After crafting a business model and strategy suitable for the Australian market, small business owners and entrepreneurs are strongly recommended to research the most appropriate business structure for their enterprise. This is important as the structure of your business will be the base for tax compliance purposes and help you best meet client standards and expectations.
In Australia, there are four structures that new businesses can choose from: sole trader, partnership, company, and trust. The sole trader and partnership structures are mostly used by the self-employed, whereas the company structure has a more professional branding image and is also widely used by small businesses.
For entrepreneurs seeking to incorporate their venture as a small business, the recommended business structure in Australia is the company-type of structure.
Company structures in Australia
The company structure branches out to 4 specific types:
- Proprietary limited company (PLC)
- Public company limited by shares or guarantee
- Public company with no liability
- Special purpose company.
The recommended and most used type of entity for a small company is the Proprietary Limited Company, for reasons that will be explained below
Proprietary Limited company (PLC)
The Proprietary Limited Company, which is displayed as Pty Ltd in company names, is held privately, and as a company structure is considered an independent, separate entity from its owners. This means that the company can have rights as a natural person would, can incur liabilities and is able to sue and be sued.
There are some compulsory aspects to register a PLC. A PLC should have at least one owner, one director to run the business and no more than 50 non-employee shareholders. This might seem too general, but matters can be simplified as an owner can be both a shareholder and a director. They can even be the only shareholder.
What are the benefits of a PLC?
Overall, the benefits for a small PLC are a lower tax bracket than sole traders or other business forms, plus the ability to carry out debt, animosity, liability, and succession.
Shareholders are not directly liable for any company-related debt, as the PLC is separate from its owners. In other words, the personal assets of owners can’t be used to pay company debts. However, it is important to mention that in cases where directors breach their duties, they may be held personally responsible for losses.
Another important benefit enjoyed by Australian businesses is the capability to carry out debt forward indefinitely. This allows early-stage companies to better manage cash and have a greater cash flow to work with as they work to generate greater profits.
2. Advantages of tax regulation in Australia
Tax rates for PLCs can be lower than the tax rates for other business structures. At its highest bracket, tax for individuals sits at 49%, whereas tax for a small proprietary limited company is 27.5%. Additionally, there are tax deduction and benefits depending on your business industry and other characteristics.
To break down the taxes you will need to pay specifically, these will usually include PAYG and GST rates.
General taxes for a PLC apply to Pay As You Go (PAYG) and Goods and Services Tax (GST). The latter applies if your expected turnover is higher than US$75,000 in your company’s first year.
PAYG isn’t taxed on your business. Instead, it is a tax on employees’ wages. A company is required to withhold a tax amount from its employees’ salary (directors included) to comply with PAYG. The withheld amount must be forwarded to the Australian Taxation Office (ATO).
Moving onto GST, this is a rate of 10% that is applied to all goods and services sold in Australia. Only businesses that expect a turnover of US$75,000 or higher in their first year are obliged to pay GST. However, businesses in their first year with a smaller expected turnover can choose to register for GST to gain access to credit benefits. Registered businesses are able to claim credits based on the GST included in the price of any purchase they make for operational purposes.
Australia currently offers special tax deductions and benefits for industries they are working to develop and expand nationally. For specific details on any tax benefits or legal particularities related to your industry, it’s recommended that you seek professional assistance from an accountant or a lawyer.
3. The benefit of anonymity
Under Chapter 6D of the Corporations Act 2001, a company must not disclose information about its investors and shareholders, and public disclosure is also limited. This allows a company to be managed in a more private manner, without the burden of excessive public scrutiny.
Another benefit is longevity. Owners are able to sell or hand over the reins of the company if they want to retire. The assurance of company longevity and independence even after the owner decides to retire can give shareholders greater peace of mind.
Registering a PLC business structure in Australia
The entity that regulates business structure registration in Australia is the Australian Securities and Investments Commission (ASIC), so you will need to register your business with them.
To begin the process, you will need to choose a company name and check its availability on ASIC’s website. There, you’ll find a tool to search for company names that have already been registered, and confirm if your preferred name is available. Then, you will need to apply for three things generally: your company’s registry application, a business Tax File Number (TFN) and an Australian Business Number (ABN).
Online process makes registering easy
In the past, company registration needed to be submitted manually. However, as of October 2019, Australian company registrations are now completed online. Make sure to have all relevant details about your business ready before you start the process. To know what information you’ll need to provide, it’s important to engage with a local lawyer or accountant. Regarding your business’s TFN, this will be issued automatically by the ATO once you have registered your business.
The last thing you will need to secure for your business is an ABN. An ABN is a unique 11 digit number that serves as the identification for your business. Applying for an ABN is free. Having an ABN is important as it is necessary to register a business name and an Australian domain name for invoice purposes and to avoid 46.5% of payments your clients make being withheld from you.
This process is simple and straightforward if you have the appropriate information at hand.
Choosing the right business structure is very important for Australian businesses because it will dictate how your expenses are managed. The cost to register a proprietary limited company generally is AU$495, but this amount could go up depending on any particularities of your company.
Since the cost to register for the ABN and PAYG withholding is zero, registering a business in Australia is usually quite inexpensive.
Why start a business in Australia?
There is a reason why Australia is considered an attractive point for both local and foreign investors. Not only has the country accrued nearly 3 decades of sustained growth,it also offers a raft of tax incentives that are not as widely known.
Picking the appropriate business structure in Australia is key to ensure your business’ ongoing success, and its ability to meet corporate compliance requirements in accordance with your commercial activity.
Additionally, Australia is one of the world’s biggest e-commerce markets. This means your business has the opportunity to gain access to a significant proportion of a global consumer market through digital means.
Make sure to seek out the right legal assistance in Australia when registering your proprietary limited company to ensure that you start your business on the right track. As a small company, you have much to gain from Australia’s welcoming business environment and the many incentives offered to support small-scale operators.
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