Setting up a trading company

[Investments2013]

To set up your trading company did you engage a lawyer or did you use one of the several websites available which can do it for less than $500? Either way what was your impression and expense? Thank you.

 

[Gringotts Bank]

IB will provide margin if trading as a company as pointed out by some posters here on ASF (thanks for that). In practical terms that means the cash proceeds from sold stock are available immediately. A big advantage in itself. All 2000+ ASX stocks are marginable, even thought the small ones are 100%.

So what about the advantages of trading as a company? A lower rate of tax sounds good. What sort of things need considering? I'm assuming some of you guys trade as companies?

Thanks.

 

[Trembling Hand]

It is not necessarily a lower rate of tax. It is a flat tax of 30% - make $100 pay $ 30 in tax, make $100,000 pay $30,000 in tax. Then any earning paid out will have your marginal tax rate added onto it.

You will have a lot more admin cost as any accountant will charge you more for company returns etc. Plus the ASIC setup and annual fees for a company. You would have to do the calculations to see at what level of earning you would be better off.

Also all trading losses stay in the company.

I would suggest talking to an accountant

 

[tech/a]

It is not necessarily a lower rate of tax. It is a flat tax of 30% - make $100 pay $ 30 in tax, make $100,000 pay $30,000 in tax. Then any earning paid out will have your marginal tax rate added onto it.

You will have a lot more admin cost as any accountant will charge you more for company returns etc. Plus the ASIC setup and annual fees for a company. You would have to do the calculations to see at what level of earning you would be better off.

Also all trading losses stay in the company.

I would suggest talking to an accountant

Not quite
Company earns $100k
You pay yourself $75k
Tax at your rate.
Company pays 30% on the $25k

 

[Trembling Hand]

Not quite
Company earns $100k
You pay yourself $75k
Tax at your rate.
Company pays 30% on the $25k

Thats why i said talk to an accountant. Depends on what you want to do with any profit. That 75K still gets taxed at your personal tax rate. So then what your company now has a 75k drawdown?

 

[tech/a]

Thats why i said talk to an accountant. Depends on what you want to do with any profit. That 75K still gets taxed at your personal tax rate. So then what your company now has a 75k drawdown?

No it pays a wage of $75k out of it's $100k profit.

 

[Gringotts Bank]

Thanks guys.


The bloke at IB today told me with a cash account, that if I buy stock today and sell tomorrow, there's still 3 days of waiting for the cash. So restrictive. Probably just have to leave IB.

Would like a little break through!!!!!!!!!!!!!

 

[Trembling Hand]

No it pays a wage of $75k out of it's $100k profit.

Yeah - and if you are a wage earner like I think GB is(?) how much tax are you going to pay? it is going to be no less tax paid and more cost and restrictions. Its no easy win. There is 100s of way to do it but it has to be earning a fair bit for it to be better than outside of a company. I think its something around 80k profit (anyone done the sums?)

 

[rnr]

So what about the advantages of trading as a company? A lower rate of tax sounds good. What sort of things need considering? I'm assuming some of you guys trade as companies?

Have a look at this post in the IB thread.

You will need to allow for annual costs of approx. $1,000 - $1,500 depending on how much work you do yourself.

N.B. Usual disclaimers apply.

Thanks guys.

The bloke at IB today told me with a cash account, that if I buy stock today and sell tomorrow, there's still 3 days of waiting for the cash. So restrictive. Probably just have to leave IB.

Would like a little break through!!!!!!!!!!!!!

Why did you ask the bloke at IB about a "Cash Account" when you need a "Margin Account" (Reg-T Account using IB terminology).
You solved this problem in your first post in this thread...slow down and come up for air occasionally.

 

[Gringotts Bank]

Have a look at this post in the IB thread.

You will need to allow for annual costs of approx. $1,000 - $1,500 depending on how much work you do yourself.

N.B. Usual disclaimers apply.




Why did you ask the bloke at IB about a "Cash Account" when you need a "Margin Account" (Reg-T Account using IB terminology).
You solved this problem in your first post in this thread...slow down and come up for air occasionally.

