What is a Company?

The first thing to know about a company structure is that it is a completely separate legal entity. It is treated differently than an individual. A Company is subject to different tax laws. As far as the law and the ATO are concerned, it is another person - without a soul.

A company consists of several roles and is broken up into one or more shares. One or more directors control the company's day to day running and is/are responsible for keeping the company solvent. This includes future planning for continual expansion.

The person with the most shares generally controls the company. A shareholder may or may not be a director. At the director's discretion, shareholders can receive a share in the profits of the company via dividends.

Directors are legally responsible for what happens with the company. Should the company fall into bankruptcy, the directors can be held responsible. Today, a proprietory limited company doesn't protect the directors if the company is sued. Therefore, directors of companies are wise to use asset protection precautions, especially if they are in an industry that commonly suffers litigation claims of negligence.

Disadvantage of using a Company Structure

Firstly, the 50% capital gains discount is not available to a company, only to an individual or a trust. Income can only be taken out as Wages, Director's fees or Bonuses and Dividends.

Whenever a company pays wages, director's fees or bonuses, in addition to being subject to income tax, the income is also subject to worker's compensation and superannuation payments.

If the company makes a loan to a shareholder, and it is not a genuine loan requiring repayment and evidenced by a loan agreement, the loan will be deemed to be a dividend. Such a dividend is not frankable, and therefore dividend imputation credits are not attached to it.

A major problem is inadequate cash flow. Poor management, lax credit terms, insufficient cash flow and trading losses are among the most common reasons why companies fail and in most cases, unsecured creditors receive less than 10 cents in the dollar back.

Company Tax Rate

One of the main differences between an individual and a company is the tax rate. A company pays 30% whether it earns one dollar or a million dollars. Therefore, a company has an immediate advantage over an individual who is in the higher tax bracket. Through sensible planning, income tax can be limited to 30%. This, of course doesn't apply to an employee, but for an investor or business owner it may be possible.

Tax Return Checklist

Last year's accounts and tax returns (if a new client), bank statements, cheque butts, deposit books and details of all assets used in the business and their cost etc. Books of account or Accounting Program file or P & L and Balance Sheet Statements as well as General Ledger detailed.

Copies of all BAS Statements

What is an auditor?

Someone who arrives after the battle and bayonets all the wounded