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Manoj Makanjee, Jannali, NSW
1. Costs of registration
Since 28 May 2012, business name registration in Australia is done nationally with the government charge being $37 for a one year registration period and $87 for a three year registration period.
Likewise, registration of an Australian company is also an Australia-wide 'thing' and commonly costs around $650 to $750 through a 'shelf company provider' or 'company formation agent' and around $1200 or $1500 through an accountant. [However if you use Incorporator (the supplier of this information) the total cost will be $665 (including GST). But if price is particularly important to you, you should make your own price comparisons.]
Accordingly, there is no question that the mere registration of a business name is cheaper than registering a company. However, the registration of a company/company name will obviate the need to register the name as a business name (on the basis that the full and exact company name, including the 'name ending' - e.g. 'Pty Ltd' - is always used).
2. Ongoing costs
Business name registrations need to be renewed periodically, when their one or three year registration period expires, with the government charge being $37 for a further one year registration period or $87 for a further three year registration period.
In contrast, a ('standard' private) company must pay a yearly ASIC annual review fee of $230
(as at 1 July 2012).
In addition, and speaking generally, companies usually have other additional ongoing costs - the most common being additional accounting fees associated with maintaining
a proper set of company accounts.
3. Limited liability
The principal (and longstanding traditional and historical) advantage of an incorporated company is that it has limited liability. That is (and speaking generally), a company may only be forced to pay creditors up to the extent of its own assets and capital, plus any moneys unpaid on its shares (usually nil because most companies issue shares which are fully paid for at the time of issue, and for a mere nominal amount such as $1.00). Further, the company is a separate legal entity or 'person'. In particular, a company is separate from its owners (its members/shareholders) and the persons who run it (its directors).
So, speaking generally, assuming that the directors have acted honestly (and in particular have not allowed the company to incur debts at a time when they knew that the company would not be able to repay its debts as and when they fell due), and assuming that the directors or owners of the company have not otherwise given personal guarantees for the company's debts or obligations, then the personal assets of the directors and the shareholders/owners of the company will be not be within the reach of (and thus will be protected from) the company's creditors.
4. 'Impression' created on outsiders
Often (rightly or wrongly) outsiders are more impressed by an incorporated company name (ending, for example in 'Pty Ltd') than a mere registered business name. For a start, 'people in the know', know that it costs more to set up a company than merely to register a business name. Thus, a greater impression of 'seriousness' can often result from the registration of an Australian company.
Individuals (including if they are trading under a mere registered business name) are taxed at the normal marginal rates of tax - with the top tax rate (as at 1 July 2013) being 47% (including the 2% Medicare levy).
In contrast, Australian companies are taxed at a flat company tax rate of 30% (as at 1 July 2013). But this does not necessarily mean that companies will always pay 'less tax'. Why? Because the individual tax rates are on a sliding scale and they include an initial tax-free threshold. In contrast, companies are taxed from their first dollar of profit, with no tax-free threshold. Then again, companies may (or may not have) deductions available to them which individuals do not. Also, there can sometimes be a bit of a 'trap' with companies as regards capital gains tax. Why? Because companies pay tax on all their assessable capital gains, whereas individuals and trusts 'get' 50% of their capital gains tax-free. Moreover there are some relatively new tax rules regarding 'personal service companies' which, for example, may result in a company not being able to claim a tax deduction for wages paid to an 'associated' employee (e.g. the wife of the company's sole shareholder and director). However all of this 'depends' and you should therefore speak to an accountant for a further analysis of this.
Also, here is a link to a very useful and informative Australian Taxation Office (ATO) publication entitled Tax aspects of incorporating your business.
6. 'Own' property, and 'deal in' the name of a company
For various reasons it sometimes suits persons to 'own property in, or deal in' the name of their company rather than in their own name. Further, Australian company law now allows for a 'one person company' - that is, a company which has a single person as its sole owner (shareholder) and director. In saying this however, one must always remember that a company is an entity separate from its owners & directors - it must not simply be treated as an 'alter-ego' of its owner(s)/director(s).
7. Attracting investment/capital
Companies may find it easier to attract investment/capital, than say a partnership can. Why? Because (passive) investors can be confident that they will not be legally obliged to contribute further funds to the company (i.e. in addition to what they have already paid, or already have agreed to pay, for their shares) in the event that the company gets into financial difficulties (see 'Limited liability' above). In contrast, if such passive investors were to contribute equity funds to a business being run as a partnership, and become a 'silent partner' of the partnership, they would be likely to be fully exposed to, and liable for, the debts of the partnership - this becomes particularly relevant in the event that the partnership/business gets into financial difficulties.
8. Transfer of ownership & control
In the case of companies limited by shares, the very fact that the company has shares acts to facilitate a possible sale of the company (either in whole or in part). Why? Because the company's shares may be sold (either all of them, or only some of them). Share capital also facilitates the bringing in of new owners (either by way of existing shareholders transferring all or some of their shares to new shareholders, or by way of the company issuing new shares to new shareholders).
Also, a company structure facilitates any desired changes in the day-to-day control of the company and its business activities (i.e. by way of the resignation of all or some of the company's directors, and by the appointment of replacement or additional directors).
9. Perpetual succession
A company exists indefinitely (unless wound up), irrespective of the retirement or death of its managers, directors, and shareholders/owners.
10. Sometimes you simply 'need' a company
Example 1: You are an independent contractor (e.g. an Australia Post courier) operating as an unincorporated sole trader under a fixed term contract. The contract expires and comes up for renewal. You may find that your 'employer' changes its policy such that it will only renew your contract if you 'become incorporated'.
Example 2: You give up your position as an employee in order to go into business on your own. You decide that your new business will be as a franchisee (for example as a mortgage broker or as the proprietor of a hamburger or pizza outlet in a chain of such businesses). However you may find that the franchisor will only allow you to purchase a franchise if you first form a company and then purchase and/or run the new business in the name of the company.
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