So your accountant has suggested that you should set up a company for your business – but your thoughts are “if it ain’t broke why fix it?”.
Here are three good reasons:
- Limited Liability – this is one of the primary advantages of operating a business through a limited company. Any debt of the company is limited to the company’s assets and generally a creditor of the company cannot recover the debt from the personal assets of the directors (there are some exceptions to this). If a sole trader cannot satisfy a debt, then the creditors can access the sole trader’s personal assets to recover the debt.
- Perpetual succession – a company is a distinct legal entity and can survive the death of all of its members and directors (share ownership is dealt with under the deceased shareholder’s will). Whereas as a sole trader does not enjoy perpetual succession, the assets of the business are dealt with under the sole trader’s estate plan.
- Tax benefits – a company pays tax at the maximum corporate rate of 30% of the income (ATO website, Aug 2019) whereas sole traders pay tax on their personal margin rate which can be as high as 47% (ATO website, Aug 2019).
That said, some disadvantages with starting up a new company include annual company registration fees and not being able to claim an investment as a deduction against the company’s assessable income.
However, for many businesses, the benefits of registering a company far outweigh the detriments and it would be prudent to make enquiries as to whether your business is one of the many.
For more information, contact Kelly Kelly Legal on (08) 8664 1162 and ask to speak to one of our solicitors.
This article was written by Melanie Rego.