Whether you’re operating as a sole trader, in a partnership, or are merely considering the alternatives, chances are you’ve found yourself contemplating whether “I should set up a company?” at least once or twice.
This question is something we hear often here at SBX and is also one that rarely has the simple ‘yes’ or ‘no’ answer most people expect to hear. What structure to choose will depend on where you operate, your anticipated growth, who is involved in the business, and what you want to protect.
That is why we think it is important to understand the decision before you make it rather than deal with the aftermath afterwards.
So, before we even discuss how to register with ASIC, let’s first look at what a proprietary limited company is and the five things that we think are worth knowing.
First, What Does “Pty Ltd” Actually Mean?
Many Australian businesses have “Pty Ltd” at the end of their names, but not many business owners understand what this means.
The term ‘Proprietary’ suggests that the business is privately owned and does not trade on any stock exchange. A proprietary limited business can have a maximum of 50 shareholders who are not directors and must have at least one director, but it cannot raise funds on the Australian Stock Exchange.
The term ‘Limited’ refers to limited liability, which provides that shareholders only pay for the debts of the business proportional to their shareholdings. Their personal assets should generally be safe in the event of financial problems, ensuring that all directors comply with the law.
Thus, a proprietary limited company is a separate legal entity from its owners and directors.
The Advantages:
1. Limited Liability Protection
A proprietary limited company is a distinct entity; it has to fulfil its own liabilities. If any claims are made against the company, the assets of the company would be in jeopardy, rather than your home, car or personal savings.
This is a key reason for many business owners transitioning from operating as sole traders when their circumstances warrant more risk, contracts or employees. It is important to bear in mind, however, that such protection is not absolute. Directors may still be liable for their actions if they breach their obligations or provide personal guarantees. Therefore, knowing your responsibilities as a director is just as crucial as knowing about the structure itself.
2. Stronger Branding and Credibility
The perception of the business goes through a change the instant it transitions into a private limited company. This means that clients, vendors, and potential partners are likely to perceive a company with a registered business as a business that is reliable and trustworthy compared to an unregistered sole trader.
This perception of the business is quite instrumental when it comes to winning bids, getting bigger customers, or getting investment. By establishing a well-structured company, you can offer clients this credibility.
3. Easier to Attract Investors, Suppliers and Clients
Having dealt with branding earlier on, it has to be mentioned that the structure of a company affects the relationships with investors and larger clients. Indeed, investors and larger clients prefer dealing with proprietary limited companies over sole traders and informal partnerships, since with the company structure there are clearer rules of governance, specific ownership and accountability that are harder to establish in other cases.
Therefore, if you are planning on getting investment, growing your business, or applying for big contracts, you should take this advantage into account from the very beginning, so that you do not find yourself having missed a chance of getting a very good deal because your structure is not appropriate for it.
4. Perpetual Succession
Unlike a sole trader business, a proprietary limited company continues to exist, notwithstanding the absence of the owner, whether through retirement, resignation, or death. The company continues its existence, with ownership transferring to new shareholders or directors.
The necessity of this should not be underestimated. A sole trader business might come to an end with the death of its owner, while partnerships leave remaining partners struggling with a transition, along with someone with zero experience in the matter.
In contrast, a company structure provides a solid platform for continuity, which we take very seriously when dealing with our clients when it comes to legacy and succession planning.
5. Tax Efficiency
Sole traders are subject to the rules for individuals, namely that they would pay tax on their profits at their individual marginal rates, which increase with the amount of income earned and could be as high as 45% (plus the Medicare levy). Proprietary limited companies, by contrast, generally pay a flat corporate tax rate, which is currently 25% for eligible base rate entities as well as for companies above that threshold.
While this makes for a noticeable difference when it comes to profits earned, it does not necessarily mean that it will be beneficial for the particular business to operate through a company. Overall tax efficiency achieved through a corporate vehicle depends on how profits are both kept and distributed over the course of the year.
So, Is a Proprietary Limited Company Right for You?
The short answer is that it depends. While a company structure provides benefits, it also introduces ongoing obligations such as ASIC registration, annual corporate tax returns, and compliance issues that need to be managed well.
At SBX, we do not believe in starting by telling you about a service before working back from there. Instead, we start with the decisions you face, then give you clarity on what it means for your tax, risks, and plans long-term, and only then move on to actionable steps.
This is the difference between putting out fires brought on by a structure that no longer works and creating a new, suitable structure for your business.
Be it a new business, a growing company, or succession planning, we will show you what having a proprietary limited company means for you in simple terms.
Not sure if a Pty Ltd structure is right for you?
Book a Strategy Session with SBX and let’s look at your numbers, your goals, and your options together before you make your next move.
