If you are considering starting a business, it is important to start your business the right way. This often involves setting up a Proprietary Limited Company (Pty Ltd). ‘Proprietary’ simply refers to ownership, in this case a company which has between 1 and 50 shareholders, and ‘Limited’, means that the any liability attached to the ownership of those shares is ‘limited’ to the unpaid value of the shares.
In most cases shares are paid in full and usually there is no further liability attached to owning shares once you have paid for them. This doesn’t mean there is no liability whatsoever, but it does afford some protection against repaying company debts. More on some specific liabilities below.
Running your business through a company offers great flexibility and is the perfect structure if you are geared for growth. Starting out as a company may cost a little more to begin with, but in the long run it will avoid unnecessary future costs associated with changing structures. Additionally, many government grants or concessions are only available to those businesses trading as a company.
How to Setup a Pty Ltd Company
Setting up a Pty Ltd is a relatively simple process and can be completed by a registered tax agent or online services such as Easy Companies
The setup process is quite straightforward and can be completed by following these steps:
- Choose a company name and register it with the Australian Securities and Investments Commission (ASIC).
- Appoint a company director and company secretary.
- Create a company constitution and share capital structure.
- Prepare and lodge the required paperwork with ASIC.
- Pay the registration fee and obtain a Certificate of Incorporation.
Once you have followed these steps, your Pty Ltd company will be registered and ready to operate.
Advantages of a Pty Ltd
There are many advantages of setting up a Proprietary Limited Company, also known as a Pty Ltd. This company structure is popular among small businesses as it offers limited liability protection to its shareholders. This means that the shareholders are not personally liable for the debts of the company, which can be a significant risk mitigation strategy.
Another advantage of a Pty Ltd is that it can help to build business credit. This is because the company is a separate legal entity from its owners, meaning that it can establish its own credit history. This can be beneficial when the company is seeking loans or other forms of financing from lenders. Finally, a Pty Ltd is relatively easy and inexpensive to set up, which makes it a popular choice for small businesses.
More advantages include:
- Limited Liability
- Branding / Professionalism (attracting stakeholders)
- Succession
- Tax effective 25-30% tax rate (compared with up to 47% including medicare levy)
- Flexible business expansion (CSF, convert to limited)
- Perpetual (lives forever)
- Access to grants / R&D / incentives
Disadvantages of a Pty Ltd
There are several disadvantages of setting up a Proprietary Limited Company. Firstly, the company may be less flexible in its operations as it is required to comply with certain regulations. Secondly, the company may have difficulty raising capital as it is not able to offer shares to the public. Finally, the company may be less transparent as it is not required to disclose its financial information to the public.
More disadvantages include:
- Higher set up costs
- Higher running costs (Accounting / ASIC / distributing profits)
- More complicated / higher level of tax understanding and corporate responsibility
Roles of a Pty Ltd
A Proprietary Limited Company (Pty Ltd) is a company that is privately owned and operated. The company’s shareholders have limited liability, meaning that they are not personally responsible for the company’s debts. The company is run by a board of directors, who are elected by the shareholders. The board is responsible for making decisions about the company’s business operations. The shareholders have the right to vote on major decisions, such as the appointment of directors and the sale of the company.
- Director – responsible for operating the company for the benefit of the shareholders
- Secretary
- Shareholder – kick back and reap the rewards
Other liabilities
Proprietary limited companies are required to maintain accurate records of their financial affairs, including their liabilities. This ensures that shareholders and creditors can assess the financial health of the company and make informed decisions about their investment or credit exposure.
The most common types of liabilities that a proprietary limited company may have are:
- Trade creditors: money owed to suppliers for goods or services purchased on credit
- Tax liabilities: money owed to the ATO or other tax authorities
- Bank loans: money borrowed from banks or other financial institutions
- Employee entitlements: money owed to employees in the form of wages, salaries, superannuation, leave entitlements etc.
Proprietary limited companies are liable for their debts and obligations. If the company is unable to meet its financial obligations, creditors may take legal action to recover the money owed. This could lead to the company being placed into liquidation.
- Directors Guarantees
- ATO – PAYGW, Super, GST
Grants / Concessions
There are a number of grants and concessions that are available to Proprietary Limited Companies. These include the Small Business Grant, the Research and Development Tax Incentive, and the Export Market Development Grant. Each of these grants has specific eligibility criteria that must be met in order to apply, and companies should consult with their accountant or financial advisor to determine if they are eligible.
The Small Business Grant is a government-funded grant that is available to companies with less than 20 employees. The grant can be used for a variety of purposes, including business expansion, marketing, and employee training.
The Research and Development Tax Incentive is a federal government incentive that is available to companies that engage in research and development activities. The incentive is designed to encourage companies to invest in innovation and to create new jobs.
The Export Market Development Grant is a federal government grant that is available to companies that are looking to expand their business into new export markets. The grant can be used for a variety of purposes, including market research, marketing, and employee training.
- EMDG
- R&D
- Concessional tax rates
How to get paid
- Wages
- Dividends
- PSI