Updated: 14 July 2020

If you’re a sole trader or in a partnership, you’re likely assessing Pty Ltd Company advantages and whether setting up a Pty Ltd Company would be suitable for your situation. Many clients ask me why they should set up a Pty Ltd company. The answer to that is – it depends.

The most appropriate business structure you choose really depends on a number of factors including:

• The type of industry your business is operating in
• The value of assets within the business
• The number of employees in your business
• Future growth
• Net profit
• Ownership
• Tax implications if you were to set up a company

As you can see, this is a bit more complicated than a yes or no answer. You should really speak to your accountant so they can go through each of the factors to assess your situation and work out what is the best structure for you.

Setting up a company means you must register the company with the Australian Securities and Investment Commission (ASIC) and lodge annual company tax returns with the Australian Taxation Office (ATO), an exercise that can be costly and tedious if it’s not suitable for your situation.

However, there is a clear advantage when setting up a Pty Ltd company (with less than $25 million turnover) – you end up paying a corporate tax rate at 27.5% which is significantly lower than the highest marginal tax rate for individuals of 47% (including Medicare levy). Note these rates are based on the 2019 – 20 tax rates.

Firstly, What’s the Meaning of Pty Ltd?

Pty Ltd stands for Proprietary Limited.

Proprietary means that the company is private (rather than publicly owned or listed) and therefore, would have a smaller number of shareholders and owners in the company. For private companies, there’s a maximum of 50 shareholders and a minimum of one director. The company can’t be listed on the Australian Stock Exchange (ASX) and that means there are limitations in how it raises capital if it needs it.

Limited refers to limited liability. This means that the shareholder’s responsibility for company debts or liabilities are limited based on the shares they own. If a business were to become insolvent and no longer be able to trade, the shareholders would only have liability in losing the money they used to invest in their share of the business.

Now let’s get into the advantages of a Pty Ltd company.

Advantage of a Pty Ltd Company #1: Limited Liability

As a Pty Ltd Company is a separate legal entity, it will be liable for its own debts. This ensures that claims made against the company can only be paid using assets owned by the company. This gives a layer of protection for directors’ and shareholders’ personal assets.

Unlike Pty Ltd Companies, sole traders may be exposed to having their personal assets called upon to settle claims or debts.

It’s important to note that company directors may not have their personal assets protected if they breach their duties or provide a personal guarantee for a contract.

Advantage of a Pty Ltd Company #2: Branding

Branding is an often-neglected benefit for setting up a Pty Ltd Company.

Companies can project a higher level of professionalism and stability by having strong branding associated with their business, something that sole traders lack.

With better branding generally comes with better opportunities (see below).

Advantage of a Pty Ltd Company #3: Attracting Stakeholders

It’s a well-known fact that investors, suppliers and customers prefer to do business with companies rather than sole traders.

Having a registered Pty Ltd company gives the impression that the business operates on a much more serious level which generally inspires much more confidence amongst stakeholders. This is a major attraction point when businesses wish to win tenders and contracts.

Advantage of a Pty Ltd Company #4: Perpetual Succession

Another key benefit of setting up a Pty Ltd Company is that the company will exist indefinitely (unless it is wound up) which will enable you to sell the company when you retire or resign. In the event of the death of a director or shareholder, their position can be replaced and the business continues trading.

Conversely, sole trader businesses will find that in the event of the death of the sole owner of the business, the business will cease to exist or may be given to the nominated next of kin if this is stated in the owner’s will.

Similarly, in partnerships, this may mean the remaining business partner may potentially have to own the business with a next of kin who may have limited business experience.

Advantage of a Pty Ltd Company #5: Tax Efficiency

Individuals such as sole traders generally only need to complete a personal tax return, even from the income generated from their business. This means that depending on the level of assessable income, they can be paying as high as 45% in tax. On the other hand, Pty Ltd Company offers the benefit of a flat tax rate of 27.5% – 30% for small businesses.

Key Takeaways

If you want to learn more about companies, we suggest you take a look at the ASIC website.

Also, check out our guide if you would like to know more information about companies vs sole traders.

Ultimately, setting up a Pty Ltd company boils down to your priorities and situation.  We urge you to discuss your options with us at Box Advisory Services before taking the next step. To find out more information, simply book in a free initial 45-minute consultation with us to find out how we can assist you with your business structure situation.

Disclaimer: 
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.