Companies are the most widely used and understood business structure.
You can enjoy almost complete limitation of liability as a shareholder. However, if you are a director, your liability is no longer as limited as it once was. Indeed, you can be held liable as a director for the company’s tax debts including PAYE or employee superannuation not paid or remitted to the Tax Office on employee wages or salaries. Some States may also hold you liable as director for environmental or other offences committed by the company.
The main advantages and disadvantages of a company are as follows:
- you can have limited liability as a shareholder and, to a lesser extent, as a director
- but as a director you must not permit insolvent trading or company tax defaults
- directors must keep certain minutes and file statutory forms
- undistributed company income is taxed at 30%
- distributed income is taxed at the individual or corporate rate of recipient shareholders (but with refundable credits for any company tax paid)
- funds flowing into the company must be classed as debt or equity
- but if a loan is classed by the tax law as equity it is not withdrawable without being taxed as a dividend
- funds cannot come out of company for your personal use except as a taxable dividend or through a buyback of your shares
- loans to you as a shareholder may trigger double tax as a Division 7A deemed dividends with no franking credits for tax previously paid
- company tax losses cannot be distributed and used in same year but must be carried forward and may even be cancelled on change of business or sale of shares in the company
- there is no flow-through to you as a shareholder of cashflow representing deductions
- there is no CGT discount on capital gains made by the company