Creating a company - How to/101 Class

[prawn_86]

Hi All,

I am interested in creating a company, for various reasons. I know that they can be done fairly cheaply via certain websites such as ClearDoc etc, however i do have a few additional questions so if someone could point me in the right direction...

1. Do companies pay their 30% tax no matter what? IE - if the money is just sitting in a bank account will the interest get taxed 30%?
If so i am better of building up a larger capital base first as my tax bracket is not yet above that being a student and all


2. Is there any difference having joint owners of a co rather than single owners?


3. Following on from 2, can the owners continue to contribute into the company after it has been formed? (cant see why not its just more 'shares' issued). So i put in 6k and my partner 4k, the ownership stake would then be 60/40% and then would adjust as either of us contributed more. Is this correct?


4. If the worst was to happen and my partner and i seperated, we would only be entitled to whatever % of the company we owned? Or could you try to claim/sue for more?


Thats about it for now, im sure there are a few accountants out there who can help

 

[adobee]

Re: Creating a company - 101 Class

I dont think I can give you specific advise on this but my understanding is -

Hi All,

I am interested in creating a company, for various reasons. I know that they can be done fairly cheaply via certain websites such as ClearDoc etc, however i do have a few additional questions so if someone could point me in the right direction...

1. Do companies pay their 30% tax no matter what? IE - if the money is just sitting in a bank account will the interest get taxed 30%?
If so i am better of building up a larger capital base first as my tax bracket is not yet above that being a student and all

- Yes you will pay tax
- If you make capital purchases with the company instead of personally you can end up with tax franking credits which you can somehow carry over on your balance sheet and defer tax etc..
- In some cases if you are buying property etc you will not get the tax effectiveness of the assett
- Perhaps consider putting the money into super and using your super like a company .. (downside is you wont get it back for a while)

2. Is there any difference having joint owners of a co rather than single owners?

- You would set up shares for the company and nominate percentage of share to each owner.. You can also set up a & b class shares etc so you can allocate b class shares to say your wife and pay her a fully franked dividend however have b class shares with no voting rights etc..

3. Following on from 2, can the owners continue to contribute into the company after it has been formed? (cant see why not its just more 'shares' issued). So i put in 6k and my partner 4k, the ownership stake would then be 60/40% and then would adjust as either of us contributed more. Is this correct?

Yes they can.. You could possible charge interest on capital if it was a loan to the company and required repayment.

4. If the worst was to happen and my partner and i seperated, we would only be entitled to whatever % of the company we owned? Or could you try to claim/sue for more?


Thats about it for now, im sure there are a few accountants out there who can help

 

[Whiskers]

Re: Creating a company - 101 Class

Hi prawn.

I'm not an accountant, although my major was accounting and law, but have a single owner/director company that is trustee for a trust and operates in it's own right as well.

Important to get your constitution set up to take account of what you intend to do.

Hi All,

I am interested in creating a company, for various reasons. I know that they can be done fairly cheaply via certain websites such as ClearDoc etc, however i do have a few additional questions so if someone could point me in the right direction...

1. Do companies pay their 30% tax no matter what? IE - if the money is just sitting in a bank account will the interest get taxed 30%?
If so i am better of building up a larger capital base first as my tax bracket is not yet above that being a student and all

Yes, a company pays the flat rate tax from the first dollar profit.

From a tax prospective you would be better off generating higher taxable income first and a business/investment partnership (with spouse) could improve your tax position before it became benificial to start paying the flat rate company tax.

If you did not intend to draw funds from it, set it up as part of a SMSF from the start.

2. Is there any difference having joint owners of a co rather than single owners?

There may be and often is more complex audit and reporting requirements the more owners and directors a company has. But generally if there is a sole owner and director it's not much different to a sole trader entity. In fact I find a single owner/director company easer for reporting purposes than my sole trader entity... particularly tax return. A family (related parties) company would also be pretty simple.

3. Following on from 2, can the owners continue to contribute into the company after it has been formed? (cant see why not its just more 'shares' issued). So i put in 6k and my partner 4k, the ownership stake would then be 60/40% and then would adjust as either of us contributed more. Is this correct?

