Why Choose A Company?
Apart from undertaking business or investment activities as an individual, there are two main types of structures that a business or investor will operate from - a trust and a company. In addition, some individuals form a self managed superannuation fund to manage their retirement savings.
While each structure has benefits and detriments, this article explores the use of a company for either business and investment purposes. While a company is often considered as a preferred business structure, companies may be overlooked as an investment vehicle as the disposal of capital assets by a company does not attract the current CGT discount benefits.
Companies offer many other benefits that may well outweigh the loss of access to the capital gains tax discount. Some of the advantages and disadvantages of utilizing a company structure are detailed below.
What are some of the advantages of a company structure?
Simplicity
A company, specifically a private company, is a simple structure – a proprietary limited company only needs to appoint one Director and have one shareholder and it can be established within an hour. This structure is easily searched and details verified, is allocated a company number and can simply apply for an ABN (if it is operating an enterprise) and tax file number, open a bank account and commence trading.
A company limited by guarantee will have members and is often the preferred structure choice for ‘not for profit’ entities (charities).
The company is also a separate legal entity from its Directors and shareholders, enabling it to enter into contracts and agreements, and legal action, in its own name.
Limited Liability
As a shareholder, your liability is usually limited to the unpaid value of your shares. This enables the personal assets of shareholders to be protected from the claims of the company’s creditors.
Contrast this with the position of Director, where you are personally liable for the debts and misdemeanors of the company.
Vehicle to Raise Capital
Company structures are easily understood by investors. As companies are bound by the Corporations Act 2001 from incorporation to winding up, there is a level of comfort that these rules will be followed, including the rules associated with capital raising and reporting.
Characteristics attached to each share (the ability to vote, receive dividends and participate in the return of capital on winding up of the company) are detailed in the company’s constitution, and the number of shares on offer can be found by searching the ASIC database, enabling investors to make informed decisions prior to participating in a capital raise or investing in the company.
Flat rate of tax
Ø 25% for "Base Rate entities"
Ø 30% for all other companies
A company is a base rate entity if:
Ø it has an aggregated turnover of less than $50 million
Ø 80% or less of your assessable income is base rate entity passive income (for example interest, dividends or rent)
While determining base rate entity status can be a little more detailed than this description, a ‘base rate entity’ is often a small to medium sized business.
Compare this to the top marginal individual tax rate of 47% including Medicare Levy, and the highest current capital gains tax rate of 23.5% including Medicare Levy.
Compare the Company Tax Rates to Self Managed Superannuation Fund (SMSF) Tax Rates
A complying SMSF currently pays 15% tax on concessional contributions and earnings. Capital gains enjoy a tax rate of 10% where the assets disposed of have been held for more than 12 months. Where a member has commenced a superannuation pension, there may be no tax on a portion of the earnings of the fund.
Mind you, a non-complying SMSF will pay tax at 45%. There are also penalties imposed where the fund receives non-arms length (related party) income or pays non-arms length expenses.
There are additional taxes levied on individuals in relation to their superannuation interests, which can be paid from their member account in the fund - an additional 15% tax on concessional contributions where a member’s adjusted taxable income exceeds $250k, and the introduction of Division 296 tax which may see an extra 15% tax on earnings for those with a superannuation balance above $3m, and a further 10% tax for those with a balance exceeding $10m.
Perpetuity
As long as you pay your annual ASIC fee, and don’t encounter a liquidation event, a company may continue in perpetuity. Compare this to a trust structure which may have a life of between 80 to 125 years in most states (perpetuity periods vary from State to State, for example in South Australia there is no perpetuity period), or an individual taxpayer who may not make it to 80 years!
Death may have limited impact
Where a Director has a valid Will in place at the time of their death or mental incapacity, their Executor or Legal Personal Representative (LPR) may appoint another person to the role of Director (there must be at least one Director at all times for the company to continue to operate).
Note, the shareholders of the company vote on the appointment of a Director.
The death of a sole, individual shareholder may see their shares transferred to another individual or entity (either directly or via their Estate). After this has occurred, it is business as usual for the activities of the company – death does not require a change to the business or investment operations, but may necessitate changes to any licenses held, bank account signatories, etc.
Compare this to a self managed superannuation fund – on the death of a member their benefits must either be transferred to a dependent under the Superannuation Industry Supervision Act 1993 (SISA) (a spouse, child, financially dependent individual or a person in an interdependent relationship with the deceased) or the Estate of the deceased.
