Should I register my business as a company?

One of the most frequent questions we get from business owners is, "Should I set up a company structure?" It’s a crucial decision that can shape your business's future, from your tax obligations to your personal liability. The honest answer is: it depends. There’s no single solution that fits every business. The right choice for you will depend on your specific circumstances, goals, and risk tolerance.

Making this decision can feel overwhelming, especially when you're already juggling the day-to-day demands of running your business. You might be worried about making the wrong choice, getting hit with unexpected costs, or creating a structure that’s too complicated to manage. We understand these concerns. Many of our clients come to us feeling frustrated and unsure about how to move forward.

To help you find clarity, we've broken down the four key factors you need to consider: the costs involved, the tax implications, the level of asset protection, and the impact on your business's reputation. By exploring these areas, you can make an informed decision that gives you confidence and peace of mind.

Factor 1: The Cost of a Company Structure

Setting up and maintaining a company involves more than just a one-off registration fee. It's important to have a clear picture of all the ongoing costs to ensure the structure is financially sustainable for your business. These expenses can add up, and what might be a minor cost for a large enterprise could be a significant burden for a small business or startup.

Let's break down the typical costs you can expect:

Initial Setup Costs

The first expense is the registration fee paid to the Australian Securities and Investments Commission (ASIC). As of 2024, this fee is around $576 to register a proprietary limited company. While you can do this yourself, many business owners choose to use a formation service or engage an accountant or lawyer to ensure all documentation is correct. This professional assistance can add several hundred to a couple of thousand dollars to the initial setup cost, but it provides peace of mind that your company is established correctly from the start.

Ongoing Annual Costs

Once your company is registered, you’ll face an annual review fee from ASIC. For a standard proprietary company, this is currently $310 per year. This fee ensures your company remains registered and compliant with ASIC's requirements. Failing to pay this on time can result in late fees and, eventually, deregistration of your company.

Accounting and Tax Compliance

This is where costs can vary significantly. A company has more complex tax and reporting obligations than a sole trader. You will need to lodge an annual company tax return, maintain detailed financial records, and potentially register for GST, PAYG withholding, and other taxes depending on your operations.

Most businesses will need an accountant to manage these obligations. Accounting fees for a company can range from $2,000 to $5,000+ per year for a small business, depending on the complexity of your transactions, the number of employees, and the level of service required. This is a considerable step up from the few hundred dollars a sole trader might pay for their annual tax return. These costs cover services like preparing financial statements, lodging tax returns, and providing ongoing advice.

Other Administrative Costs

There are other potential costs to consider. If you act as a director, you may need to pay for director's insurance to protect yourself from personal liability. You might also have costs associated with holding annual general meetings (even if you're the sole director and shareholder), maintaining a corporate register, and ensuring all company details with ASIC are kept up to date. Changing your company’s address or director details requires lodging forms with ASIC, which can sometimes involve fees or professional time.

For a small business, these combined costs can be substantial. It's essential to weigh these expenses against the potential benefits of tax savings and asset protection. A company structure might not be cost-effective if your business profits are modest, as the compliance costs could eat into a significant portion of your earnings.

Factor 2: Understanding the Tax Implications

Tax is often the primary motivator for business owners considering a company structure. The potential for a lower tax rate is appealing, but the reality is more nuanced. The tax implications depend heavily on your business's profitability and how you plan to use the profits.

Company Tax Rate

In Australia, the current company tax rate is 25% for businesses with an aggregated turnover of less than $50 million (known as base rate entities). For all other companies, the rate is 30%. This flat rate is often lower than the higher marginal personal income tax rates, which can climb as high as 45% (plus the Medicare levy).

This is where the attraction lies. If your business is generating significant profits, keeping those profits within the company and paying tax at 25% seems much better than taking it all as personal income and paying a higher marginal rate. For example, if your business makes $200,000 in profit, a company would pay $50,000 in tax. If you were a sole trader, that entire profit would be added to your personal income, likely pushing you into the highest tax brackets.

Pass-Through Taxation vs. Company Taxation

Sole traders and partnerships operate under a "pass-through" taxation model. This means the business itself doesn't pay tax; instead, all profits "pass through" to the individual owners, who pay tax on their share at their personal income tax rates.

A company, however, is a separate legal and tax entity. It pays tax on its own profits. This creates a crucial distinction: the money belongs to the company, not to you personally. To get money out of the company, you need to pay yourself a salary (as an employee) or distribute the profits as dividends (to shareholders).

Getting Money Out of the Company

This is the part that many business owners overlook. When you take money out, further tax implications arise.

• Salaries: If you pay yourself a salary, it’s a tax-deductible expense for the company, but it's personal income for you. You'll pay income tax on it at your marginal rate.
• Dividends: If you distribute after-tax profits as dividends, these dividends come with "franking credits." These credits represent the tax the company has already paid. When you receive a franked dividend, you include both the dividend amount and the franking credit in your personal taxable income, but you get a tax offset for the value of the franking credit. The goal is to prevent double taxation.

