Firm News | 16/01/2017

Thinking of Setting up a company? Have you considered the Pros and Cons?


1. Cost of Registration

Business name registration in Australia is done on a state-by-state basis. So the costs, and registration periods, vary from state to state. However they range from $65 (in the Northern Territory) to around $200 for a two or three year registration period, with the most common cost being around $150, and the most common registration period being two or three years.
In contrast, registration of an Australian company is an Australia-wide ‘thing’ and commonly costs around $500 to $2,500 depending on the additional services provided as part of the registration process.
Accordingly, there is no question that the registration of a business name in a single Australian state is cheaper than incorporating a company. However, a business name must be registered in each Australian state in which the business carries on the business. So if the business is being carried on in all Australian states and territories, the business name will need to be registered in each Australian state and territory (all eight of them), and thus the cost of doing so may well be more than the cost of registering a company (and thus a company name) Australia-wide. Further, the registration of the company/ company name will obviate the need to register the name as a business name (on the basis that the full and exact company name, including the ‘name ending’ – e.g. ‘Pty Ltd’ – is always used).

2. Ongoing costs

Business name registrations need to be renewed periodically (usually every two or three years) and the renewal costs vary (see ‘Costs of registration’ above). However the cost is commonly around $150 and the renewed registration usually lasts for two or three years.
In contrast, a (‘standard’ private) company must pay a yearly ASIC annual review fee of $230 (as at 1 July 2012).
In addition, and speaking generally, companies usually have other additional ongoing costs – the most common being additional accounting fees associated with maintaining a proper set of company accounts.
3. Degree of ‘protection’ of the business/company name
Speaking very generally and in a practical sense, the registration of a company (and thus the company’s name), often has a greater ‘protective effect’ on the name than the mere registration of the name as a registered business name in a single Australian state or territory. Why? Because if someone else subsequently attempts to register that name as a business or company name, the ‘registering authority’ (ASIC or the relevant state or territory ‘business names office’)
will always have to have regard to the previous ‘Australia-wide’ company name registration.
In contrast, a state business names registration office (say in NSW), in receipt of an application
to register a particular business name (again in, say, NSW), would not have to have regard to a
mere identical registered business name registered in another state (say QLD).

4. Limited liability

The principal (and longstanding traditional and historical) advantage of an incorporated company is that it has limited liability. That is (and speaking generally), a company may only be forced to pay creditors up to the extent of its own assets and capital, plus any moneys unpaid on its shares (usually nil because most companies issue shares which are fully paid for at the
time of issue, and for a mere nominal amount such as $1.00). Further, the company is a separate legal entity or ‘person’. In particular, a company is separate from its owners (its members/shareholders) and the persons who run it (its directors).
So, speaking generally, assuming that the directors have acted honestly (and in particular have not allowed the company to incur debts at a time when they knew that the company would not be able to repay its debts as and when they fell due), and assuming that the directors or owners of the company have not otherwise given personal guarantees for the company’s debts or
obligations, then the personal assets of the directors and the shareholders/owners of the company will be not be within the reach of (and thus will be protected from) the company’s creditors.

5. ‘Impression’ created on outsiders

Often (rightly or wrongly) outsiders are more impressed by an Australia-wide incorporated company name (ending, for example in ‘Pty Ltd’) than a mere state registered business name. For a start, ‘people in the know’, know that it costs more to set up a company than merely to register a business name in a single state. Thus, a greater impression of ‘seriousness’ can often
result from the registration of an Australian company.

6. Tax

Individuals (including if they are trading under a mere registered business name) are taxed at the normal marginal rates of tax – with the top tax rate (as at 1 July 2011) being 46.5% (including the 1.5% Medicare levy but excluding the 1.0% flood levy applying to the 2011-2012 tax year).
In contrast, Australian companies are taxed at a flat company tax rate of 30% (as at 1 July 2010). But this does not necessarily mean that companies will always pay ‘less tax’. Why? Because the individual tax rates are on a sliding scale and they include an initial tax-free threshold. In contrast, companies are taxed from their first dollar of profit, with no tax-free threshold.
Then again, companies may (or may not have) deductions available to them which individuals do not. Also, there can sometimes be a bit of a ‘trap’ with companies as regards capital gains tax. Why? Because companies pay tax on all their assessable capital gains, whereas individuals and trusts ‘get’ 50% of their capital gains tax-free.
Moreover there are some relatively new tax rules regarding ‘personal service companies’ which, for example, may result in a company not being able to claim a tax deduction for wages paid to an ‘associated’ employee (e.g. the wife of the company’s sole shareholder and director). However all of this ‘depends’ and you should therefore speak to an accountant at Axis for a
further analysis of this.

7. ‘Own’ property, and ‘deal in’ the name of a company

For various reasons it sometimes suits persons to ‘own property in, or deal in’ the name of their company rather than in their own name. Further, Australian company law now allows for a ‘one person company’ – that is, a company which has a single person as its sole owner (shareholder) and director. In saying this however, one must always remember that a company
is an entity separate from its owners & directors – it must not simply be treated as an ‘alter-ego’ of its owner(s)/director(s).

8. Attracting investment/capital

Companies may find it easier to attract investment/capital, than say a partnership can. Why? Because (passive) investors can be confident that they will not be legally obliged to contribute further funds to the company (i.e. in addition to what they have already paid, or already have agreed to pay, for their shares) in the event that the company gets into financial difficulties (see
‘Limited liability’ above).
In contrast, if such passive investors were to contribute equity funds to a business being run as a partnership, and become a ‘silent partner’ of the partnership, they would be likely to be fully exposed to, and liable for, the debts of the partnership – this becomes particularly relevant in the event that the partnership/business gets into financial difficulties.

9. Transfer of ownership & control

In the case of companies limited by shares, the very fact that the company has shares acts to facilitate a possible sale of the company (either in whole or in part). Why? Because the company’s shares may be sold (either all of them, or only some of them). Share capital also facilitates the bringing in of new owners (either by way of existing shareholders transferring all
or some of their shares to new shareholders, or by way of the company issuing new shares to new shareholders).
Also, a company structure facilitates any desired changes in the day-to-day control of the company and its business activities (i.e. by way of the resignation of all or some of the company’s directors, and by the appointment of replacement or additional directors).

10. Perpetual succession

A company exists indefinitely (unless wound up), irrespective of the retirement or death of its managers, directors, and shareholders/owners.

11. Sometimes you simply ‘need’ a company

Example 1:
You are an independent contractor (e.g. an Australia Post courier) operating as an unincorporated sole trader under a fixed term contract. The contract expires and comes up for renewal. You may find that your ’employer’ changes its policy such that it will only renew your contract if you ‘become incorporated’.
Example 2:
You give up your position as an employee in order to go into business on your own. You decide that your new business will be as a franchisee (for example as a mortgage broker or as the proprietor of a hamburger or pizza outlet in a chain of such businesses). However you may find that the franchisor will only allow you to purchase a franchise if you first form a company and then purchase and/or run the new business in the name of the company.

We also offer the following range of accounting and referral services through our strategic partners:

  • Individual and Small Business Tax Compliance
  • Preparation of BAS and IAS statements
  • Business consulting and advise
  • New business structure setups
  • Tax Planning / Financial Planning
  • Mortgages Loans and Business Finance
  • Business insurance
  • Management Accounting
  • Bookkeeping
  • Self Managed Super funds –accounts and audit
  • Assistance with all liquidations and associated matters

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