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Help understanding Company Structure!

Discussion in 'Business & Startup Investing' started by Heinko, 15th Apr, 2010.

  1. Heinko

    Heinko Member

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    Hey guys,

    I'm very new here and also to company/business structure so please bear with me!

    I will be attempting to start a company over the next few weeks, and resultantly I've been digging around for the past few weeks trying to muster up what I can on the correct company structure (we've decided on a company because we can't risk the liability), however I can't seem to grasp the whole concept due to mixed responses.

    We've decided on a Proprietary Limited structure, as we don't plan to go public, and not becoming limited by shares would open us to unlimited liability. Since our 'company' will consist of 3 people, and we don't plan to expand or offer any employee shares any time soon, we've decided that 3 shares at $1 each is substantial.

    What I'm completely stumped on is how company tax works. To my understanding, our personal income will have to go through a 30% tax on company profits, then our each individual personal tax (up to 48% on the highest tax bracket).
    However, if the 30% company tax only applies to profits, and we (all directors and equal share holders) as employees, are paid a wage or remuneration, does this not bypass the company tax? As these are company expenditures, only whatever is left (essentially nothing) are considered company profits, then suffer the 30% company tax?

    Is my understanding of this correct? What are the alternative/optimal methods are there of paying ourselves?

    Also, as share holders AND employees, do our wages 'belong to the company' as our shares do, and resultantly are at risk if every sued?

    Many thanks in advance for any help guys!
     
  2. MattR

    MattR Well-Known Member

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    Simply, companies do pay tax at 30% on Net Profit.

    Net Profit = Sales - Expenses

    Income Tax = Net Profit x 30%

    Retained Profits = Net Profit - Income Tax

    Expenses includes wages. Wages have to have tax withheld at the prescribed rates of tax.

    Double taxation doesn't occur because of the Imputation System. This means if the Directors of the company decide to issue a Dividend out of Retained Profits of the company, that dividend can have a tax credit of up to 30%, andthis passes through to the shareholders (assuming they are Aust).
     
  3. Heinko

    Heinko Member

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    Thanks MattR!

    So essentially, wages go through personal prescribed tax rate, however dividends distributed to shareholders are taxed by the company at 30%, and this credit is passed along to share holders.

    Does this mean that regardless of whether we are paid as an employee or though dividends, we will end up paying the same amount of tax (assuming we were in the highest tax bracket of ~47%). So as an employee we would pay the 47% on our wages, and as a share holder, the company would pay 30% for us, and we would pay an additional 17% personally on our shares?

    If this is the case, would we be better off distributing our company's income as employee wages, as then, the income ceases to become part of the company, and not liable should the company be sued?
     
  4. MattR

    MattR Well-Known Member

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    The second question is much harder to answer and really needs specific advice. There can be possible disadvantages of taking wages (for high income earners) through a company as this may incur further liabilities;
    - super
    - workers comp insure
    - payroll tax

    Remember the top tax rate is now 45% for $180,000 plus.

    I would suggest you get specific advice. Also I would consider more than 1 share each to allow for greater division of shares should one of the shareholders decide to sell. Which then leads to Buy/Sell agreements etc etc.
     
  5. Superman

    Superman Well-Known Member

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    If you have three owners (shareholders) of the company - this is a must!

    Also a shareholders agreement if someone wants to get out - what has to happen or what is there is a conflict - a well written shareholders agreement will save a lot of heartache in the future.

    Seek advice from a good accountant! Let me know if you want me to refer someone.

    Cheers
    SM
     
  6. Heinko

    Heinko Member

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    Thanks for the advice guys, huge help.

    Someone bright recently advised me to worry about all the complicated details at a later date, and just worry about getting the company up, running and on the road to success. In the end, what good is it having all the details sorted if we don't make money :D

    So, I suppose I can worry about the income issue (share distribution vs wage) at a later date, but how essential is a buy/sell agreement? Can we not establish this at a later date when we are more successful? How much does it typically cost to arrange a buy/sell agreement?
     
  7. Superman

    Superman Well-Known Member

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    I agree with this bright person.

    Starting a new business you will get bombarded with 1000 thing you MUST DO RIGHT NOW - but at the end of the day, you only need to focus on one thing - MAKING MONEY!!!

    So make money first, worry about the details later.

    Just don't leave it too late.

    In regards to the buy/sell agreement, maybe at least have an informal plan if one of the owners wants to get out what would happen. At least have the conversation.

