If your main goal is to scale your business, a company structure may be your ideal choice because it provides flexibility to expand and bring in new partners to the business. It also offers a capped taxation rate and a reduced level of personal liability.
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Setting up a company is an effective way to grow your wealth but it has its risks as well. Here are some pros and cons of structuring your business as a company.
A company structure allows for easy additions of new investors, co-owners and shareholders. It is also easy to issue additional shares to new shareholders. A company business structure is flexible especially when transferring ownership or selling the company. It is also subject to the flat company tax rate; its tax is capped at 27.5% so wealth generation and sustained growth is not hampered by tax, allowing the business to be more tax effective.
Companies also have written and well-defined shareholder agreements that clearly outline governance rules, dispute processes and exit protocols. It offers a strong support structure so you can make decisions with confidence, knowing that all shareholders are on the same page.
A company structure is an independent legal entity. The company is run by directors and owned by shareholders so it limits personal liability because all liability is assumed by the company entity. In case of a legal action or financial difficulty, shareholders are liable only for the debts that the company has incurred to the total amount that’s unpaid on their shares. The company shoulders the rest of the liability, making it a low-risk investment.
A company may also continue indefinitely until it’s dissolved. Companies also benefit from several government schemes, incentives, concessions and grants designed to help them succeed.
However, a company structure also has its risks. It involves more complex management and higher administration and set-up costs and annual fees. It costs $495 to register for an Australian Company Name and about $267 for an Annual Review Fee for proprietary companies or $1,240 for public companies.
It also offers less personal control of the business if shareholders and directors are involved because they are required to agree on all business decisions. If you’re considering a company business structure, take note of the potential loss of control and competing shareholder interests of the business.
A company structure also requires in-depth reporting and governance responsibilities for the company and its directors. They are regulated by ASIC so a higher level of understanding of the business is required. Company share structures, legal obligations and regular financial reports are required, along with the annual lodgement of tax returns. Companies also have limited tax concessions – while they can apply for government schemes and grants, they are not eligible to receive capital gains concessions.
A company business structure is ideal for those who are aiming for high growth. It allows for easy franchising and expansions to multiple locations. It provides management flexibility for multiple owners. It is not recommended for businesses who do not foresee much growth because they will be taxed the flat 27.5% rate throughout their business journey. It isn’t recommended for sole practitioners and or family businesses as well. A family trust structure may be best for the latter so income can be divided among family members in a tax-effective manner.
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As you look for different ways to grow and improve your business, seeking professional advice could prove to be an important and helpful decision.
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