How to Set Up a Company

There are so many questions people have about setting up a company, we thought we would try and answer a few of them here. There are many different types of companies however for the purpose of this article, we are going to focus on private companies.

How to setup a company in Australia.

1.Decide on a name for the Company.

2.Decide on the Officers, Members and Location of the Company.

3.Draft Company Constitution.

4.Lodge ASIC Form 201.

5.Apply for Director Identification Number.

6.Apply for the ABN and TFN.

7.Open a company bank account.

What is a company?.

Company definitions.

Director.

Secretary.

Public Officer.

Shareholder.

Registered Office.

Principal Place of Business.

Company advantages and disadvantages.

Company advantages.

Company disadvantages.

Lower Tax Rates.

Directors Liabilities.

Limited Liability for Shareholders.

Public accessible records.

Raise capital or debt

Upfront and ongoing costs.

Retain Profits.

Flexibility of distributions.

Ease of ownership transfer.

Entity name.

How much does it cost to setup a company?.

Frequently Asked Questions FAQs.

Who can set up a company?.

Do companies pay less tax?.

Can I still be personally liable for debts of the company?.

How to setup a company in Australia

The following steps outline how to set up a company. This can be complicated, and you should seek advice from an accountant who will explain the intricacies and help you decide what is best for you.

1.Decide on a name for the Company

The company name can be anything you want, however it can’t be the same or similar to another registered company or business name. There is a Name Availability tool on ASIC’s website which you can use to check for availability. If it is similar to another company name or business name, it may require manual processing with ASIC upon submitting the relevant forms. The company name must include the liability of its members at the end of the name which means appending ‘Pty Ltd’ in most cases. For further information on company names, you can visit ASIC’s website.

2.Decide on the Officers, Members and Location of the Company

There are a few different roles which are required to be filled within a company as per the Corporations Act 2001. The roles most people would be familiar with are directors and shareholders so let’s start there. To put it simply, directors are responsible for running the company and shareholders are the legal owners of the company. Directors can also be shareholders of the company and vice versa.

The other two roles which aren’t as well known are the company secretary and the public officer. These are statutory roles and simply speaking, the secretary is responsible for ensuring proper governance and corporate compliance of the company and the public office is the representative of the company to the Australia Tax Office.

Finally, you will need to decide on where the company is going to be located. There are to locations you will need to specify. The first is a Registered Office, which is the statutory address for the company where all documentation and communication related to the company is sent. It is also where notices for the company will be served and is required to be open during office hours. This is most commonly your Tax Agent. The second is the principal place of business which is reasonably self-explanatory, however is the place where decisions are made, and the books of the company are maintained.

Further explanations of these concepts can be found below in the Company Definitions section.

3.Draft Company Constitution

Once you have all the key stakeholders of the business worked out, the next step is to draft a company constitution. This can be done by a solicitor who specialises in corporate law.

Many accountants do provide a service to be able to set up companies however they do not draft the constitution themselves, instead outsource it to a legal document provider (i.e. use a legal template).

4.Lodge ASIC Form 201

As companies in Australia are regulated by ASIC, to be able to establish a company, you need to lodge a Form 201 with them. This can be done yourself using the Business Registration Service, which is a tool provided by the government, however we recommend doing this through an accountant to ensure it is done correctly. Once you lodge a form with ASIC, it can be time consuming and costly to make any changes.

5.Apply for Director Identification Number

Directors of Australian companies are now required to apply for a Director Identification number. A director ID is a unique identifier that will be kept indefinitely and applied across companies. You will need to apply for your Director ID yourself.

From now until 5 April 2022, you will have 28 days to obtain your director ID after a company has been established. After 5 April 2022, you will need to obtain this before your company can be set up. If you do not obtain your Director ID within this timeframe, ASIC will impose hefty penalties and fines.

