Incorporating your business may be the last thing on your mind. While many start-ups and small businesses start as sole traders or partnerships, incorporation is often a more suitable often. In this post, we will look at what incorporation entails and the benefits it can bring.
What does it mean to incorporate?
The term corporation comes from the Latin term “corpus”, which means body. A corporation, then, is a separate body or legal person in the eyes of the law. More precisely, incorporating a company helps you to establish a separate legal entity, limiting liability and functions to act as a catalyst for business growth. According to section 124 of the Corporations Act 2001 (Cth), a company has the legal capacity and powers of an individual.
The most common type of company in Australia is a proprietary limited company (“Pty Ltd”). Other types of companies include companies limited by guarantee and no liability (“NL”) companies.
When is the best time to incorporate?
While there is no definitive right time to incorporate, there are some instances that make it easier than others. Critical times to consider incorporating your business include before you launch your product or service to the market. This strategy comes with your business’s set up and helps protect your personal assets. Additionally, consider incorporating before a new business partner joins. This turning point in your business helps to define your shareholding percentages to avoid disputes at a later date. Finally, if you want the flexibility to issue shares to new investors or run an employee share scheme, then you will need to incorporate.
It is worth noting that as a company, you must register for goods and services tax (GST) if your turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000.
What are the advantages?
Incorporating your company is vital to decreasing personal risk. When a sole trader goes bust or becomes involved in a business dispute, they will be personally liable and their assets will be at risk to pay off business debts. In contrast, if a company goes bust, only the assets held by the company will be available to satisfy creditors’ claims. (Creditors will still be able to get to your personal assets if you give them personal guarantees, so proceed with caution before signing contracts with suppliers, your landlord or bank.)
Tax advantages are hugely beneficial to every business too. Small business companies are taxed at a flat rate of 27.5%, which can be significantly lower than that levied on sole traders. In particular, if you are a sole trader who reaches the higher tax brackets, there are significant benefits to choosing an incorporated company structure.
It is not just financial gain that is at stake. Suppliers, customers and business associates perceive corporations as being more stable. Incorporating your business can then aid in improving public relations and customer relations. Business owners know this too, as shown in recent studies. The number of sole traders and partnerships continued to decrease in 2016, by -1% and -4% respectively. More and more businesses are moving towards incorporation, so contact your lawyer to see how it can benefit you.
Additionally, you will have greater flexibility as a business owner for the company’s future. If you set up as a company, you can define each partner’s shareholding from the beginning, and lower the likelihood of ownership disputes further down the line. Companies can also merge, restructure, or be bought and sold, unlike partnerships, sole traders or discretionary trust set ups.
What does incorporation entail?
If you are moving from a sole trader to corporate status, you will need to incorporate a new company through the Australian Securities and Investments Commission (ASIC). You will also need to obtain a brand-new Australian Business Number (ABN) and a separate Tax File Number (TFN) for the company. It is important to note that it is not possible to incorporate online through the ASIC directly. However, some providers offer same day online incorporation services. Check ASIC’s checklist for registering a company for further details. While the process may seem straight forward, it is best to have some expert advice on hand. Hire a specialist corporate lawyer to complete this process for you, as mistakes can negate the asset protection and tax benefits provided by company incorporation. A specialist lawyer can also advise on advanced topics such using multiple companies to form a corporate group.