Generally speaking, it’s a fairly significant step for any entrepreneur when the prospect of incorporating a business is becoming more and more realistic. The main benefits are obviously the ones that come with having a formal and legally recognised company structure, but like pretty much any business decision, there’s a set of pros and cons that we’re going to need to consider first:
Pros
Let’s start positively by walking through some of the reasons why you should consider incorporating your business:
Limited Liability
Legally speaking, when your business is classed as a separate legal entity, it’s the company that’s responsible for all its debts and obligations, which means that none of the shareholders’ personal assets are ever in jeopardy.
Tax Benefits
Australian corporations are also able to enjoy a bunch of tax advantages – namely, the fact that they’ll have access to lower company tax rates and can also claim various tax deductions for certain business expenses. It’s also worth mentioning that the corporate tax rate for small businesses is around 25%, which is usually lower than most personal income tax rates.
Easier Access to Capital
You’ll also have way more opportunities to raise capital for your business through equity, as the shares you’ll be able to issue will naturally attract investors – this ultimately will help boost your overall growth.
Cons
While the above benefits are certainly enticing, there are plenty of opposing reasons that are also worth considering:
Regulatory Complexity
Unfortunately, you’ll suddenly gain a bunch of new responsibilities regarding regulations you’ll need to adhere to after incorporating – needing to register with the Australian Securities and Investments Commission (ASIC), for instance – which will obviously add a lot more administrative burdens.
Costs
While it’s not so much of a problem for large, established businesses with higher budgets, the cost of incorporating can actually be pretty expensive for small businesses since it involves certain costs like all the initial registration fees – not to mention some of the ongoing compliance expenses, whether they’re accounting or legal fees. Again, chances are that if you’re a small business, then you’re going to find these costs pretty burdensome.
Double Taxation
Furthermore, one of the other unfortunate realities of incorporating your business is that there’s a chance your company profits might actually be subject to double taxation – first when your company earns a profit, and then again, once the dividends have been distributed among all the shareholders.
Loss of Control
Finally, something that’s often enough for most business owners to avoid incorporating is the fact that once the shares are finally issued to investors, you’re no longer going to have full control over your business decisions, which can be pretty frustrating if you were responsible for building the company from scratch.