If you've just set up a company, or are considering doing so, you will probably have some idea of what a company is, but here is a brief overview to get us on the same page.

1. Limited Liability

Companies are often "limited by shares", which means that if any legal action is taken against the company, the most that can be taken from shareholders is the dollar value of the shares that they hold - which is usually a very small amount. If I hold 10 shares in company x, and the agreed value of those shares is $10, then that is the maximum that can be taken from me.*

*unless personal assets are specifically and intentionally leveraged against loans.

2. Low Tax Rate

A company is taxed at a fixed rate for every dollar of profit, which is 25% for small companies. This is often one of the reasons why people set up companies in the first place, since tax for individuals quickly goes above 25%, and it gradually increases to 45% for high income earners.

3. Tax paid by a company can benefit shareholders in future years

When a company pays tax on its earnings, this generates a tax credit, which we give a strange name of "Franking Credits". These franking credits can be attached to future dividends (I'll explain this later), and act as refundable tax credits when paid to individuals (even if it is first sent to a trust). This often takes some tax planning to make the most of this benefit.

4. ASIC Registration and renewal

Every year you'll have to pay ASIC an annual renewal fee (currently $290), and submit a form to ASIC. This form can be handled by your Tax or ASIC agent.

5. Dividends

The profits remaining in a company at the end of the year can be paid out as Dividends to shareholders, the dividends must be equal for each class of shareholder, meaning you can't pay one shareholder more per share than another - unless they hold a different class of share. It is common for couples to have a different share class (eg. Class A, Class B) to enable tax planning benefits. 

A company does not have to pay dividends, and the profit surplus may continue to grow where profits continue. These growing profits are shown on the Retained Earnings account on your Balance Sheet.

6. GST Registration and BAS

You only need to register for GST once your revenue is $75,000 or more. GST registration means you have to withhold GST from sales, and it will also be factored in on your purchases. The GST you paid, and the GST you received will either result in GST owing to the ATO, or GST refundable to you. This is determined each Quarter for small businesses, and lodged through a Business Activity Statement (BAS).

If you hire employees, you will need to withhold tax from employees, and this tax withheld (PAYG Withholding) will be paid to the ATO as part of your BAS.

You may also be asked to prepay some tax by the ATO, this often happens when you have a profit on your previous year which results in tax payable. This prepaid tax is called a PAYG Instalment, and the amount to pay will be provided to you - and you pay it on your BAS.

7. Wages and Super

If you take on employees, you will be required to ensure that you always pay them, and particularly their Superannuation. Super is calculated at a fixed rate based on the ordinary hours worked. The current rate is 10.5%. Super builds up as a payable amount over the month, and should be paid at least every 3 months. Most software is designed to help you pay Super via a "Clearing House" - which means you can make a single payment and the system will split that payment to each employee's super fund for you based on what is allocated to them. This requires you to enter in correct superannuation details for each employee

Conclusion:

This outline has been prepared to provide an informative, but not exhaustive list of the basic things you should be aware of when considering or starting a new company. The benefits of Limited liability, and lower tax, as well as the benefit of carried forward tax credits are enticing perks, but ultimately the choice to set up a company should be considered in discussion with a tax professional.

If you would like to discuss any part of this article in detail, please book an appointment via the following link:

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