Day 19 – Business Structures (Companies)

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Hi Victoria here from The Bookkeeper Hub, HBA Encompass, and the author of Zest for Success.  I’m back in my car studio.  Today I’m utilizing the time while my daughter is at nipper training to have a chat with you about entity structures.  Yesterday, we spoke about trusts.  The day before we spoke about partnerships and sole traders.

Today, we’re gonna talk about companies and then we’re gonna go a little bit further down the partnership route as well.  So company is an entity which in Australia is incorporated in its own right.  It means that it’s registered with ASIC, which is Australian Securities and Investment Commission.  It has shareholders who own shares in the company.  It has directors who run that company.  Now, that’s probably as deep into the nitty gritty as I’m going to get.

So, I’m gonna talk about the advantages, the disadvantages, and the costs associated with the companies.  First in the asset protection point of view, providing the directors haven’t given guarantees.  All liabilities relating to the company are kept inside the company which like a trust means that your individual assets, your home or whatever it happens to be, are not to give up if the business should go bad or there was a court case against you unless as I said there is that directors guarantee.  For an asset point of view, a company is a really good structure to have.  From a tax point of view, there are disadvantages in that the corporate tax rate for companies with under ten million dollars of income is twenty-seven and a half percent so as long as they’re trading entities, which means there is a business involved, twenty-seven and a half cents in a dollar is what that profit is taxed at.  And it doesn’t matter if it’s one dollar, a million dollar, or five million dollars, it’s still twenty-seven cents in a dollar.  If it’s not a trading company or you are over that threshold, it’s thirty cents in a dollar.  And with that as with any other company will it be BHP, Commonwealth Bank, or whatever it is, if you have a private company and you pay dividends to your shareholders, you don’t pay tax on that money twice.  There is a thing called an imputation credit or a franking credit that comes with the distribution from the company which means that there’s tax that’s already been paid on that money and you get a credit for that in your own name.  So there’s definitely tax advantages to companies and definitely asset protection advantages.  On the downside, they do cost money to set up and they do cost money to maintain.  And you do need to pay an annual ASIC fee for registration of the company.  So financial statements do need to be prepared, that’s a statutory rule.  So you’re gonna have accounting fees with the company which you may not have with the sole trade.  Very similar type cost to a trust as far as running them goes but you will also have an annual ASIC fee.  Now currently in 2017, it’s two hundred forty-nine dollars.  It usually goes up by one or two dollars each year as ASIC increases its fees for CPI.  From a rules and regulation point of view, there are minutes that need to be provided if you pay dividends or make decisions or issue shares.  There’s an annual solvency minute which you need to sign prior to lodging your asset company return.  Not a big drama, your accountant can look after that for you.  You just need to know that they do exist.  The other downside to companies is when it comes to capital gains tax.  So currently, there’s some amazing exemptions from capital gains tax for individuals.  And they flow through from individuals in partnerships and individuals in companies but not all of them flow through if you use a company.  So the main one that’s there is if you sell an asset that you’ve held for more than twelve months, you automatically get an exemption for 50% of the value of that asset.  Well you don’t get that exemption in a company.  And the other downside which is a bit bizarre and hard to explain but if you use the other capital gains exemptions whether it be the 15-year rule or the retirement exemption, then whatever profits that in that company that haven’t had tax paid on them to get them out of the company, it has to come out as a dividend.  But because the company hasn’t paid tax on that money, you don’t get the imputation credit or franking credit that I was talking before which means that the owners of the shares in the company end up paying tax on that money.  So even though there’s a capital gains tax free, it flows through and there is ultimately tax payable on it.  So a company is generally not the best vehicle for holding assets that are gonna increase in value such as shares, properties, or businesses.  But as far as asset protection and tax minimization, just normal income tax, they’re a great vehicle.  And if you are in Queensland  and you are registered with the QBCC, the company is the best structure for you because they can’t wrap their heads around trusts and it makes the paperwork that’s required absolutely horrendous and puts all kind of existing rules in.  So that’s companies and trusts in a nutshell.  I’m gonna leave it at that.  You can have different varieties of trusts owning shares in companies or companies being shares in partnerships and stuff like that.  The best advice I can give you is actually have a chat to your accountant before you decide on the best business structure for you.  Because they will take into account what you’re doing, the rest of your family is doing, what other assets you have, the growth aspirations of your business or whatever it is and sit down with you and come up with a structure that’s gonna be the best.  The only thing that I do suggest is you just try and keep it simple.  We’ve heard of the KISS principle, keep it simple stupid.  Well, entity structures are exactly the same.  There are accountants out there that will give you wide variety of structures and all interlinking and all kinds of stuff but at the end of the day it may not be the best outcome for you.  It may be something that creates great income for them but not the best outcome for you.  Although, I say that if you do change accountants or all your structure needs to change, there are exemptions that you can get if you do need to change these.  So that’s companies and trusts.

We’re gonna look at chapter four in the book in our next session.  I’ve had enough for this afternoon.  As you can see the past videos have been me and my car because I’ve taken advantage of the time that I’ve got.  I’ll see you on the other side.

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