Companies are a common structure favoured by businesses, particularly where there are a number of unrelated parties involved. One of the main reasons for this is because the shares in the company provide for a clear definition of the interest or share held by each shareholder in the company and its assets and also because it facilitates with relative ease, the sale and purchase of shares and accordingly the change of shareholders’ interests in the company.
Another draw card prompting people to use a company structure, is the ability to lock in a flat corporate tax rate in the year in which the income is derived, with the potential for shareholders to claim franking credits when dividends are subsequently paid. Currently the corporate tax rate is in the range of 28.5 % to 30% and there may be small cuts to that tax rate in the future.
As a comparison, an individual will be paying at least 34.5% tax rate, including the Medicare levy for every dollar above $37,000 of income in a year.
From an asset protection perspective, the use of a company can provide a high level of protection, if the objective is to quarantine the risk to the company. This is because the company’s creditors will generally only have access to the company’s assets in the event of insolvency and will not have access to a shareholders personal assets.
Where however it can be shown that a company has been trading whilst insolvent or where there are unpaid company tax debts, directors may be held personally liable for the debts of the company.
A significant disadvantage of a company particular in relation to holding assets which are likely to increase in value, is that companies are ineligible for the 50% capital gains tax discount. Furthermore, the small business capital gains tax concessions are effectively negated by the use of a corporate entity.
The time to consider which entity you will commence or run your business is at the time you are considering commencing the business, as there are usually significant transactional costs and taxes associated with changing the structure after the business has commenced.
We can at Everingham Solomons, assist you with most business matters because Helping You is Our Business.
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