The company structure: is it right for you?

Most Australian businesses of any size end up in a company, and usually for one reason: it draws a line between the debts of the business and everything you personally own.

That line is the whole value of the structure, so it is worth understanding precisely – including the places it does not hold, which is where people get caught.

What a company actually is

A company is a separate legal person. It owns the business, signs the contracts, employs the staff, owes the debts and pays its own tax. You do not own the business directly. You own shares in the company that owns it.

Two roles sit inside that, and in a small business they are usually the same people – but they are legally distinct, and the difference matters when something goes wrong:

• Directors run the company and carry the legal duties

• Shareholders own it and receive the dividends

A company also outlives the people in it. Shares can be transferred or inherited and the entity continues, with its contracts, registrations and history intact. Nothing needs to be novated because nothing changed hands except shares.

Pty Ltd or Ltd?

Pty Ltd – proprietary limited – is the private company that nearly every small and medium business uses. It can have up to 50 non-employee shareholders and cannot raise funds from the general public.

Ltd is a public company. Far more disclosure, far more cost, and not what you want unless you are raising capital broadly. If someone is describing your situation and says "company", they almost certainly mean Pty Ltd.

What the structure gives you

The tax rate deserves a qualification, because it is the advantage most often misunderstood. It applies to profit the company retains. Every dollar left in the business to fund stock, equipment or staff is taxed once at the company rate rather than at your marginal rate, and the difference stays in the business working.

Draw it all out to live on and that particular advantage does not arise – the money is taxed in your hands as it comes out. The liability reasons stand on their own regardless, and for most businesses they are the ones that decide it.

What it costs you

Setup and ongoing compliance. ASIC registration, an annual review fee, a company tax return separate from your own, a share register and minutes of the decisions that need them. None of it is difficult; all of it is a cost that a sole trader does not carry.

Division 7A. Money in the company is not simply yours to use. An unrepaid loan to a shareholder or an associate is treated as a dividend and taxed accordingly, which catches people who assumed the company account was another pocket. Drawings need to be planned as wages, dividends or a documented loan on commercial terms – not taken as needed and sorted out afterwards.

No 50% CGT discount. A company cannot pass it to its shareholders. Where the plan is to hold something that grows in value and sell it later, a structure that saved tax every year can cost considerably more on the way out. From 1 July 2027 this gap narrows rather than closes: individuals and trusts also lose the 50% discount, replaced by cost-base indexation and a minimum 30% rate on gains for resident individuals, with gains accrued before that date preserved through a deemed disposal. The old rule of thumb – never hold appreciating assets in a company – is worth re-testing on your own numbers rather than assumed.

Losses are trapped. They stay in the company and can only be used against its own future profits, and only if it passes the ownership or business continuity tests. A sole trader can sometimes offset a business loss against other income in the same year; a company never can.

Where a company does not protect you

A company draws the line in most places, but not everywhere. Directors are personally exposed in three situations, and these are the ones that actually catch people.

• Trading while insolvent. Incur debts when the company cannot pay them and directors can be made personally liable for those debts. "I did not look closely at the numbers" is not a defence – it is closer to the problem.

• Unpaid PAYG withholding, GST and super. The ATO can issue a Director Penalty Notice making directors personally liable for these amounts. Superannuation catches people hardest, because unpaid super feels like a cash flow decision and is treated as something much closer to a debt you personally owe.

• Personal guarantees. A landlord, a bank or a large supplier will usually ask for one, and it steps straight past the company. Read what you are signing – a guarantee undoes the protection you paid to establish.

None of this makes the company structure a poor one. It makes it a structure that has to be run properly, which is a different thing, and most of the exposure above comes from paperwork left undone rather than from bad luck.

Setting one up

Registering a company is quick – the entity, ABN, TFN, and GST and PAYG registrations where they apply. Getting it right is about what surrounds it: who the shareholders are, whether a trust should sit above it, and whether the people involved need an agreement between them.

Business setup is where we handle the execution, and a shareholders agreement is worth reading about before you register anything with more than one owner.

Is a company right for you?

Usually, if you employ people, carry real risk, deal with unrelated partners or reinvest your profit. Often not, if you are on your own, doing low-risk work and drawing everything out to live on.

Our business structuring page has a short tool that will point you one way or the other in about a minute, along with the ownership questions that a form cannot answer. The other structures are covered too – the sole trader, the partnership and trusts.