Setting up a company
Many start-up businesses begin as sole traders. Any available finances they have are used to fund equipment and other resources that help to generate revenue. What little money remains usually funds the sole trader until the new business can make a profit.
This shortage of funds is the reason that many Australian businesses begin as sole traders, however, most start-ups outgrow this model and eventually become companies.
What is a company?
A company is a separate legal ‘person’ that can own assets and enter contracts in its own capacity, separate from the company shareholders and directors.
The core difference between a sole trader and a company is that a sole trader is legally the same as the individual founder, whereas a company is a separate legal entity. Another difference is that a company’s profits are taxed at a flat rate.
Why set up company?
Companies can help legally build a wall between your personal assets and the financial risks of your business. That’s important if you want to protect yourself and your family’s personal assets. In an Australian company your financial liability is generally limited to the amount of money you’ve invested in a company’s shares.
There are also tax benefits to owning a company. The company tax rate is lower than individual income tax rates (for anyone that has annual taxable income of more than $37,000.00). This lower rate means more funds are left over to invest back into the business.
Earning a salary
Companies make it simpler and cleaner for shareholders and directors to earn a salary, like their staff.
Although a company does not remove liability altogether (there are rules around the conduct of shareholders and directors), it does provide you and your family with a greater degree of certainty around your future. A company also creates a legal barrier if anyone ever wants to take legal action against your business.
When is the best time to set up a company?
If you can afford it, setting up a company before you open the doors may be a good idea, however, if this is not practical, other events may trigger the need to set up a company.
Hiring employees can come with some risks. If you are considering hiring employees, this is often a good time to incorporate a company so that the company takes on potential risks, rather than you as a sole trader. Transferring employees from a sole trader to a company in the future can be complex so there are numerous benefits to incorporating a company before you start to hire staff.
Entering a commercial lease may mean that your business is now at a stage that might make a company worthwhile and provide you with an extra level of legal protection.
Once you start generating larger profits, a company can help you reduce your tax burden, as well as manage the distribution of profits.
If you intend to go after large contracts, many organisations would demand that you have a company structure in place. It provides them with a sense of certainty.
First steps to setting up a company
There’s an old expression which says, ‘start the way you mean to finish’. This is especially true when setting up a company. Like most business decisions, the more informed you are, the better chance you have of setting up a company correctly. Bizally are experts at helping entrepreneurs like yourself set up companies for start-ups. If you want to know more, contact Bizally today and set up an initial, free discussion.