You can apportion the share ownership however you like and change it along the way. However there are forms you have to notify ASIC about for all these sorts of changes. A sole owner/director would start with two shares. The more owners and various proportions the greater the number of shares.

Generally if you make pro rata contributions, the number of shares doesn't need to change. The new capital contributions are just recorded in the balance sheet in owner/shareholder equity.

However, you can contribute any additional funds as borrowings and it's recorded as debt.

Additional 'class' shares becomes more complex and is not often considered in small companies.

If you set it up as part of a SMSF you can get personal tax benifits from additional contributions.

4. If the worst was to happen and my partner and i seperated, we would only be entitled to whatever % of the company we owned? Or could you try to claim/sue for more?

Thats about it for now, im sure there are a few accountants out there who can help

In the event of a Family Court Property Settlement or even Child Support, I'm afraid it all gets bundled into the same basket of 'joint assets', however when considering the contributions to the relationship the court may find it easier to account for and apportion the contributions to the company from the records.

For example, if you set up for say an investment/trading company with funds you had before the relationship and your partner made no financial contribution later and did not have any input into the company and you supported the family from your regular job... then the court would likely see it as all your contribution, however when apportioning the assets the court would consider the company assets contribution as 100% yours... however the asset pool contribution factor is discounted over time, ie the longer the relationship the more equal assets become and your share would be further discounted for any children the seperated partner may have custody of.

Superanuation is no longer exempt from Family Court property settlements, so a SMSF would come under the same umbrella now.

A prenup may be handy there.

If your main consideration is minimising tax, you might consider an accural accounting method more benificial than the cash accounting method in that it brings expenses onto the profit and loss statement sooner.

Also have a look at any benifits from the Simplified Tax System.

 

[prawn_86]

Re: Creating a company - 101 Class

Thanks for the replies guys,

very helpful so far. It looks as though i should just wait until i earn more, although when i do eventuially start day trading seriously i would prefer to do it under a co structure rather than just as an individual.

Whiskers,
you mentioned that additional capital could be recorded as debt. Does this mean you could "lend" the co money and therefore push it into debt, so that means tax would not need to be paid?

That might be way off the mark Hence why im asking...


EDIT - Im not looking at this for a SMSF, as one day i may wish to take money out/pay dividend etc

 

[nioka]

Re: Creating a company - 101 Class

This proposition is full of traps, the biggest being governments changing the rules.

I set up my first company in the 50s. Had a good company lawyer set it up. I had 5 classes of shares, the A class I owned and it had a majority of 200 to 1. That was supposed to give me permanent control with me able to distribute any profit as I saw fit to any of the 5 classes of shares. In the event of a divorce I would stll retain a majority shareholding.

The law has changed. In the case of a divorce (which hasn't happened in my case) two of the classes of shares would be evenly distributed and that means you lose control and if the other 4 or even 3 gang up on you then you are in the proverbial. This happened to a friend of mine and he lost out.

In my case one of the minority shareholders created a lot of problems for me when I tried to give some benefits to a D class shareholder, who deserved it, without giving the same benefit to an E class one that didn't. The fact that it was permitted by the articles of association didn't count.

The advantage was that you could carry forward tax losses.You could include your family etc in the business. You can formalise business arrangements with family and/or friends. You could also cap your tax rate.


Apart form the disadvantages above there is also a lot of red tape with records and returns.

 

[cuttlefish]

Re: Creating a company - 101 Class

Prawn I'm no accountant but I did own a reasonable sized business in partnership with others - here's some of my input:

* Before kicking the whole thing off have a discussion about and document the following things with your fellow shareholders:

Establish a shareholders agreement that covers:
-- The roles and responsibilities of each of the shareholders
-- what happens if the business requires additional capital
-- what happens if one of the shareholders wants to exit (do the other shareholders get firsts right of refusal or can they just sell to anyone etc.)
-- what actions will require a board meeting/special resolution/vote (e.g. capex over a certain amount, hiring/firing a key employee etc.)
-- how often you'll meet, what information you'll track etc. (e.g monthly cash position/P&L etc.)
-- various other thinigs - there are template shareholders agreements on the web that are worth having a read through because you'll see there are a lot of things to consider.