The system is designed so that, ultimately, the total tax paid on the profits is roughly equivalent to your personal marginal tax rate. So, if you need to draw out all the profits to cover your living expenses, the tax benefit of a company structure is largely neutralised. The real tax advantage of a company emerges when you can afford to leave profits within the company to reinvest in its growth.

Factor 3: The Importance of Asset Protection

Beyond tax, one of the most critical reasons to form a company is to protect your personal assets. This is a topic that many business owners don't think about until it's too late. When you operate as a sole trader, you and your business are legally the same entity. This means if your business incurs debts or is sued, your personal assets—like your family home, car, and savings—are at risk.

Creating a Legal Shield

A company is a separate legal entity. This separation creates a "corporate veil" between the business and its owners (the shareholders). If the company accumulates debt or faces legal action, creditors and litigants can typically only claim against the company's assets. Your personal assets are protected.

This protection is invaluable for businesses that operate in high-risk industries, have employees, take on significant debt, or enter into large contracts. Imagine you run a construction business. If an accident occurs on-site and your business is sued for negligence, a company structure can prevent the lawsuit from bankrupting you personally. As a sole trader, you could lose everything.

When the Veil Can Be Pierced

It's important to understand that this protection isn't absolute. The corporate veil can be "pierced" in certain situations. The most common is if you, as a director, have given a personal guarantee for a business loan. Banks and landlords often require personal guarantees from directors of small companies, which makes you personally liable if the company defaults.

Directors also have legal duties to act in the best interests of the company. If you engage in reckless or fraudulent trading (for example, continuing to incur debts when you know the company is insolvent), you could be held personally liable for those debts.

Despite these exceptions, the level of asset protection offered by a company is a significant advantage over a sole trader structure. It allows you to take calculated business risks without betting your family's financial security. For many entrepreneurs, this peace of mind is worth the additional cost and complexity of a company structure.

Factor 4: Enhancing Your Business Reputation

The structure you choose can also influence how your business is perceived by customers, suppliers, and potential investors. While it might seem like a minor point, business reputation and credibility can have a real impact on your growth.

Projecting Professionalism and Stability

Having "Pty Ltd" (Proprietary Limited) after your business name often projects an image of professionalism, stability, and permanence. It signals to the market that you have a formal, established business structure. This can be particularly important in B2B industries, where you might be dealing with larger corporations. Some large companies and government agencies have policies that only allow them to engage with incorporated entities, effectively ruling out sole traders.

This enhanced credibility can make it easier to secure contracts, attract high-calibre employees, and build trust with suppliers. A supplier might be more willing to extend credit to a company than to a sole trader, viewing the company as a more durable and lower-risk entity.

Attracting Investment

If you have ambitions to grow your business by bringing in external investors, a company structure is essential. A company can issue shares to new investors, making it a straightforward way to raise capital. Sole traders and partnerships cannot sell shares in the business, making it much more complicated to formalise an investment arrangement. Venture capitalists and angel investors will almost always require a business to be a company before they will consider investing.

Even if you don't plan to seek external investment now, setting up as a company from the beginning makes it easier to scale in the future. Transitioning from a sole trader to a company later on can be a complex and potentially costly process, so starting with the end in mind can be a strategic advantage.

Making the Right Choice for Your Business

As you can see, the decision to form a company involves a trade-off between cost and complexity on one hand, and asset protection, tax flexibility, and credibility on the other.

A company structure is often a good fit if:

• Your business is generating substantial profits that you can afford to reinvest.
• You operate in an industry with a higher risk of litigation or debt.
• You want to protect your personal assets from business liabilities.
• You plan to seek investment or eventually sell the business.
• You need the credibility of a "Pty Ltd" to secure clients or contracts.

On the other hand, remaining a sole trader might be more appropriate if:

• Your business is in its early stages with low profits.
• You need to draw all the profits to cover your personal living expenses.
• Your business operates in a low-risk industry.
• The administrative costs and complexity of a company would be a significant burden.

Every business journey is unique. Don't let yourself get overwhelmed by the options. The most important step is to assess your individual situation against these four factors.

If you’re still feeling uncertain, that's completely normal. Making these foundational decisions is tough, but you don’t have to do it alone. Mahler Advisory is here to provide tailored support and help you choose the structure that gives you peace of mind and sets you up for future success. Click the call button or schedule an online appointment to discuss your specific requirements and discover the optimal structure for your unique situation.

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is correct at the time of publishing and is subject to change*

Tax laws and regulations can change over time, so it is important to stay informed about any updates or amendments that may affect your tax obligations. The Australian Taxation Office (ATO) is the authoritative source for the most up-to-date information regarding tax requirements and regulations in Australia.