# Using the company to buy shares?



## timmeh (7 January 2011)

Hi guys, I'm real new to share trading so please go easy!

Currently, I have a company structure in place - originally set up for my music business/studio (money pit) for liability concerns on advice from my lawyer wife (not a finance lawyer!). It's been running at a loss for the last couple of years due to quite high outlays and as I'm juggling that with raising kids so it's not been a full time focus. Now we are keen to use the company to buy shares and utilise that current loss for tax purposes (if that would be advantage to do so?). Haven't yet gone to the accountant yet but would be keen to hear any opinions, suggestions on what we can do/how we should best go about it?

Thanks in advance,
Tim


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## tech/a (7 January 2011)

Company structure used to minimise tax.
If your running at a loss and have personal taxes then a company structure doesn't matter.

See your accountant---why take financial advice from un known faceless people on a forum?


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## luke256 (7 January 2011)

From what i know there are two types of losses:
1. Revenue losses
2. Capital losses

I'll assume the music business losses are of revenue nature. So if you buy shares and make a capital gain i don't think you will be able to offset the share capital gains against prior business losses.

Also in regards to the capital gains on shares, i dont think you will get the 50% CGT discount if the shares are held by a company.

If you recieve fully franked dividends they would have a 30% franking credit which is equal to the company tax rate - my understanding is that the revenue losses wouldn't be used up if the dividends are fully franked.      

Hopefully the above points will help you ask the right questions when you speak to an accountant.


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## timmeh (7 January 2011)

Thanks guys - yeah i know this question is best of for an accountant/financial adviser but I'm not seeing him for another week so just thought I'd pose the question here in case anyone else may have some knowledge about how it might work as I don't know much in regards to this. 

As I understand it a company can't get a 50% CGT concession, though a trust can.Anyway will be interesting to hear what the accountant has to say.

Thanks again.


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## skc (7 January 2011)

luke256 said:


> From what i know there are two types of losses:
> 1. Revenue losses
> 2. Capital losses
> 
> ...




If you are trading under a company and conducting a trading business, then your losses are in deed revenue loss and not capital loss.

P.S. Me no accountant.


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## Tyler Durden (8 January 2011)

I'd be interested to hear more responses on this as well, since I've been thinking of doing something similar. But I haven't heard of many people doing it, so it probably can't be that beneficial?


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## tech/a (8 January 2011)

Tyler Durden said:


> I'd be interested to hear more responses on this as well, since I've been thinking of doing something similar. But I haven't heard of many people doing it, so it probably can't be that beneficial?





I would say that's due to very few making enough out of trading to structure a company or trust to trade through.


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## skc (9 January 2011)

Tyler Durden said:


> I'd be interested to hear more responses on this as well, since I've been thinking of doing something similar. But I haven't heard of many people doing it, so it probably can't be that beneficial?




Like Tech/a says depends on your profit amount.

Company tax is 30%. Plus say $500-800 to set up, and depending on your trading level, annual accounting and registration fees can be another $1K. Personal tax rates hits 'average' tax rate of 30% after ~$100K. If trading is your sole income that's what you need to make before your company structure breaks even.

If you are on a marginal tax rate of >30%, you save 7% for the next $100K on trading profits that you make with a company structure. Again, that may be slightly marginal given how much effort you need to set up a company.

If you are on 46.5% marginal tax rate, company begins to make sense. But the problem is always when you want to take money out of the company structure. If you take out as dividends you still pay the tax eventually.

With a trust the benefits available depends on how many family members you have whom you are comfortable with your money and have low enough tax rates for you to make meaningful distributions. If your partner doesn't work it will makes sense reasonably quickly but DYOR.


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## dannydb (10 January 2011)

Some further info available here: http://www.ato.gov.au/individuals/content.asp?doc=/content/12333.htm and here http://www.ato.gov.au/businesses/content.asp?doc=/content/44266.htm

You should speak to a financial advisor/accountant/tax agent to get a an answer applicable to your own situation but a general starting point is to calculate the net position after tax in each structure you're considering and make the comparison. Make sure you include every extra cost the company structure would bring with it (as skc has pointed out) i.e. accounting fees, ASIC fees, insurance, etc... also don't forget to include the intrinsic cost of running the structure itself (i.e. time needed for you to administer a company etc.)


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## WayneC74 (Friday at 4:30 AM)

you can all so read
https://legalvision.com.au/owning-shares-dual-company-structure/ or
https://legalvision.com.au/category/business-structures/ 
Bare in mind You would need to have a shareholder agreement  witch is legal binding Agreement will will protect the Shareholder Because Company Constitution Will not Protect a shareholder  hears a copy and past from https://legalvision.com.au/shareholders-agreement/ 
Shareholders Agreements​
A shareholders agreement is an agreement made between two or more shareholders, independent of the company’s constitution or contracts in which the company is involved.
The agreement may contain clauses on the roles and responsibilities of shareholders, how your company will be managed, how disputes are to be resolved, the rules and requirements around new share issues, selling shares, and how to handle a takeover offer.
A standard company constitution will not always protect you and your shareholders in the event of a dispute between shareholders and members. You should individually tailor your shareholders’ agreement because every company is different.
Why Have a Shareholders Agreement?​The specific provisions of each shareholders agreement should take into account the number of shareholders, the objectives of the shareholders, the funding arrangements, and the nature of the business or industry in which the company operates.