Its easier to sort these issues out when you're all friends at the start and feeling enthusiastic. If you can't put a shareholders agreement together you probably shouldn't be in business together. (even if its with a spouse!).


* In relation to capital - I'd recommend issuing an easily divisible amount - e.g. 120 shares - can be divided by 2, 3 and 4 so if you want to bring people in or buy people out or do partial buyouts its easier. (doesn't really matter because you can consolidate or change the capital structure at any time, but might save a little bit of hassle down the track)

* In relation to the tax issue - if you are not doing anything with the interest income within the company then you can pay it out as a franked dividend to yourself and use the franking credits against your own tax bill so unless you're paying less tax than the tax on the interest it will work out the same.

*In relation to putting in more capital - you can issue more shares or an individual can loan money into the company and become a creditor of the company (this is a risky thing for someone to do). You can also use preference shares, convertible notes or other mechanisms (speak to an accountant).

*There are various rules about discriminating against minority shareholders from a voting perspective and fomr a dividends perspective so if issuing different classes of shares be aware of this. I'd suggest keeping it simple and only having one class to start off with - but think very carefully about who you make a shareholder and what their contribution to the business is going to be. If they are not going to be an active participant I probably wouldn't include them on the share register myself.

*There are responsibilities as a director - having a company doesn't automatically protect you from personal bankruptcy - research this before becoming a director.

* There is a fair bit of paperwork - I would only recommend doing it if you really plan on growing a proper business.

 

[wabbit]

Re: Creating a company - 101 Class

The best suggestion I could offer to anyone looking to establish their own business is to find a good account and pay them for their professional knowledge. Their skills and expertise may cost a little bit now, but might save you thousands in the future. (When we established our business, getting it done through our accountant saved us on the cost compared to buying a "shelf" company.) Half the DIY books on the subject that you can buy aren't up-to-date with the latest regulations, but a good accountant will be conversant with the very latest rules.

If you do (unintentionally) end up in the **** with ASIC or ATO, I am fairly sure that excuses like, "someone on an internet forum told me I could do <insert action here>" are not going to keep you out of poor house/jail.

There are some very knowledgeable people here; but good intentions don't always equate with good advice.


$0.02


wabbit

 

[Whiskers]

Re: Creating a company - 101 Class

Whiskers,
you mentioned that additional capital could be recorded as debt. Does this mean you could "lend" the co money and therefore push it into debt, so that means tax would not need to be paid?

Important to distinguish between the meaning of capital as equity in the company and capital as everyday cash money.

Additional cash can be lent to the company to create an interest charge against the company. If the company used accural accounting it would incur an expense and a payabe as each interest calculating period passed and if you (individual person) used the cash accounting method you would only pay tax on the interest when recieved... could be monthly, annualy or at expiration of loan.

This is less problematic with a single owner/director and becomes potentially more problematic the more people are involved.

You're making a good move looking at all the aspects from different peoples prospectives and experiences before you commit to anything.

PS: Once you have an idea of whats involved and what you wish to do, I would also recommend consulting your lawyer and accountant to draw up the documentation.

 

[julius]

prawn - why do you want a joint-partnership ?

 

[prawn_86]

prawn - why do you want a joint-partnership ?

Im not sure if i do yet, im just looking at different options at this stage.

 

[reece55]

Lotsa a good stuff on this thread, a few aspiring accountants I see!!!

At the end of the day, the benefits for a Company are as follows:

* Ability to retain profits;
* Limited liability, subject to ensuring you have complied with your director duties
* Lower tax rate than the marginal rate of tax and therefore attractive to high net wealth individuals who wish to accumulate wealth
* Ability to have a discretionary distribution if a constitution is set up with the ability to have alternative classes of shares.

The downsides are:
* Increase compliance costs;
* No CGT benefits (no discount);
* Potential issues with debit loan accounts (where you take more money out of the Company than you have contributed via loan);
* Taxed at a fixed rate and therefore if the company is profit rich but cash shy, a lower net wealth or net income individual is worse off.

