A company structure is a pretty complex type of business structure.
It’s great if you are making a decent profit.
A company is a separate legal entity
So the company becomes likes its own person. Own TFN, ABN and ACN.
When it comes to getting sued, it’s on the company and the company’s assets (not your personal ones). As a separate legal entity, it can also incur debt like an individual, and sue another entity.
Directorship
- A company must have at least one director, who can also be an employee of the business, but does not have to be. The director is also where the responsibility of the business lies.
It’s also an easy structure to allow the transfer of directorship when selling the business.
Proprietary or Public
- The most common structure is a Proprietary (Pty. Ltd.) company as it is very expensive to set up and run a Public company.
Profits
- It’s a relatively flexible structure and you can pay yourself from a company via a wage, if you are an employee, or via dividends, if you are a shareholder or even both.
The Paperwork
- Ugh, the dreaded paperwork!
I’m afraid a company is more complex and so the setup costs and yearly administration and maintenance costs are higher than that of a Sole Trader. Also, there is a lot more paperwork too.
Let’s Talk About TAX
A company, due to the fact that it is now a separate legal entity, also has their own tax requirements. This includes now having to pay income tax on its profits. However this is at a fixed company tax rate, which is currently sitting at 27.50% or 30%, depending on several factors.
This tax is paid on every dollar of profit made by the company, as, unlike a Sole Trader, there is no tax-free threshold applied. Due to the tax that the company now must pay as its own entity, it is also required to lodge its own separate tax return. This is also where a lot of the tax deductions can be found to get you a few $ back from all that tax we were previously talking about.
If the company is also annually turning over above $75,000, then you need to be registered for GST (or $150,000 for not-for-profit Company’s).
The other thing to take into consideration is a little thing called Personal Services Income (PSI). This is where you are working your butt off for your company and most of the company’s profits are due to your personal efforts. In this case, the businesses profits may be treated as your individual income for tax purposes, which in turn starts to change how we go about hunting down and claiming those deductions. This does get very complicated and seeking advice from a knowledgeable professional is essential.
So, is a company structure right for you?
- Is your business getting big enough and have enough clients or customers that there is a chance you may be sued?
- Are you making a profit higher than $180,000 (that is, the 47 % tax rate bracket)?
- Are you wanting to implement tax minimisation strategies?
If you answered yes to one of the above questions, then there is a pretty good chance you should be considering the viability of a company structure for your business.
If you’re still not sure, how about trying out this handy little quiz to choose the right structure for you.