When a company is used as a business vehicle, the liability of the persons who own the business is limited to their investment in the company, or the investment they have undertaken to make in the company (in the case of partly-paid shares). However, it should be noted that those persons who take on the role of “director” (i.e. who manage the company), may expose themselves to additional liabilities in the event that they do not properly and fully carry out their duties as a director. In the case of closely held companies, where the owners and managers are the same persons, the protection of limited liability afforded to the owners may be somewhat illusory.

Debt and equity capital may be more readily available to a business conducted in the familiar corporate structure, as opposed to the more complicated and uncertain trust and partnership structures. This was certainly the case before the use of trust and more complicated partnership structures became more commonplace. The controllers of corporate structures (i.e. directors and de facto directors) are subject to clearly defined prudential and ethical standards contained within the Corporations Act. These may provide external parties (such as banks, other capital providers, customers and suppliers) with a degree of confidence in the entity they are dealing with.

Ownership and therefore control of the business may be transferred in a clearly defined manner via the widely recognised practice of a transfer of share capital. When less than 100% of the business is transferred, only the portion of the business which is transferred becomes subject to possible stamp duty and CGT. Stamp duty is also applied at the relatively low “securities rate”, as opposed to the higher ad valorem rates.

When a company needs to raise further capital it can merely issue further shares. The issuing of new shares does not trigger a liability to CGT to either the company or the existing shareholders. Furthermore, the raising of capital by issuing further shares does not give rise to a liability to stamp duty.

Income and capital growth associated with the business may be spread among various family members via their holding of shares in the company. This may provide financial independence to some members, while limiting assets held by other members of the family that may be subject to liability from their professional or business activities.

The first dollar of income earned by a company is currently subject to 30% tax, as is the last dollar of income. Because companies are not subject to a progressive scale of tax rates, the marginal and average rates of tax will always initially equal the flat company tax rate. Business persons whose marginal rate of tax exceeds 30% will gain a taxation advantage in receiving any further income through a company. However, when the current or accumulated income is distributed to the individual owners of the business via dividends, the effective rate of tax on the business income will equal the specific individual’s marginal rate of tax (provided they are able to fully utilise any franking credits). Therefore accumulation of income in a company only represents a timing advantage in the form of deferring taxation. Furthermore, when the trading activity relates primarily to personal services of one or more individuals, the rules in Pt 2-42 of ITAA 1997 relating to “personal services income” may apply to tax the individuals providing the services directly on that income.

Providing certain benefits or paying certain expenses via a separate “employer entity” (such as a company or trust) may result in the conversion of an essentially “private” expense into a business deduction. While in some cases this remains possible, the rules in relation to the alienation of personal services income (found in Pt 2-42 of ITAA 1997) – and the limitation on certain deductions applying to persons affected by these rules – reduce these possible advantages.

A corporate taxpayer will receive a deduction for contributions made to a complying superannuation fund in respect of an employee. The amount of the deduction is not limited as the age-based limits that previously applied for pre-2007/08 years have been abolished. However, the employee may be liable to excess contributions tax if the contributions in the year exceed the relevant contributions cap.

Interest on money borrowed to finance the payment of company tax instalments or superannuation contributions for employees will generally represent a deductible expense necessarily incurred by the company in deriving its assessable income. Funds borrowed by an individual to finance these expenses are not considered deductible.

When an individual takes out death and disability insurance for payment of a capital sum upon a disabling event, premiums are not tax deductible and any benefits paid under the policy are not assessable. If the individual becomes an employee of a separate employer entity, the employer entity may be able to take out such insurance, with the premiums becoming deductible, as a cost necessarily incurred in deriving assessable income.

When a company is used, the employee status of the business person facilitates the provision of remuneration in the form of tax-effective benefits (such as cars and interest-free loans, lap-tops, mobile phones, etc.). Provided the overall remuneration package is commercially realistic; what would ordinarily have been wholly or partly private expenditure may be converted into a business expense, free from FBT.

When a business person transfers their business activity to a corporate structure, whether the business relates to the provision of goods or services, the business person must become an employee of the company (either as a day-to-day employee, or a director). As has already been noted, this “employee” status has both tax and non-tax related advantages. However, there are also significant costs associated with business person becoming an employee. These on-costs include:

Payroll tax is a state tax levied on an employer’s total payroll when it exceeds certain thresholds. A payroll tax liability is unlikely to be triggered if the business person is running a small business. However, if the business person already has a significant payroll, and they will be required to derive a large personal income, the payroll tax threshold may be breached, or further payroll tax may be incurred in respect of their personal remuneration.

 It is mandatory for an employer to take out a certain level of workers compensation insurance. The premium is generally based on a combination of the type of industry and the total level of wages paid to employees each year.

An employer must make certain minimum statutory contributions to a complying superannuation fund on behalf of employees. If these contributions are not made, a liability to the SGC will arise.

When the business person uses company assets for their personal/non-business use, a liability to FBT is likely to arise. This liability would not have arisen in the circumstances of self-employment.

A corporate structure costs money to create and requires continual maintenance by professionals, such as accountants and lawyers.

In particular, the management of the company’s affairs must comply with the Corporations Act and is subject to the scrutiny of ASIC. Statutory accounts and Annual Returns may need to be prepared, and depending on the size and nature of the business, may need to be audited (both general audits and specific purpose audits for parties such as banks and guarantors).

The business person can no longer personally represent their business affairs in courts of law. A qualified solicitor and barrister must be retained by the company.