    Good luck with the new venture!

    SM
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    A word of caution.

    There are two future scenarios you need to think about up front, because by the time they arrive, it will possibly to too late to have the discussion:

    1. Things go really badly.

    You need an exit plan for if things go pear shaped. Who gets paid what? Who owes what? Under what circumstances will you wind up the company? What happens if one person wants to leave? What happens if one person chooses to (or is forced to) assign/sell their shareholding to someone else.

    2. Things go really well.

    This is potentially far worse than scenario 1 ... since we assume that with things going really well, there is now some serious money on the table. Along with that can come greed, envy, mistrust, miscommunication, and more. What if someone wants to cash in their windfall and retire, or take a different direction? How do you determine who gets paid what? What is your eventual exit plan from the business?

    You don't need to have a formal written document (although it helps), but you should at least make sure you are all on the same page and you understand what everyone expects from the venture.

    Don't let these issues stop the enthusiasm and drive - but don't ignore them until it is too late either. Keep the lines of communication open - make sure you are all talking to one another and you are being open and frank about things. Like any relationship, a business partnership relies on trust and communication - work hard to keep them sound.

    Good luck!
     
  9. Wilmac

    Wilmac New Member

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    I have to disagree with the suggestion you should leave the detail to later.

    You can leave some of the detail until later, but it is important to get thestructure right from the start. If you start making a lot of money, it can be very expensive down the track to change the structure, with Capital Gains Tax and Stamp Duty being real issues.

    You may also want to consider other structures which can provide protection and also more flexibility in relation to income, such as a partnership of trusts or a Hybrid trust. Alternativly you might want to consider who will own the shares in the company.

    You also sound as if you are concerned about your potential liability. There are many situations where directors can be liabl. You need to make sure you have appropriate insurances in place as this can often be more effective protection. You should also look ath your current assets and consider if you need to implement further asset protection strategies.

    A shareholder agreement is very important and should be in place as early as possible, cracks can begin to appear very quickly when you go into business with others.

    David
     
  10. Heinko

    Heinko Member

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    Thanks for the advice guys.
    We've gone ahead and had an informal discussion regarding the buy/sell agreements, laying out some general ground rules about the value of each shareholder and what should happen if they decide to leave/exit the company.

    Wilmac we considered this, however found that not all of our shareholders were in an optimal situation to arrange a discretionary trust, so as a result we went with a limited company.

    When you say that there are situations where the directors can be liable, do you mean that they can be personally liable outside of the company?
     
  11. Wilmac

    Wilmac New Member

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    Yes, it is not uncommon for directors to be personally liable, it of course depends on the situation. You should get advice if you are concerned.

    I could help, or refer you to someone if you would like.

    David
     
  12. Heinko

    Heinko Member

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    Wilmac: We would greatly appreciate any help! However I'm afraid we're a bit low on capital at the moment, and won't be able to afford any professional advice until we can get up and running, make a bit of money and re-invest back into the some professional consults!

    However thanks for the offer!
     
  13. Superman

    Superman Well-Known Member

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    Basic areas where directors can become personally liable are:

    1. PAYG Withholding tax on the wages of employees
    2. Insolvent trading

    Insolvent trading is where the company can't afford to pay its debts on time - we are not talking about a temporary cash flow shortage - but serious issues that cannot be rectified easily.

    Ignorance is no excuse. In this situation the directors can become personally liable for debts incurred by the company while it was insolvent.

    For small businesses, it is often hard and costly to prove, so I don't believe there are many cases of directors of small or start up businesses getting pinged on this one - but it does happen.

    Also, obviously is a director gives a personal guarantee they can be liable.

    It is prudent for any company directors that are taking on risks to look at their personal asset protection. Have any investments / assets in the name of your partner or a trust where you are NOT the ultimate controller (i.e. trustee and/or appointer). Super is also protected (unless you are trying to evade creditors as there is a 'claw-back' provision). Be the fall guy.

    Despite the above, a company has separate legal identity and is a superb structure for a business to operate from.

    Once you are up and running you need to surround yourself with a good team - especially an accountant and commercial lawyer.

    Hope this was informative.

    I (and others) have also replied in detail to a similar post a few months ago. Check it out here.

    SM :cool:
     
  14. Heinko

    Heinko Member

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    Awesome, thanks for the replies guys.

    This is something we've always planned on. Once we are up and running, first thing is to hire a good commercial lawyer and accountant!