One of the main advantages of operating as a company is the limited liability protection it offers. Sole traders (individuals) who operate a business put their personal assets at risk if they are unable to meet their business debts or if they face serious legal issues. In contrast, a company is a separate legal entity. This separation may offer some legal protection for the individual shareholders, as the company is responsible for business-related liabilities, not the individuals.

Operating as a company often enhances the credibility of the business in the business world. Customers and suppliers may perceive a registered company as having greater permanence and scale, which has the implication of being more reputable and trustworthy, potentially opening doors to larger contracts and collaborations with larger businesses. However, be aware that banks lending to smaller companies will usually still ask for personal guarantees from the company’s shareholders for funds lent to the company.

A company structure may also make it easier to attract new business partners without disrupting day-to-day operations. Instead of selling a share in the assets to a new business partner; the transaction is simply an issue or transfer of company shares. The existing supplier and customer contracts should remain unaffected. Companies are also useful for succession planning, making it easier to gradually pass the business on to key employees or family members.

Companies often have more opportunities for tax planning and optimisation compared to sole traders. Sole traders are taxed at their personal marginal tax rate, which is currently 33% for income between $70k – $180k and 39% for income over $180k. Companies have a flat tax rate of 28% for profits retained in the company. This can be an advantage when your business is in a growth phase and is looking to reinvest profits into new assets or working capital or paying off debt in the company. However, be aware that you cannot treat the company’s money as your own. Any funds you take from the company are essentially a loan to you. If you want to keep those funds, you need to consider arranging for the company to pay you a dividend.

Companies also have their own specific legal and regulatory compliance, and it is important to understand the basics of these rules. In particular, it is an offence to operate a company if it is insolvent, so good financial management is key. You should invest in accounting software that caters to your needs and allows you to keep track of cash flow and analyse expenses and revenue. Budgeting and cash flow forecasting is often essential for sustainable growth and to help with better understanding of your financial information. The software you choose should also be able to help manage payroll, GST and other tax compliance.

We would always recommend seeking guidance from legal and accounting professionals who can help set things up and assist you in making informed decisions that align to your business goals. They can also help with defining and regularly monitoring key performance indicators of your business. This will help you track progress, identify areas for improvement and make informed strategic decisions.

In summary, transitioning to a company structure could bring a range of benefits, from limited liability protection, better business credibility and making it easier for bringing in new business partners.

This article has focused on the advantages of companies, however in certain situations there may be other legal structures to consider such as Limited Partnerships, Look-Through Companies and Trusts. These may be beneficial and provide further opportunities and your options should be talked through with your advisor.