Starting a Business
4. Advantages & Disadvantages
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 06 Jul 2015
- There are many advantages of operating your business as a company. In particular the fact that a company is a distinct legal entity from its directors and shareholders and the resulting limited liability can be a large incentive for business owners. However there are also concerns such as the strict legal obligations of directors and other company officers, potentially high establishment costs and more demanding ongoing compliance requirements.
- The main advantages of running your business as a company are:
- a company is a separate legal entity which provides a higher degree of protection from liability for directors and shareholders
- companies are well understood and accepted commercial structures which can facilitate their success in the marketplace. This is often referred to as 'commercial familiarity';
- it can be very easy to transfer the ownership of the company to another person simply by selling shares;
- it is usually fast and efficient to incorporate (establish) a company;
- any payments that a company makes into a superannuation fund for its employees can be claimed as a tax deduction;
- it can be easier for a company to raise capital than for an individual (sole trader);
- the current tax system makes companies competitive as a choice of business entity. If the company has paid tax the shareholders will receive tax credits for that amount paid;
- the company tax rate is currently 30% which is substantially lower than the maximum tax rate for individuals of 45% and
- it is possible to income split between family members to some degree through the issue of different share classes and the employment of family members. This enables minimisation of taxes across the family group.
- The main disadvantages of running your business as a company are:
- a company can often prove expensive to establish, maintain and wind up;
- tax losses can become 'trapped' inside the company meaning that companies are not ideal for the negative gearing of property assets;
- there can be substantial commercial costs in maintaining a company including the annual accounting and filing fees which flow from the various compulsory reporting obligations;
- companies are not entitled to the Capital Gains Tax (CGT) exemptions that individuals are entitled to and as such are not ideal for acquiring appreciating assets and
- shareholders have only limited involvement in the day-to-day affairs of the company which can be a valid concern when considering how decision-making and control of the company should be arranged.
- More information about the tax implications of running a business can be found in our Company Tax topic.
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