Registering business entity as a company may not be appropriate and necessary for all business activities for self employed persons and small business firms.
To better understand if company structure fits your business please review the following advantages and disadvantages of the company structure:
Advantages
- Name. Once a company is incorporated no other company can be registered with an identical or near identical name.
- Any number of business owners (shareholders) with varying levels of investment capital and personal services.
- Limited Liability of shareholders. But note that liability can be increased if, for example, shareholders and directors provide guarantees to Financial Institutions to cover the company’s borrowings.
- Separate Legal Entity. As a consequence of this a shareholder may be employed by the company and may also loan money to the company on the same basis as any unrelated party.
- Trading Credibility. Business vehicle possesses an increased level of credibility in the market place. It is very much a recognized, accepted and trusted.
- Trading Confidence. Customers and suppliers will feel more confident and comfortable doing business with you.
- Tax Efficiency. Company structures may offer tax advantages. Company tax is 33% flat. There is also ‘Tax-Dividend Imputation’ which can further help
- Employing Relatives. There is no requirement that you need to get an approval from the Inland Revenue Department to pay wages to relatives for any work they may undertake for your company.
- Continuity. Directorship and ownership changes do not cease the company.
- Company Funding. Raising capital through venture capital, debentures etc is more flexible and effective.
- Borrowing. Arranging security for a loan can be both cheaper and easier for a company than an individual.
- Security for Shareholders Loan. It is possible for a shareholder to have their lending to the company secured by way of a debenture.
- Easier to sell part of company. Just sell some of the shares.
- LAQC. Loss Attributing Qualifying Company status allows distribution of the Company’s Loss Amongst Shareholders.
Disadvantages
- Does not protect directors from personal liability. If a director continued trading when the company was insolvent one can be held to be personally liable for the debts of the company.
- Directors must be fully aware of the financial operations of the company to prevent it trading while insolvent.
- Does not provide any opportunity to spread business income to family members on lower marginal tax rates other than through legitimate wages.
- Business losses have to remain in the company unless the company is an LAQC one.
- A public company must declare financial results publicly and must be audited every year.
- Depending on profit levels, company may start paying income tax earlier than other business structures.
Sounds great! Register New Company