Company Legal Structure

What is a company legal structure?

Unlike Sole Trader or Partnerships, companies are considered to be separate legal entities from the individuals who own shares (i.e. the owners). A company can legally own assets, incur debt, sign contracts, and employ people it is own right. A company can also sue or be sued.

For tax purposes a company has its own identity and must pay tax on its earnings and lodge tax returns, separate from those of its owners.

If a company gets into financial trouble, creditors can only claim assets held by the company, and not the personal assets of the shareholders, unless the shareholders have made personal guarantees for the company or offered any other personal security against the company's liabilities.

Ownership and control over the business is not necessarily the same thing in a company. The shareholders 'own' the company but unless they also hold a position on the board or are employed as a director (or manager) they do not have day-to-day control over the business.

There is usually no requirement for company directors, who do have day-to-day control over the business to own shares. In a new (small or family owned) company, this separation of ownership and control tends to be "in theory" rather than the usual practice, as the company founder is generally also the managing director.

Types of Company Legal Structures

There are two main types of companies, public and proprietary. While public companies can have any number of shareholders, there is a limit on the number of shareholders a proprietary company can have.

The shares of a public company are publicly available for purchase through the share market, whereas the shares of proprietary companies are only traded privately.

There are many advantages to incorporating a company. Your liability is limited to the amount you have already invested in the company (unless you have offered personal guarantees to creditors), companies can be expanded quite easily by increasing the number of shares available for sale, it is relatively easy to increase the number of owners and it is reasonably easy for existing owners to leave, and a company can continue to exist if the founder, managers or shareholders leave.

However, there are disadvantages as well. A company can be expensive to set up, and they face high compliance costs due to the greater degree of scrutiny they receive from government organizations (i.e., the tax office).

What are your other choices

If you find that this legal structure is not quite right for you and your business, you may have to consider one of the following alternatives:

• Sole Trader Legal Structure
• Partership Legal Structure
• Trust Legal Structure

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