Business structures
Company
A company is a separate legal entity registered with ASIC, owned by shareholders and run by directors, which pays tax on its own income at the company tax rate.
A company is a legal entity separate from its owners, registered with the Australian Securities and Investments Commission. The owners are the shareholders, and the company is managed by one or more directors. Because the company is a separate person in law, it can own assets, enter contracts and be sued in its own name. The shareholders' liability is generally limited to any unpaid amount on their shares, which is the main reason many people choose a company for a growing business.
A company must get its own ABN and tax file number, and lodges its own company tax return. It pays tax on its taxable income at the company tax rate. A base rate entity pays the lower rate of 25%, and other companies pay 30%. The tests for base rate entity status depend on turnover and the proportion of passive income, so check the current requirements on ato.gov.au. Company profits are not taxed in the shareholders' hands until paid out as dividends, which may carry franking credits.
Directors have legal duties, including acting in good faith, avoiding insolvent trading and ensuring the company meets its tax obligations. If a company fails to pay withheld tax or super, the ATO can issue a director penalty notice, making directors personally liable. Companies also have ongoing ASIC obligations, such as an annual review and keeping registers, which add to the cost and administration compared with a sole trader.
GST works as for any entity. A company registers for GST once its GST turnover reaches $75,000, or earlier if it chooses, and charges GST on taxable supplies, claims credits on purchases with valid tax invoices, and lodges BAS. If the company employs its directors or other staff, it must withhold PAYG and pay super on their wages. Directors who are paid by the company are employees for those purposes, and fees can also attract super guarantee.
Money flowing between the company and its owners needs care. A director cannot simply take money out of the company bank account without it being a salary, a dividend or a properly documented loan. Loans from private companies to shareholders or associates can be treated as deemed dividends under the tax law unless specific conditions are met. Keep clear records and seek advice before drawing on company funds.
A common misunderstanding is that a company protects its owners from all personal risk. Directors can still be personally liable for tax debts, and banks and landlords often ask for personal guarantees. Another mistake is mixing personal and company expenses, which can lead to denied deductions and unwanted tax outcomes.
This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
Lakeside Pty Ltd earns $400,000 in sales with $300,000 of deductible expenses, so taxable income is $100,000. If it qualifies as a base rate entity at the 25% rate, tax is $100,000 x 25% = $25,000. The remaining $75,000 stays in the company or is paid to shareholders as dividends, which may carry franking credits for the tax the company has already paid.
Practical tips
- Keep personal and company money strictly separate and document any loans between the company and its owners.
- Directors should make sure PAYG withholding, super and GST are paid on time, as unpaid amounts can create personal liability.
- Check each year whether the company qualifies for the lower base rate entity rate, as it depends on tests that can change.