As a business owner, there are a lot of reasons why you should do business under a company, as opposed to a sole trader entity. Depending on the risk profile of the business, it may even be prudent to set up that type of structure right from the start, before you even start trading!
A business that provides services to other businesses is also one that should consider incorporation straight away from a legal risk perspective.
There are obviously a lot of things to consider and each business has to obtain specific legal advice given their particular scenario and also the assets of the business owner/s. It shouldn’t cost a lot to get this advice and it’s the old ‘stitch-in time, saves-nine’ principle.
Certainly if the business conducted would be considered high risk from a legal perspective, then in the words of Tony Robbins – “when would NOW be a good time?”
Otherwise, you’re potentially exposing the assets of each of the business owners and of course the business itself.
Most businesses we find leave it too late to incorporate. They then quickly realise that it’s like moving house at Christmas!
Often things get forgotten – business names don’t get transferred, trade marks don’t get renewed, domain names, various contracts are still in the business owner’s name instead of the company. You name it, we’ve seen it.
The business has a lot of moving parts, has no doubt accumulated a lot of intellectual property which will need to be transferred to the new entity, have various contracts that will need changing with suppliers, employees, contractors, you need a new Xero account (separate from the sole trader), other software etc. You might find that you need to file 2 tax returns in any event, if the advice is to incorporate mid-financial year.
The team at Progressive Legal will help you with tailored legal documents and advice around corporate law and choosing the right legal structure.
Firstly, it separates the business owner/s from the business. The business will be a separate legal entity to the owner/s.
This means that from a legal liability perspective, the risk of the business owner is greatly reduced. Unlike sole traders or partnerships, the business and the owners are separate legal entities.
There are still obligations which won’t change. E.g. tax/GST/PAYG obligations, the directors still have fiduciary obligations and directors duties that they owe to the company and shareholders, however should the company become insolvent and need to shut down either by voluntary administration or by appointed liquidation by creditors, then the personal assets of the business owners are at far reduced risk ordinarily.
Unlike a sole trader, where the owner in legal reality IS the business. i.e. if the business was to be successfully sued, then the personal assets of the business owner/s would be at serious risk of attack. Even if you don’t have substantial assets, the prospect of bankruptcy for anyone is a very serious and scary scenario.
It’s really strange, but banks seem more likely to lend money or credit to companies.
Many sole traders can’t even get a $2,000 increase on their personal credit cards. However, when they have incorporated and asked for a business credit card, the bank throws a $20,000 – $50,000 credit card at them. Go figure!
Obtaining bank loans for the business also appears to be easier when you’re a company.
After incorporating, other businesses (including clients/customers) start to take your business more seriously.
They see you as more stable, permanent and evidence of your commitment to the business.
In fact, some businesses just simply won’t do business at all with sole traders (they just won’t tell you). Or they’ll award the contract to the one that’s a company and not a sole trader.
A company will continue to exist regardless of what happens to the individual directors, officers, managers or shareholders. Good for succession planning as well.
It’s also easier to obtain investment when there’s a company already set up ready for shares to be issued to the investor. It’s also a bit easier to sell, especially if the new owner doesn’t want to be put to the cost of having to transfer everything over to a company, move all the contracts, insurances, trade marks, subscriptions etc. They’d prefer to have that done before they buy. It makes sense.
A final thought is that some government grants are only eligible to those businesses that are incorporated. For instance, the Research & Development Tax Incentive may not be available to sole traders.
A company is taxed on its profits. Those taxable profits can be reduced by legitimate business expenses, including operating expenses, marketing and advertising, travel and entertainment, employee salaries, health benefits, pension contributions etc.
As described on this page, there are a number of great reasons why you should move business structure to a separate legal entity, however the main thrust from a legal perspective is that it separates you as the business owner from the business.
Legally, if you’re a sole trader, you are the business, the business is you. So, from a legal perspective if the business was to be sued at any stage, it would be Them v You (trading as your business ABN 123456).
If you set up a company, then you as the owner, even if you own all the shares and are the sole director and secretary, are generally only liable for the unpaid value of your shares.
You still have many duties as a director (these are called fiduciary duties) which you need to be conscious of and compliant with at all times e.g. your duty to trade solvent, and your duty to act in the best interests of the company at all times and many more.
However, the costs of set-up and maintaining in our view are vastly outweighed by the legal protection a separate entity provides (generally).
You might also consider a good time to “roll over” to a Pty Ltd could be 30 June / 1 July. That is the sole trader finishes on 30 June and the company begins 1 July. There will always naturally be a slight amount of overlap between the two, but that is minimised around this time instead of having to incorporate “mid-financial year” or “mid-cycle”.
Make sure you get advice from both your accountant and lawyer. It’s even better if they can see eye-to-eye as well and get along. It’s really beneficial to the business if you have a lawyer and accountant that agree.
It’s not as expensive as it once was to incorporate to a Pty Ltd company, and in our view, if you’re going to become a company at some stage, you’re better off doing it sooner rather than later.
For around $900, you can have the business incorporated with an Australian Company Number (ACN), Australian Business Number (ABN), Tax File Number (TFN), and registered for Goods and Services Tax (GST). It’s a no-brainer if you’re planning on doing it anyway.
There are costs involved in setting up a corporate structure and ongoing compliance in terms of annual reports etc. But those costs have come down in the last decade and your accountant can assist you to register the company, obtain an ACN, ABN, TFN and GST registration.
Most people are afraid to incorporate because they think it’s a really expensive exercise. It was in the past. It really isn’t now.
You should incorporate the business to a proprietary limited company (Pty Ltd) sooner rather than later, provided your business is not a hobby, or if you have personal assets you wish to protect, or to reduce any legal risk.
If you wait too long to incorporate, and only do so when your accountant tells you to, chances are you have an extremely busy business and it’s like moving at Christmas. You have to open new bank accounts, change all your subscriptions, insurance, transfer business names, domains, contracts, credit cards, new Xero accounts, transfer your intellectual property, trade marks, employment contracts …etc etc.
Trust me, you don’t want to do that when it’s a really busy business. You’re much better off doing this when things are starting to ramp up, not when business is exploding.
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Sabrina Jacquier Parr, Founder at Keeko Oil