One of the biggest challenges when starting out in business is deciding on the right corporate structure for your company. Do you want to be a sole trader? A partnership? A company? Your answer will have lasting implications for how you file your tax returns, what happens to your profits, and how much financial risk the business owner assumes.
A company (Pty Ltd) is a business entity that creates a separate legal entity. This prevents individuals from being liable for the company’s financial losses and debt liabilities. In the event of legal action or business failure, liability is assumed by the company rather than its constituent partners or shareholders.
Examples of limited liability companies
The definition of a company is broader in Australia than other countries such as the US. The most popular form of company in Australia is a private limited company (Pty Ltd). Filing as a limited company means that if the business goes under, shareholders’ only liability is for the face value of their share in the business.
Alternatively, Public Limited Companies (Ltd) are similar to private limited companies. The only difference is that a public company (Ltd) must be open to investment by the public. It therefore requires a higher level of regulation and obligations.
Many types of businesses find that limited liability is favourable to running a business as a sole trader. These include:
- professional services like accountants or solicitors
- cafes, bars and restaurants
- handymen, builders and contractors
Advantages and disadvantages of limited liability
Benefits of a company
- liability protection for business owners and shareholders
- personal assets are protected
- legal protection from the effects of other people’s mistakes
- flexible business structure with a variety of trading options
- corporation tax rates are lower than income tax rates
- because the company is independent of its owners, it can be sold or passed on
Disadvantages of a company
- company accounts will be made public
- owners don’t have as much control when compared to sole traders
- accounts are more complicated, meaning that you’ll likely need an accountant
- limited partnerships may place a barrier on how much profit can be retained
Frequently asked questions about limited liability companies
What is an operating agreement?
An operating agreement is a document that ensures that a company’s operations are suited to the needs of its members. It is part stockholder agreement and part corporate by-law. While an operating agreement is not mandatory, especially for non-US companies, it can help to clarify how the company will be operated and managed.
What is unlimited liability?
Unlimited liability means that there is no distinction between the individual and the company in terms of taxation. A freelancer or sole proprietor will have unlimited liability, as will some partnerships. This means that traders get to keep all of the profits after paying their tax, and get to be owners of their assets. It also means that they are responsible for covering losses and debts incurred by the business.
This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.