Because I wanted to know what happens with a cash account in regards to T+3. I had thought that buying then selling before the buy has settled (T+3) would see the cash re-appear in your account. But it doesn't. It does here, but not with IB.

The other guy you recommended was unreachable today.

Thanks for the other thread ref.

 

[skc]

Yeah - and if you are a wage earner like I think GB is(?) how much tax are you going to pay? it is going to be no less tax paid and more cost and restrictions. Its no easy win. There is 100s of way to do it but it has to be earning a fair bit for it to be better than outside of a company. I think its something around 80k profit (anyone done the sums?)

So what about the advantages of trading as a company? A lower rate of tax sounds good. What sort of things need considering? I'm assuming some of you guys trade as companies?

Your total personal income needs to be ~$115,000 before your average tax rate (including medicare levy) is equivalent to the company tax rate of 28.5%. So a company would not yield too much benefits under that threshold, if trading is your total and only income. And this is before the additional costs involved in maintaining the company.

On the other hand, if you have a regular salary income of $80k, your next dollar of income from trading will be taxed at 32.5% (+2% medicare levy). So the company tax rate of 28.5% is 6% lower. However, remember that money made in the company stays in the company unless you get it out in one of several ways:

1. Pay it out as a dividend (assuming you are the shareholder in that company). The dividend would be franked at the company tax rate and you would need to report that dividend in your personal tax return.
2. Pay yourself a wage/salary from the company. Again this would be subjected to personal income tax. The company's taxable profit is reduced by this expense
3. Borrow money from the company. This will be treated as a related party loan and there are certain rules you need to follow. There is no additional personal income from the loan proceed, but it must be paid back overtime.
4. Pay it out as return of capital. There won't be any personal tax on it, but it's obviously limited to the amount of capital you have put in the company. The company still pays the corporate tax rate on the full profit amount.

Some other benefits of trading under a company structure:
- You can compound your return at the lower company tax rate, if the income will be taxed about that % otherwise.
- You have some ability to "split" your income over different financial years (if you expect lower total income levels in future years).
- You have some ability to split your income among various shareholders... but these must be set from day 1.

I am not an accountant and any of the above can be wrong. It's merely some background information for your consideration and to verify with your tax professional.

 

[Gringotts Bank]

Your total personal income needs to be ~$115,000 before your average tax rate (including medicare levy) is equivalent to the company tax rate of 28.5%. So a company would not yield too much benefits under that threshold, if trading is your total and only income. And this is before the additional costs involved in maintaining the company.

On the other hand, if you have a regular salary income of $80k, your next dollar of income from trading will be taxed at 32.5% (+2% medicare levy). So the company tax rate of 28.5% is 6% lower. However, remember that money made in the company stays in the company unless you get it out in one of several ways:

1. Pay it out as a dividend (assuming you are the shareholder in that company). The dividend would be franked at the company tax rate and you would need to report that dividend in your personal tax return.
2. Pay yourself a wage/salary from the company. Again this would be subjected to personal income tax. The company's taxable profit is reduced by this expense
3. Borrow money from the company. This will be treated as a related party loan and there are certain rules you need to follow. There is no additional personal income from the loan proceed, but it must be paid back overtime.
4. Pay it out as return of capital. There won't be any personal tax on it, but it's obviously limited to the amount of capital you have put in the company. The company still pays the corporate tax rate on the full profit amount.

Some other benefits of trading under a company structure:
- You can compound your return at the lower company tax rate, if the income will be taxed about that % otherwise.
- You have some ability to "split" your income over different financial years (if you expect lower total income levels in future years).
- You have some ability to split your income among various shareholders... but these must be set from day 1.

I am not an accountant and any of the above can be wrong. It's merely some background information for your consideration and to verify with your tax professional.

Thanks. Probably better than most accountants!

 

[sinner]

Your total personal income needs to be ~$115,000 before your average tax rate (including medicare levy) is equivalent to the company tax rate of 28.5%.

Good if ya can get it, I'm a salary man and my effective tax rate is about 30%

 

[brisman]

Great response thanks skc. I'd forgotten about using return of capital. I'm thinking of forming a company while I've got two incomes but as I want the trading proceeds to pay off property debt it may not be worth the complexity as I need to draw down funds rather than retain them in the company.

