards and regulations which will ensure that a company is compliant and being administered correctly. There are penalties for non-compliance with regulations contained within the Act.

There are also strict obligations on directors, called ‘directors duties’. The failure of directors to meet their legal obligations can result in penalties and in some circumstances even criminal liability.

Further, the effectiveness of the limitations on liability have been a reduced as lenders and supplies are reluctant to enter into agreements with small or new companies without the safety of a directors guarantee. This is having a negative effect on the biggest advantage of incorporation of a company for operation of your business – the protection from personal liability and the protection of personal assets.

Further, a company can be expensive to establish and maintain. ASIC fees for incorporation of a company are up to $433, and further annual fees apply.  There are complex rules regarding taxation and the distribution of profits and losses.

 I have an idea and want to start a business. How do I know what structure is right for me?

A properly run company comes with many benefits which can outweigh the additional fees and complexities associated with incorporation and running of a company structure. The key to obtaining the most out of any company structure is ensuring that you receive the requisite advice and guidance. Nautilus Law Group can assist your company from the beginning through to assisting with issues that arise in day to day operation.

If you are unsure whether a company structure would suit the particular needs of your business, we encourage you to contact the office to discuss your matter. Should you require any further information, we welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.

Submitted by:  Katrina E. Brown BA JD ATIA TEP SSA