For someone like yourself Prawn, a Company isn't the way to go. Even if your trading, the one advantage a company offers you (the corporate veil, or limited liability) will most likely be removed because to trade with CFD/FOREX providers, they will require you to sign the liability over to you as an individual. A partnership is likely to be the easiest way to split your profits out and is the cheapest/simplest option. Trust are also not too bad....

Come and see me if you need your taxes done - you know where to find me

Cheers

 

[wildkactus]

Prawn,
yes a company is a good thing for asset protection and as a entity for investment. the best thing i could advise is see a good acountant an get it setup to meet your needs.

They way I normally setup an investment company is to create a $2 company with the shares issued to whoever, normally I keep any single outside shareholdings below 20% (their are shareholders rights for shareholders with % share above X% of stake in the company, Need to check on this.) and I keep 51% min, then I setup Shareholders and Personal role agreements, this way the roles of the shareholders and the people involved in the running of the company is spelled out in detail. makes it easier when a problem occurs or you want to get rid of a person or shareholder, without these it can be hard to resovle a disagreement. Then any money placed into this comapny is just a loan with a standard loan agreement drawnup.

and when it is time to sellup it is just a matter of selling the company as a whole or it assets and dividing the money as per the shareholders agreement.

but I cannot stress the importance of a good accountant / lawyer because when you have any hassles in the long run they will be worth every penny.

all the best with your decision.

 

[theasxgorilla]

1. Do companies pay their 30% tax no matter what? IE - if the money is just sitting in a bank account will the interest get taxed 30%?
If so i am better of building up a larger capital base first as my tax bracket is not yet above that being a student and all

FWIW, I think your suspicians here are correct. The company structure has many advantages, but most of them are associated with either protection or tax planning eg. increasing net profits through effective deductions.

Personally, I'd worry about the topline. Tax brackets aren't as bad as they once were in Australia. The breakeven for company structure vrs sole proprietor (sp?) must be well over 100k, these days, probably closer to 200k. p.a.

 

[motorway]

Definitely you want expert advice

But as a suggestion

Why not a Discretionary Trust?

Which later can add a Company has a beneficiary...
If needed.


A trust would seem to cover the points you are concerned with.

And allow flexible options as you succeed

DYOR

motorway

 

[Tysonboss1]

Hi All,

I am interested in creating a company, for various reasons. I know that they can be done fairly cheaply via certain websites such as ClearDoc etc, however i do have a few additional questions so if someone could point me in the right direction...

1. Do companies pay their 30% tax no matter what? IE - if the money is just sitting in a bank account will the interest get taxed 30%?
If so i am better of building up a larger capital base first as my tax bracket is not yet above that being a student and all


2. Is there any difference having joint owners of a co rather than single owners?


3. Following on from 2, can the owners continue to contribute into the company after it has been formed? (cant see why not its just more 'shares' issued). So i put in 6k and my partner 4k, the ownership stake would then be 60/40% and then would adjust as either of us contributed more. Is this correct?


4. If the worst was to happen and my partner and i seperated, we would only be entitled to whatever % of the company we owned? Or could you try to claim/sue for more?


Thats about it for now, im sure there are a few accountants out there who can help

Hi Prawn,..

Yes companies pay 30% tax from first $,... How ever you can get around this by getting the company to pay you a wage as a director up until the point where your wage will be taxed higher than 30%,

If you want to put more money into the company then you can just loan the money to the company rather than listmore shares,.... this way you can get money back out easily without having to pay tax on it because it is just your money being repaid to you,....

One other big thing to think about is when selling the assets a company does not receive the 50% capital gains tax discount. so it may be better to hold the assets in a family trust with a company as the trustee of the trust,... this way you have all the tax benefits of people, combined with the benfits of a company.

 

[josh_in_a_box]

prawn,

I think we have the same idea in having a "vessel" to invest in, with the option of including partner(s).

From what I understand just in a very general level, I would set up a partnership with a BRILLIANT partnership agreement over setting up a company.
Just because the associated cost with starting a company is so much.


BTW nice work on the topic, going around those goverment sites are rather confusing.