It is very important that investors and entrepreneurs in Australia carefully deliberate on their options when it comes to the choice of business structure. This can have a large impact on crucial aspects of the ventures including but not limited to taxes, bookkeeping, personal liability and legal liability. As such, professional consultation from a lawyer and/or accountant on business restructuring is absolutely necessary as it is a very involved process.
Private Limited Companies
A private limited company, also called a propriety company, is a company that does not sell its shares to the general public (such as through a stock exchange). A propriety company has “Pty Limited” or”Pty Ltd” after the name and it is the simplest and most common type for small businesses. Setting up a private limited company is recommended for any business activities involving a potential exposure to commercial liability. Commercial liabilities can fall under the Fair Trading Act, duties, and obligations imposed by statute or the Resource Management Act to name a few.
The transfer of shares in a private limited company is often restricted in certain ways, such as by the requirement that the company directors must approve any transfer of shares and that new shareholders only become members of the company on registration of the transfer of the shares to them by the company
The Wrong Business Structure
Depending on the classification of the company as either small or large, private companies have respective accounting requirements. This is one of the risks of having the wrong business structure or waiting too long to restructure. A company’s classification can change from one financial year to the next as its circumstances change. As such, with the new classification, distinct legal obligations and implications for taxation, liability and succession may arise.
Having the wrong business structure runs the risk of exposing a business to the respective range of lawsuits. The right structure can offer a business some degree of legal protection. Also, waiting a long time to restructure a business robs in of potential capital gains. With a propriety company, it is much easier to raise capital and as time goes so does this window of opportunity.
In Australia, companies are regulated by the Australian Securities and Investment Commission (ASIC) which administers the Corporations Act 2001. ASIC main function is to protect businesses and customers in their dealings with companies as well as maintain an information record of details of all companies in Australia. In simple terms, a company has three major obligations; operate according to law, maintain proper records and report its activities.
Benefits of Restructuring to a Private Limited Company
One of the main advantages of a propriety company is the benefit of “limited liability. If a company falls, the owners will potentially only lose the value of the shares they hold and the money they contributed for the shares. A propriety company is capable of accommodating multiple owners who have differing interests, more easily than say a Partnership or public company.
This also enables it to be flexible. Changes in ownership and shareholding can be implemented without changing the ownership of the company assets themselves or ceasing the company’s operations. As such, a propriety company structure provides a commercially acceptable and well-recognised structure for doing business and has several tax advantages.
It is important to note that setting up a proprietary company requires compliance with key government registrations, failure to which can have undesirable legal implications. As such, it’s recommended that you contact Femia Accountants to help you to restructure your business correctly, whether it is to a private limited or to another structure altogether.
Contact our office today on 9316 4500 or book a time to meet with us.