Don’t be late, Incorporate!

If you conduct a high risk business from a legal perspective and don’t incorporate early enough, you’re just playing ‘Russian Roulette’

Most accountants have a magic number

Each accountant will have a magic number they consider is the right time. They will sometimes advise to stay a sole trader until that time or at the end of a financial year around that time. From a financial perspective, it makes sense to Incorporate 1 July so you don’t have to file two sets of tax returns, pay two lots of fees and be running two sets of accounts from when you moved over from sole trader to company. If you’re going to incorporate some-time during a financial year, it makes sense to do it from a financial perspective on 1 July, however there might be reasons from a legal perspective, not to wait until that time. i.e. not to wait until the next financial year, just because you’re not doing the amount of revenue your accountant says will allow you to achieve tax benefits of incorporating.

What we don’t find often is the accountant saying at that point – “but……you should obtain legal advice as to whether the business you are conducting is potentially risky and whether you should consider incorporating right from the start”.

This is a really important point.

Most business owners will start to trade in their business and some are doing quite risky activities and rely on the advice from their accountant solely, without seeking legal advice as to whether that structure is right from a legal protection standpoint.

If you’re selling ‘risky’ products or conducting potentially risky business you should usually incorporate faster

For example, if you’re selling baby products, there appears to be a legitimate risk to warrant incorporation straight away.

What we find is that businesses don’t incorporate fast enough.

And if you think about it for a moment, just imagine how busy a business is when you’re doing the kind of turnover your accountant might be recommending?

Professional service providers should consider incorporating straight away

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 playing Russian Roulette with your business and the potentially exposed assets of each of the business owners.

Incorporation requires a lot of work (if you do it at the time your accountant says to do it)

When the business is that busy (i.e. doing the level of turnover required to achieve tax benefits), 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!

Business owners often don’t incorporate fast enough

If you’re intending for your business to be anything other than a hobby, you might seriously consider incorporating right from the start, or very early on.

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 there are various providers of incorporation services out there and for around $850 you can have a company name, 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.

So why incorporate?

1.Risk Management

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.

2. Easier Access to Capital 

It’s really strange, but banks seem more likely to lend money or credit to companies. I couldn’t even get a $2,000 increase on my personal credit card when I was a sole trader. When I incorporated and asked for a business credit card – they threw a $35,000 credit card at me. Go figure!

3. Enhance Your Business’ Credibility

Also strangely, you find when you incorporate that other businesses start to take your business more seriously. They see you as more stable, permanent and evidence of your commitment to the business.

4. Perpetuity 

A company will continue to exist regardless of what happens to the individual directors, officers, managers or shareholders. Good for succession planning as well.

5. Government Grants

A final thought is that some government grants are only eligible to those businesses that are incorporated. For instance, the Research & Development Tax Incentive isn’t available to sole traders. Luckily we incorporated when we did, otherwise we wouldn’t be eligible for the R&D tax incentive for building Legal Shield and Law in a Box. That was a $35,000 decision.

6. Other Benefits

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.

Contact us today if you require any assistance with setting up a Company!

(c) Progressive Legal Pty Ltd – All legal rights reserved (2019)

Related Articles