This topic is our most popular blog post and the most frequently asked question at Shelcom Corporate Services.
It is very typical that when speaking colloquially the words business and company are used interchangeably and it is not entirely incorrect. A company is in fact a business and a business can be a company.
In the official business structure world however, the two are very different. A business and a company are very dissimilar in the way that they are structured financially and legally.
The basics of a business
A business is usually a great starting point for a new small to medium size venture.
The cost of setting up a business is relatively low as all you need is an Australian Business Number or A.B.N. for which you can apply for free through the www.abr.gov.au website.
Business name registration is one of the first activities that you will need to take care of. If you would like to register your business with the Australian government you can do so for $30 for one year or $80 for three years. (These are the prices if you apply directly through the Australian Securities & Investments Commission). Australian business name registration is handled by ASIC you will need your A.B.N and a name for your business, along with a postal address and a physical business address.
Generally there are two types of businesses: Sole Trader or Partnership.
A sole trader does not have to register a business name with ASIC if they trade under their own name, however they must apply for an A.B.N. ABN number registration will need to be completed as part of this process. Also, if the proprietors name changes, the business must be registered with ASIC.
A partnership can comprise of two or more individuals or entities, and a formal partnership agreement should be put in place.
Legally and financially a business and the proprietor are not separate from one another. The money the business earns is income that needs to be claimed on the proprietor’s personal tax return. Tax-wise, in the eyes of the ATO you are seen as an individual, which means you are privy to the $18,200 tax-free threshold and the individual tax threshold rates.
The proprietor of a business is solely (or together with a partner or partners) responsible for any debts the business suffers. If the business has bad debt, creditors are within their legal rights to repossess the proprietor’s personal belongings and private assets.
Remember, you can always restructure your business down the line as it grows. You can go from running a business as a sole trader to running a company as a director in the future if need be.
The basics of a company
A company is a much more complex and expensive structure and is often favoured by medium to large enterprises, or by proprietors who need asset and liability protection.
A company structure set up costs around the $600-$700 mark, and it is advised that an accountant, lawyer, financial planner or corporate service provider is involved in the entire company registration process from general business advice to the compilation and filing of paper work. An expert should be involved to ensure that the structure fits the circumstances and that everything is completed correctly and in compliance with the law. There are also mandatory annual fees (including company name registration), which must be paid to ASIC on the anniversary of company incorporation. Today, the fee is $230, but this is subject to change at ASIC’s discretion.
Legally and financially a company is a separate entity from the proprietor. If a company is set up with a limited liability structure and it goes into debt, the debt remains the responsibility of the company, which means that the proprietor’s personal assets are secure. Keep in mind that this does not mean that company directors are not accountable if they violate the law.
Incorporated companies have shareholders which enables the company to raise funds more easily. Companies are also taxed differently to individuals and pay a flat tax rate of only 30%, yet they don’t get the tax free threshold privileges. These are all factors that you will need to take into account whilst completing the required company registration tasks.
A company must meet many regulatory standards and government directives. It must report and disclose information about itself on a regular basis. ASIC ensures that companies are meeting their obligations under the Corporations ACT 2001.
You can read more about company compliance here.
Have more questions? Still unsure? Ask me I will do my best to help!