Wondering what are the advantages of a Company? Are you setting up a new business and trying to determine the right business structure?
Here at Stellar Accounts, we get asked what is the difference between Sole Trader vs Company vs Trust so we’ve put together a series of short blogs.
In this article we explore what are the advantages of setting up a Company.
What is a Company?
A company is a separate legal entity to the people who run it.
That means that the company lodges its own tax return and pays tax on its profits at the company tax rate – currently 27.5% (provided the company’s aggregate turnover is less than $10m).
Benefits of Creating A Company in Australia
1. Profit Distribution
The company can then distribute profits to shareholders in the form of franked dividends. These dividends are taxable to the shareholders less a credit for the tax already paid by the company. Franked dividends are only available once the company is paying tax on any profits.
2. Limited Liability
The most common reason why people choose a corporate structure is that it provides limited liability to the shareholders. In other words the extent to which shareholders are liable for the debts of the company is limited to the amount they’ve invested as share capital.
3. Asset Protection
There are also asset protection benefits because creditors of the company cannot access the assets of the shareholders.
Company vs Sole Trader Tax Implications
One of the key differences between a company and sole trader is when you use company funds for personal expenses, withdraw a wage etc, then you are taxed at individual marginal tax rates – so while the company may make a profit of $30k and will be taxed on that profit at 27.5%, if you also take personal drawings of $40k you will be taxed at 32.5% (individual tax rates). This is important to be aware of as a lot of smaller businesses are not aware of this.
Considerations When Setting Up A Company
A couple of other points to consider:
- Superannuation is also payable on wages taken from the company.
- Loans between directors and the company need to be repaid by 30 June each year otherwise the directors have to pay interest to the company under Div 7A.
- If you decide to move to a company structure, you will need to get a Tax File Number and ABN for the company plus decide if the company needs to be registered for GST.
How Do I Set Up A Company?
Have a chat to your accountant before taking the step up to a company from a sole trader – as each business’s circumstances are different and a good accountant will completely review your situation and provide advice that best suits your needs.
Stellar Accounts provides business consults for $75 for 45 mins, appointments can be in person (in Chermside), over the phone, or via Skype.
Other Related Blogs
- Sole Trader vs Company vs Trust
- What are the Advantages and Disadvantages of Being A Sole Trader?
- Setting Up A Trust: Pros and Cons