A company’s internal management will be governed by a combination of:


the Corporations Act 2001; and
the company’s Constitution, if it has one; and
the company’s Shareholders Agreement, if it has one.
The Corporations Act​The Corporations Act provides some basic safeguards for shareholders but does not adequately cover the rights of shareholders in detail. Although the Corporations Act does not require companies to have a Shareholders Agreement, having one can be beneficial for setting ground rules about issues that affect shareholders.

Additionally, the Corporations Act provides that a set of rules, known as the Replaceable Rules, apply to private companies in certain circumstances. These rules will apply to your company if you registered it before 1 July 1998 and have repealed its constitution since that day. Replaceable rules also apply if you registered your company after 1 July 1998.

Types of Shares​A company can issue different types of shares to individual shareholders. You can issue shares according to their categorisation into different ‘classes.’ Each share class has various rights and restrictions attached to it, which differentiates it from other classes. Common titles for share classes are ordinary, preference, class A and class B shares. A company can elect to choose their own titles for different share classes. A Shareholders Agreement will set out the rights and restrictions placed on different classes of shares. 

A company can also issue different types of shares. Common types of shares include: 


*Preference shares*Preference shares entitle the shareholder to a fixed dividend, whose payment of the dividend takes priority over that of ordinary share dividends. In the event of company bankruptcy, preferred stock shareholders have a right to be paid from company assets first.*Redeemable preference shares*Redeemable preference shares may be redeemed at a specified time such as a members’ option, a fixed date, or at the passing of a particular event. These shares are governed according to their prescribed terms of issue.*Bonus shares*Bonus shares are issued with no fee payable to the company. The issue of these shares does not increase the company’s share capital. 
Key Clauses to a Shareholders Agreement​Every shareholders agreement is different; however, there are several key clauses every agreement should have.

Directors and the Board​A Shareholders Agreement can set out the maximum number of directors and the percentage of shares required to appoint a director. It should also contain a clause on when and how you can remove a director, for example, if they commit an ‘Event of Default.’

Board Meetings​The frequency of board meetings, as well as who can call for a directors meeting, are essential. These meetings should be quarterly and more frequently as agreed. The Agreement should include the quorum, being the minimum number of directors required to be present at a board meeting.

Duties of Directors​The Corporations Act and general law set out the duties of directors. The Agreement can set out the key duties and additional duties, including to:


represent the interests of the shareholders;
avoid conflicts of interest;
discharge all duties with due care and diligence;
not use their position, or information obtained from their position, to gain an advantage for themselves; and
not cause detriment to the Company.
Shareholders Meetings​A general meeting is a meeting of the shareholders of the company. A Shareholders Agreement should set out what issues the shareholders decide, rather than the directors.

Deadlocks and Disputes​Where shareholders cannot agree on the management of the company, a deadlock provision resolves this. A Shareholders Agreement should set out how to resolve disputes, including how to resolve a deadlock between the directors or the shareholders. This may include a direct meeting and mediation.

New Shares and Dividends​An issue of new shares requires either unanimous approval or majority approval of shareholders. The Shareholders will often need that new shares are first offered to existing shareholders on a pro rata basis.

Regarding dividends, a Shareholders Agreement will include how the directors of the Company will determine that a dividend is payable, and they also fix the amount, time and method for payment. In addition, the Agreement should state whether dividends the Company declares will be unfranked, partly franked or fully franked.

Employee Share Schemes​A Shareholders Agreement should include the process for how to issue new shares. Employers use employee Share Schemes to incentivise key employees by issuing them with shares over the time of their employment based on agreed performance targets. A Shareholders Agreement should provide for this process. 

Transferring and Selling Shares and Takeover Offers​A Shareholders Agreement should outline how a shareholder can sell his or her shares. This will require notice in writing to other shareholders and the option of purchasing the shares pro rata in proportion to their existing shareholding. The method of valuing the shares needs to be set out. For example, set out a valuation formula, or that an independent accountant will value the company.

Key Takeaways​An agreement may provide that some decisions by the company such as mergers or acquisitions require special rules or provisions. By contrast, you can delegate day-to-day decisions or determine them through a majority vote. There is no golden rule on how voting or decision-making power should be based on an equity holding or a per partner/director basis. Relevant parties within a company will need to agree to determine this.

If you are using an incorporated ‘quasi-partnership’ or other incorporated joint venture, you should not rely exclusively on the provisions of the Corporations Act and the company’s Constitution. Instead, you should enter into a Shareholders Agreement to more fully and carefully define your rights and obligations.

Frequently Asked Questions​*What is sweat equity?*
Sweat equity is the time and effort that people contribute to a project, with no financial input from the contributors.
*What is vesting?*
Share vesting occurs when a shareholder acquires full ownership of shares. A share is considered vested when the employee may leave the job, yet maintain ownership of the share with no consequences.
*What is drag along?*
Drag along is where the majority shareholder(s) can require the minority shareholder(s) to sell, so that the bidder can buy the whole company.
*What are tag along?*
The Shareholders Agreement can include that if there is a takeover offer, and the majority shareholder(s) want to sell, the minority shareholder(s) can ‘tag along’ and sell their shares to the bidder at the same price.
How can LegalVision help me?​Do you require a Shareholders Agreement? We’ve helped many founders, and it would be our pleasure to assist you. We provide a free initial assessment and fixed prices for your certainty and peace of mind. LegalVision provides businesses and individuals with tailored online legal advice, including drafting and reviewing Shareholders Agreements.


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