This article series explores the differences between a sole trader, partnership, a company and a trust.
The is the third instalment of a 4 part series on business structures.
The main practical differences between the business structures involve risk, the ability to share pre tax and post tax income, asset protection/legal ownership, WorkCover insurance for owners and how personal super contributions requirements apply. We also need to take into account the ATO’s personal services income rules, anti avoidance and alienation of income provisions.
The key points of this business structure can be described as follows:
Part 3. Companies
- A company is a separate (from the owners) legal entity. A company can sue and be sued.
- Formal registration and set up process needs to be followed, and it involves ASIC. The owners hold shares in the company and appoint Directors to run to the company.
- Sole director and Shareholder companies are possible. For Start Up and Micro businesses, the shareholders and the directors are generally the same people.
- Business transactions are run through company bank accounts. The owners can employ themselves and so are covered under the company’s WorkCover insurance and are subject to the superannuation contribution guarantee requirements and fringe benefit tax provisions.
Easy to set up but there is a cost of a shelf company and ASIC fees
The shareholders are not personally liable for all the debts incurred by the business
Directors/shareholders can be employees and withholding of personal taxes and super can start from day one, thus averting a potentially nasty tax debt, at time the company is required to lodge its tax return.
Onerous reporting and administrative requirements required by law
Need to keep accounts for the Company that comply with the accounting standards and the Corporations Act 2001
Things To Watch For
- Generally in first couple of years, if there are significant profits left in the company, no income tax is withheld
- The directors need to be good with managing money so as to not get caught with a large tax bill in year 2.
- Personal Services Income (PSI) rules are commonly applied to micro businesses such as contactors and consultants where 80+% or income comes from one source/client/group. In essence, if the PSI rules apply, the company structure is ignored and all allowable deductions are stripped back and treated as if the person earning the PSI were an ordinary wages and salary earner.
- Similarly, there is an increasing focus from the ATO on Personal Services Businesses where the income is generally derived from principal professionals e.g. medicos, lawyers, accountants but distributed to non-income producing shareholders.
- The ATO’s view is that, particularly where this is a partnership or sole practitioner business, without professional equivalent staff ratios, this income should be attributed to the person generating the income. Other ATO guidelines and considerations apply and are available on request.
- ASIC issue an Annual Review statement each year and the directors are required to signed a Solvency/Insolvency Resolution.
- Additionally, changes of address, officeholders, shareholders etc. need to be notified to ASIC within prescribe periods and failure to do so can result in stiff fines.
- Fines also apply for not paying renewal fees on time and can lead to the deregistration of the company by ASIC. Penalties and fines are not deductible.
- Standard GST and, if employing staff, PAYG withholding and super obligations apply.
- The directors are personally liable for unpaid PAYE (employee) tax and superannuation and may be liable for other debts incurred by the company if done so while trading insolently.
- Fringe Benefits Tax rules also apply to Employees, Directors/Shareholders and their associates
- Super payments need to received into the superfunds’ bank accounts before 28th January, April, July and October in order for the company to claim a tax deduction : There are no extensions or exceptions.