For a superannuation interest paid on death, tax payable on the ‘Taxable’ portion of the member benefit by the Estate is 15% and tax payable to some dependents (for example, adult children) on this amount is generally 17%. Where insurance proceeds are distributed from the fund, the tax rate is higher. There may be limits to the amounts that may be retained as a pension in the fund if the spouse of the deceased is also a member (and they are a beneficiary of the member’s superannuation balance).
It is not only the tax payable on the superannuation interest, assets of the fund may need to be sold to meet the cash payments required, and the fund required to be wound up (in the case of a single member fund). This could be very disruptive where the fund holds illiquid assets, or where the business premises or farming land are held within the fund.
The death of a Director or shareholder of a company is a disruption to the business operations but this event can be managed by the Director having a valid Will in place – no assets are required to be sold to meet cash payment obligations, and the company is not required to be wound up on this event (although there are some steps that must be taken for single director companies to enable them to continue).
Shares in a Company Can Form Part of an Estate Plan
As a company is not required to be wound up on the death of an individual shareholder, a valid Will may provide instructions for the shares in the company to be passed directly to another or flow through the Estate of the deceased.
Regardless of the recipient of the company shares, they may benefit from a future income stream in the form of dividend payments, where the company continues to generate profits and surplus cash flow.
Income Distribution
Depending upon the type of shares held, a shareholder may receive dividends where the company has been profitable and has sufficient retained earnings to pay these.
The number and class of shares will determine the entitlement to dividends paid, which are at the discretion of directors with the approval of shareholders.
While companies pay either 25% or 30% tax on their taxable income, they are also able to distribute tax credits to their shareholders where they have sufficient retained earnings to pay a fully franked dividend.
Companies can act as ‘Bucket Companies’ for related Discretionary Trusts
In some family structures, discretionary trusts distribute to a related family company, which has the effect of limiting the taxation on the trust distributions to a maximum of 30%. Ideally the funds equal to these trust distributions will be passed from the trust to the company and the funds invested by the company, providing further returns for the family.
A specific benefit of a company earning investment returns in the form of fully franked dividends is that there may be no further tax payable by the company (where the dividends it receives are franked to 30% and the company pays tax at the same rate) and the franking credits on dividends received are also added to the company’s franking account and passed onto the company’s shareholders on dividends paid.
Research and Development Tax Incentive
Only a company is able to claim this concession – it is not available to any other type of entity/structure.
What are some of the disadvantages of a company structure?
Personal Liability of Directors
This is the most significant disadvantage to using a company structure – the personal assets of the Director may be made available to creditors to satisfy debts of the company.
Agreeing to be a company director is not a role to take on lightly, and considerable due diligence should be undertaken if you are asked to step into the role for a new or established company.
Complex Structure with Fees to Establish, Operate and Wind Up
There are many fees payable to the Government and professionals in relation to the establishment, operation and winding up of a company.
Initial fees are payable to establish a company – these will vary with the level of advice received. Annually, there is a filing fee payable to ASIC and accounting fees to comply with the varying levels of required reporting for the company. At the end of the life of the company, there will be further fees incurred for the deregistration or other winding up of the company.
Winding Up is Required
At the end of the company’s useful life, the Directors and shareholders are required to take active steps to wind up the company, either through administration/liquidation or deregistration. ASIC may also deregister a company where the annual company fee has not been paid for a number of years.
Capital Gains Tax
While currently an individual may pay no capital gains tax on the disposal of an asset (where total taxable income for the year doesn’t exceed their tax free threshold), a company will either pay 25% tax (for base rate entities) or 30% tax for all other companies on any capital gain made on disposal of assets.
While individuals and superannuation funds are able to apply a discount to their gains (where the assets are held in excess of 12 months), there is no discount available to companies.
Annual ASIC fees and Compliance Obligations
Apart from the annual ASIC fee, all changes to the structure of the company, its officeholders and shareholders (and their personal details, such as addresses) must be reported to ASIC within strict time frames to avoid late lodgment penalties.
Personal details of shareholders and directors are available on the public record (personal addresses have recently been removed from public view).
The detail above is not exhaustive and has been designed to highlight some of the common considerations when selecting a company structure. There is no single correct structure recommendation – any new company or trust must fit with existing structures and be established for much more than the tax benefits that may be generated. Tax is only one of the elements to consider when selecting the most appropriate structure.
We always recommend starting with the end in mind – consider when this structure is no longer required by the founder or fit for purpose, what is the plan for winding up or handing it onto the next generation?
Embarking on a new venture or investment strategy? Contact us to explore the right structure for you.
Michelle Wilson
March 2026
