What are the advantages and disadvantages of a private company?

A company is one of the most common business structures in Australia. A private company is a business that is incorporated and registered with ASIC and its shareholders are a small group of individuals or entities such as family members or investors.  This is in contrast to a public company whose shares are traded on a stock exchange, these types of company can have an unlimited number of shareholders. ​

In this blog we’ll be focusing on private companies, however, it’s crucial to understand the advantages and disadvantages of a private company, and how they affect your business before taking the plunge.​

One of the most significant advantages of a private company is you’ll have limited liability. This means your personal assets are generally protected from business debts. If the company faces financial difficulties, your liability is limited to the amount you’ve invested in the company’s shares.​

For example, your company owes $10,000 to a supplier but goes bankrupt. The supplier can only claim against your business assets (e.g., equipment). You are (usually) not personally responsible for paying the remaining debt, even if the company's assets don't cover it all.​

In some cases, operating as a private company can be more tax-efficient than being a sole trader, partnership or trust. For example, ​

You have more flexibility for profit extraction and tax planning when operating as a limited company. It’s often possible to develop a strategy whereby a mixture of salary and dividends can be used to extract profits from the company in a more tax efficient way, potentially lowering your overall tax liability. If you’d like to discuss your business structure and how to minimise your taxes, don’t hesitate to book a call with us or you can register and get a team of experts to handle your accounting and tax​

Companies often have an easier time securing funding from banks, investors, or venture capitalists. This is because they're viewed as more established and less risky than unincorporated businesses, allowing entrepreneurs to grow their business. ​

If you’re seeking business grants, we have a blog on this topic.​

Setting up a private company with ASIC gives your business a big boost in terms of looking professional and trustworthy. This can be a real advantage when dealing with clients, suppliers, or even banks. They often prefer to work with companies because they seem more reliable. This trust can lead to better opportunities, easier access to loans, and better deals from suppliers. In some cases, bigger companies might even require you to be a limited company before they'll do business with you.​

Before registering a company, it’s essential to fully understand the responsibilities of directors. If there’s a breach of director duties, they may be personally liable for company debts or prohibited from managing another company.​

Examples of director duties include:​

The total cost for incorporating a company ranges. For example, to register a proprietary company limited by shares, you’re required to pay $512; you’ll pay $422 for a company limited by guarantee.​

In addition, there is an annual review fee payable to ASIC. This is currently $321 for a proprietary company.​

Your accountancy and legal fees may also be higher if you trade as a limited company as opposed to a sole trader.​

There are more admin and compliance requirements for private companies, and they can be complex. For example, you’ll need to file your company’s annual tax return; if you provide non-cash benefits to your employees, you may also be liable for fringe benefit tax (FBT). ​

In addition, there are strict rules about loans made by private companies to shareholders or trusts. If the company loans money to a shareholder and the loan is not fully repaid by the lodgement day for the year the loan is made, this may give rise to Division 7A loan complications. In order for the loan to be compliant, a yearly minimum repayment amount is required and the company will charge interest on the loan based on ATO stipulated rates. If the loan is not compliant, the loan may be deemed as a dividend from the company to the shareholder and taxed at the shareholder level.​

It’s best to consult with a professional to ensure compliance. At Beany, we specialise in business accounting, ensuring your company is in good hands - get in touch or register now.​

Certain information about your limited company, such as financial statements and director details, will be publicly available on ASIC. Also, details about the company's directors, such as their names and addresses are publicly available.​

Managing the downsides of private companies doesn't have to be a hassle, Beany is here to help. We take the stress out of accounting and tax, allowing you to focus on growing your business. Our expert team handles everything from bookkeeping and filing BAS returns to year-end accounts and tax filing, ensuring your company stays compliant with all regulations. ​

With Beany, you can rest assured that your financial affairs are in capable hands, giving you the peace of mind to concentrate on what you do best – running your business. No more worrying about deadlines or complex paperwork; let Beany take care of the compliance so you don't have to. Get in touch or register today.​