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Considering scaling up? The advantages of company structures for SMEs

Posted on Tuesday, December 12, 2017 by

Company and trust structures are an ideal way of separating operational risks for growing businesses. When operating as a sole trader or in a partnership, all the risks of running a business are held personally by its owners. In fact, sole traders and unincorporated partnerships expose all of their owners’ personal assets to potential claims from creditors of the business, even if those assets are not part of the business.

This risk may be acceptable when a business is small and in its infancy, but as a business starts to grow and its operations become more complex, transitioning the business to a structure using companies may be a better way of assisting business owners to expand and safeguard their personal assets into the future.

The advantages of using company structures to operate a business include the following:

  • Limited personal liability – Corporations have separate legal personalities, meaning a corporation can sue or be sued in its own name only. Modern corporations allow business owners to help quarantine business risks and to separate their business activities from their owners’ personal affairs. However, these protections are not absolute and can be compromised in some circumstances, including when directors provide personal guarantees or allow a corporation to trade when it is insolvent.
  • Makes it easier to introduce other parties and external funding – Company structures increase the available funding options available for businesses, particularly in instances where these entities need additional funds to grow. For example, if a business decides it would like to introduce a new investor so that it can fund a business expansion, a company or trust structure can help as these can allow for the issuing of new shares or units to raise the needed capital.
  • More exit options – A company structure provides a range of exit possibilities for business owners. For example, a company owner can choose to sell some or all of its shares or business assets to a potential purchaser. In comparison, a sole trader is somewhat limited by the exit options he or she can take. They can only ever sell the business assets to a potential purchaser and/or cease trading if they wish to exit their business.
  • Different tax outcomes – A company is a separate taxable entity and is suitable vehicle for accumulating and reinvesting business profits. For the 2017-2018 FY, companies operating businesses with a turnover of less than $25 million are taxed at a flat rate of 27.5%. In comparison, individuals are taxed progressively with the top marginal rate of 45% plus 2% Medicare levy for those individuals earning more than $180,000 per annum. This difference in taxation means that the effective or average tax rate paid may be lower for corporations (as opposed to individuals operating businesses) with taxable income as low as $110,000 per annum.
  • Better governance – Under the Corporations Act 2001 (Cth), companies are required to maintain proper financial records which can assist business owners develop more sophisticated tools and procedures to manage their businesses. As a business grows, it will need to be managed with a greater reliance on policies, procedures and management systems rather than purely the “hands on” management of its founder. A company structure allows a business to bring in additional directors or independent directors to improve the organisation’s profile and give added confidence to third parties, such as passive investors.
  • Assists with succession plans, particularly for family businesses – Unlike an individual, a company has an unlimited life. As a result, ownership of the business can be expanded or transferred to new parties, including family members from different generations.
  • A professional image – Finally, a company structure can give a business a more polished image. It can send a message to customers and potential investors that it is a serious and genuine standalone enterprise.