Nudge Moments: Should I set up my startup as a company?

Every second month Emma from Nudge Accounting answers a finance question (via Vlog or Blog) asked by a member of the Microsoft Bizspark or the startup community.

Question: I’m looking at setting up my startup as a company. Do you think that’s a good idea?

Emma’s Response:

Before making a decision like this, it’s important to first understand what a company is.

What is a company?

There are two different types of companies. A public company and a proprietary limited (Pty Ltd) company. A public company is often listed on the stock exchange and is what you see at the big end of town. A Pty Ltd company is a private company where you will see many startups and small businesses.

A private company is a separate legal entity with limited liability. There are two main parties which form a company -  ‘Shareholders’ who are the owners of the company, and ‘Directors’ who are responsible for decision making within the company. You can be both a shareholder as well as a director (and many startup founders are!).

Profits within the company are taxed at a separate corporate tax rate. With the recent changes in the budget, the company tax rate is expected to come down to 28.5% from 30%.

Company’s are required to be registered with the Australian Securities & Investments Commission (ASIC) and there are additional and more complex reporting requirements that apply for company’s than simpler structures such as sole traders and partnerships.

What are some advantages of having a company structure:

  • Easier access to capital than sole trader and partnership structures including requirements to have a company by many Australian accelerator / incubator funds
  • Easy to sell/pass on ownership through the sale of shares
  • Owners have limited legal liability meaning that they cannot be sued as shareholders personally (although they can be sued as directors)
  • Can access the R&D tax incentive for eligible expenditure

What are some disadvantages of having a company structure:

  • Costs to set up and maintain are generally higher than for sole traders and partnerships
  • Time and expense in additional compliance
  • Closer regulation by the courts
  • More costly to windup/terminate than a sole trader and partnership structure and often requires the appointment of a liquidator

In weighing up whether a company is the right structure for you, consider your own startup plans and the plans and circumstances of those involved in your startup. Remember, a company is not the only business structure - and there are other structures, such as operating as a sole trader or partnership, which may suit you better.

Disclosure: This article is not intended to replace in any way professional accounting advice