Often, one of the last things that a person thinks about when kicking off their business is how they will legally operate – for example, either as a sole trader or through a company.
Business structures can take a variety of forms. The most common types of business are companies, body corporates such as incorporated associations and co-operatives, as well as trusts, joint ventures and partnerships.
Many people struggle to identify the perfect structure to operate their business from, but most land on a company structure. However, even once this decision has been made, it can still be confusing as it comes with different types and concepts.
There are two types of companies – public and private. Not-for-profits (companies limited by guarantee) are public companies, and private companies are companies that are limited by shares.
Generally, companies have:
- a Constitution, and
- classes of shares.
Different structures affect how your company runs, what your company can do or trade as, and ultimately whether there are shareholders that are benefiting from the profit made by the company or whether it’s a not-for-profit company.
From a tax perspective, certain matters do need to be considered. For Commonwealth taxation purposes, a company acting in its own right is a taxpaying entity, unless specifically exempted. It must, for example, file an annual income tax return and comply with relevant tax compliance obligations, including fringe benefit tax (FBT), goods and services tax (GST) and pay as you go (PAYG) obligations.
The general company rate of tax for 2017–18, 2018–19 and 2019–20 is 30%. However, if the company qualifies as a base rate entity, the rate of tax is 27.5%. To be a base rate entity, a company must carry on business and have an aggregated annual turnover of less than $25 million (2017–18) or less than $50 million (2018–19 and 2019–20).
The constitution of a company may prove inadequate in some respects, including regarding the rights and obligations between the shareholders themselves in various situations. If your company has two or more shareholders, we recommend entering into a shareholders agreement. Team Bolter can help you with this and prepare the shareholders agreement to address situations where there is a death of a shareholder or where a shareholder becomes incapacitated.
To learn more about companies, read our article on What is a Shareholders’ Agreement here.