 

[Value Collector]

Your total personal income needs to be ~$115,000 before your average tax rate (including medicare levy) is equivalent to the company tax rate of 28.5%. So a company would not yield too much benefits under that threshold, if trading is your total and only income. And this is before the additional costs involved in maintaining the company.

On the other hand, if you have a regular salary income of $80k, your next dollar of income from trading will be taxed at 32.5% (+2% medicare levy). So the company tax rate of 28.5% is 6% lower. However, remember that money made in the company stays in the company unless you get it out in one of several ways:

1. Pay it out as a dividend (assuming you are the shareholder in that company). The dividend would be franked at the company tax rate and you would need to report that dividend in your personal tax return.
2. Pay yourself a wage/salary from the company. Again this would be subjected to personal income tax. The company's taxable profit is reduced by this expense
3. Borrow money from the company. This will be treated as a related party loan and there are certain rules you need to follow. There is no additional personal income from the loan proceed, but it must be paid back overtime.
4. Pay it out as return of capital. There won't be any personal tax on it, but it's obviously limited to the amount of capital you have put in the company. The company still pays the corporate tax rate on the full profit amount.

Some other benefits of trading under a company structure:
- You can compound your return at the lower company tax rate, if the income will be taxed about that % otherwise.
- You have some ability to "split" your income over different financial years (if you expect lower total income levels in future years).
- You have some ability to split your income among various shareholders... but these must be set from day 1.

I am not an accountant and any of the above can be wrong. It's merely some background information for your consideration and to verify with your tax professional.

You can split the income by paying a wage to your wife/husband who might be in a lower income tax bracket also, she or he doesn't have to be a shareholder, they can provide services eg assisting with record keeping, tidying your office, etc and you can shoot them $50K a year in wages.

 

[McLovin]

You can split the income by paying a wage to your wife/husband who might be in a lower income tax bracket also, she or he doesn't have to be a shareholder, they can provide services eg assisting with record keeping, tidying your office, etc and you can shoot them $50K a year in wages.

Don't forget super ($4,750 on $50k in wages). For the purposes of this exercise (small company, no SMSF) the super contribution to the husband/wife can be viewed as a tax in the sense that it reduced the amount available to be invested/traded. So that's an additional 9.5% burden.

Seems like it would be much easier to go the trust route. A company structure isn't really the best way to income split.

 

[Gringotts Bank]

Seems like it would be much easier to go the trust route. A company structure isn't really the best way to income split.

Can you expand on that please McL?

 

[Value Collector]

Don't forget super ($4,750 on $50k in wages). For the purposes of this exercise (small company, no SMSF) the super contribution to the husband/wife can be viewed as a tax in the sense that it reduced the amount available to be invested/traded. So that's an additional 9.5% burden.

Seems like it would be much easier to go the trust route. A company structure isn't really the best way to income split.

True, but not a real tax in the sense that the money will still be sitting of to the side compounding for you.

trusts are the best for investing in my opinion, and if you are large enough you can have a company as one of the beneficiaries of the trust, so you can get the best of both worlds.

 

[lenny]

True, but not a real tax in the sense that the money will still be sitting of to the side compounding for you.

trusts are the best for investing in my opinion, and if you are large enough you can have a company as one of the beneficiaries of the trust, so you can get the best of both worlds.

Hi VC,

To trade as a trust through IB don't you need a minimum account balance of 100K and a few other things.

Is there anyone who trade as a trust through IB?

 

[Value Collector]

Hi VC,

To trade as a trust through IB don't you need a minimum account balance of 100K and a few other things.

Is there anyone who trade as a trust through IB?

I don't use IB so am not sure.

A trust isn't actually the legal owner of any assets, it's not like a company that owns stuff. When you are operating a trust, the assets still need to be held by either a person or a company, but the are held "in trust" for the beneficiaries of the trust, which are named in the trust deed.

So I am guessing you should be able to use a trust where ever a company or a person can normally operate, but you would have to check, I would recommend reading a book on family trusts first and definitely speaking to an accountant that is a good teacher.