Business Structure Factors
Sole Traders, Partnerships and Registered Companies are terms you may have heard of when looking to establish your business. In the case of a Sole Trader or Partnership, the business operation is usually carried out under a name whereby the customers of the business are able to identify them. This is called a Business Name. Companies may also like to use a Business Name to identify themselves, yet the Company name is nationally recognised in Australia and in most cases is sufficient. For the information below, the use of the words "Business Name" refer to Sole Traders and Partnerships (we assume a Business Name is in place if this is the ownership structure being used).
Costs of Registration
Business name registration is carried out on a state-by-state basis where the registration period and fees for each state are different. For example, the Northern Territory business name fee is $65.00 where the NSW fee for the same period (3 years) is $152.00. The most common registration period amongst the states is three years and the renewal fees vary between each state.
Registration of a company is more expensive than registering a business name but registering a company name provides exclusivity of the name across Australia. The company registration fee is $426.00 with ASIC and depending on the supplier (Company formation agents or your Accountant or Lawyer) you will be required to pay additional fees to obtain the required legal documentation. Fees and registration packages vary and you should be aware of exactly what you are receiving. Shelcom's Company Registration fee is $715.00 which includes the ASIC fee of $426.00.
For example, let's say a business was trading in each state or territory of Australia. There are two options:
- You could Register a Company which has national ownership of the registered name, or
- Register a Business Name in each of the states and territories.
Both options have advantages. To consistently maintain and keep control of the brand name and reduce your upfront expense, the Registration of a Company is the easiest way to go.
Ongoing Costs
Business Name registrations need to be renewed periodically and are dependant on the state the Business Name is registered in.
In contrast, a Company must pay a yearly ASIC annual review fee of $226.50. In addition to the fee, a solvency statement and clarification of the company's details needs to be completed and submitted to ASIC by the directors of the company. It is common that your accountant would also charge an annual fee for acting as the Company's registered office. Read about Annual Review's and Registered Agent Services.
Degree of 'Protection'
Generally speaking Registering a Company offers great protection against other people wanting to register the same or a similar trading name. A Registered Company Name is recognised Australia wide through a government body called ASIC. Once you Register a Company Name, the name is automatically unavailable for anyone regardless if they are trying to Register a Company or Register a Business Name.
Business Names are only recognised in the state of its registration. Therefore, each state could have a business operating with the same Business Name, yet have different owners, be different types of businesses and operate within any industry. For example, if you operate a fish shop in Victoria under a Victorian registered Business Name, someone else in NSW can be operating a book store under that same Business Name.
Limited Liability
Registered Company's are classified as a legal entity and are separate from its owners (Members) and the individuals who manage the business (directors). Being a separate body, the personal liability of the people that are involved with the Registered Company (Members and Directors) is reduced. In the event that the Company is unable to pay its debts, the Company will be ordered to pay creditors up to the extent of its own assets and capital, thus limiting the personal liability of the owners. For example, personal assets such as the family home, cars and other investments which are owned by Members or Directors would normally be protected from being used to pay debts of the struggling Company.Distinctly different, a Business Name is not classified as a legal entity. Therefore, there is no defined limit on what the owners of Business Name are liable to pay in the event that the business is unable to meet its debts. The owners of the Business Name are considered to be personally responsible for the entire debt to creditors, meaning that any personal assets (family home, private vehicles and investments) of the Business Name owner could be used to repay the creditors.
Taxation
Individuals tradings under a registered Business name are taxed at normal individual marginal rates of tax - with the top tax rate (as at 1 July 2010) being 46.5% (including the 1.5% Medicare levy). Comparatively, Companies are taxed at a flat tax rate of 30% (as at 1 July 2010). This does not necessarily mean that Companies will always pay less tax than operations using a Business Name. Due to the fact that Individual tax rates are based upon a sliding scale and include an initial tax-free threshold, in some circumstances individuals may pay less than 30% tax. Furthermore, a Company is taxed on the first dollar of profit and there is no tax-free threshold.
Operating through a Company may entitle you to become eligible for certain deductions which are not available to individuals. If you are new to business it may be worth reading the publication by the Australian Taxation Office called "Tax Basics for Small Business." Conversely, only individuals are entitled to Capital Gains Tax (CGT).
This is quite technical and If you are unsure, confused or require further information you should speak to your accountant or adviser for advice around your situation. If you don't have an advisor or you don't feel comfortable approaching your accountant then contact us and we can have an expert contact you.
Own Property and Other Assets in the Name of a Company
For various liability, protection and tax reasons there may be benefits in owning property and other assets in the name of a company rather than in your own name. The Corporations Act 2001 (section 198E) now allows for a 'sole director company' where effectively, the individual owns and controls the Company and any of the Company's assets.
Attracting Investment Capital
If you are thinking of attracting investment capital from a third party to improve or take a risk in your business, you are more likely to provide comfort for the investors if you are operating a separate Registered Company rather than a Partnership or Business Name. Rightly or wrongly, the impression to the public or potential investors is that a serious business is more likely to be a Registered Company. Registered Companies need to comply with ASIC requirements in order to continue to operate, so perhaps there is a level of comfort that people involved in Registered Companies should be granted a higher level of trust.
Making changes to a Registered Company is a simple process and a third party can be included on a ownership level (shareholders) rather than an operating level (directors). Furthermore, if the Registered Company was run into debt, the liability for the investor would be limited to the amount they originally invested and not other assets. If the same situation was to occur through a Partnership or Business Name structure, there would be a need for legal documents to be created and the investor would lose their original investment and increase their level of liability which may effect other assets.
Transfer of Ownership and Control
The way in which a Registered Company (Limited by Shares) is structured may differ, but principally there is a need for at least one Director (operator) and one Shareholder (owner). Transferring ownership (either in full or in part) is achieved by allocating the shares of the company to the new owner. For example, if all of the Company is being taken over, the entire amount of shares are to be transferred. If only half of the business is sold, then half of the Company's shares need to be transferred.
Operating bodies usually have an informal structure of staff and the roles and responsibilities are outlined and governed by the owners. Business Names and Partnerships don't have any formal structure in place and therefore controlling the daily ownership and responsibilities from a legal view can be difficult and complex. Company structures have formally defined roles where the owners (shareholders) and operators (directors) are required to take on certain responsibilities according to the law and ASIC.
There may be circumstances where an employee (which can be a director) leaves or is asked to leave the business. When operating within a Registered Company, it is easy to appoint another employee who will take on the responsibilities of the person being replaced. Once the new director is appointed, they must adhere to the new responsibilities and therefor laws pertaining to the role.
Perpetual Succession
Most business structures exist indefinitely irrespective of the retirement or death of its managers or owners or shareholders/owners. Similarly Business names can also exist indefinitely.