The fastest way to receive your director ID is to apply online through the Australian Business Registry Services (ABRS). How to apply online

To complete your online application, you will need:

  • A standard or strong identity strength myGovID. If you don’t have one, please visit How to Set up myGov ID.
  • An individual Australian tax file number (TFN). Providing your TFN is optional but it will speed up the process.
  • Your residential address, as recorded by the Australian Taxation Office (ATO).
  • Answers to two questions based on details we know about you from the following documents:
    • Bank Account Details
    • Notice of Assessment
    • Dividend Statement
    • Centrelink Payment Summary
    • PAYG Payment Summary

There are also options to apply for a Director ID application via phone and paper –  Application Options.

6.Apply for the ABN and TFN

Once the company has been set up, ASIC will issue an Australian Company Number (ACN). If you plan on carrying on a business in the company, you will need to apply for an Australian Business Number (ABN) as well as a Tax File Number (TFN).

These applications are completed online via the Australian Business Register (ABR) and typically completed by an accountant.  If all correct details of the officers and shareholders are provided, the ABN should be issued instantly with the TFN shortly after.

It can however take up to 28 days for the ABR to issue the ABN for a company if they need to undertake any manual checks of the details provided as part of the registration.

7.Open a company bank account

Now that the company is setup and it has all of its registrations, you can now setup a bank account. The name of the bank account should be in the name of the company (e.g. Example Company Pty Ltd).

To setup a bank account for a company, most banks will require the following documents:

  • Signed copy of the Company Constitution
  • ASIC Extract (to verify current officeholders and shareholders)
  • Certificate of Incorporation

In addition to the documents above, you should have handy the ABN and TFN which they may require. Also, don’t leave the documents with the bank! They should be able to take copies before you leave.

One final tip, if you are setting up a bank account for your company to carry on a business, it is important to partner with the right bank. Things to consider are whether provide commercial lending facilities, do they provide a merchant facility and do they provide data feeds to online accounting software like Xero?

What is a company?

A company is a unique structure which for statutory purposes imitates the characteristics of a natural person. It is a completely separate legal entity from its owners and means that it can raise debt, sue and be sued. A company can derive an income, hold assets, raise debt, pays tax, carries on a business and a lot more. Companies are managed by officers which are called directors and secretaries.

Company definitions

Term

Definition

Director

In short, directors are responsible for the oversight of the company. As a director of a company, you must be across all the company’s affairs including its finances, operations, and contractual obligations to name a few.

Secretary

The person nominated to be the secretary of a company is responsible for corporate compliance. This includes but is not limited to ensuring business discussed in directors’ meetings or board meetings is accurately recorded in the form of minutes, ensuring meetings are conducted in accordance with the Company’s Constitution, preparation and circulation of reports for the meetings and reporting to ASIC any changes to the company.

Public Officer

The Public Officer of a company is the nominated representative to the Australian Tax Office and is responsible for ensuring the company meets it obligations under the Income Tax Assessment Act. While it is not mandatory to appoint a Public Officer upon establishment of a company, a person does need to be appointed within 3 months of the company deriving income or carrying on a business.

Shareholder

A shareholder is a person or an entity which owns shares in a company. Shareholders are entitled to profits of the company and have voting rights on specific decisions outlined in the Company’s Constitution. It is important to note that there can be different types of share classes which a shareholder can hold which entitle them to different things, however for the purpose of this blog, we will assume all shareholders are equal. The most common kind of shares are Ordinary shares.

Registered Office

All companies must have a Registered Office which is the address of where you wish for official documents, communications, or notices to the company to be delivered. This does not have to be where the principal place of business takes place, this is nominated separately. It can’t be a PO Box and is required to be an address in Australia. It is common for the Registered Office to be your accountant’s office as it is required to be open to the public during specified hours.

Principal Place of Business

The principal place of business is as the name suggests, there is really nothing more complicated to it than that. If you have multiple places of business, it should be where most of the business is conducted, company’s financials are maintained, and decisions are made.

Company advantages and disadvantages

Company advantages

Company disadvantages

Lower Tax Rates

The tax rate for companies, either 25% or 30% depending on the source of income, is lower than the highest individual marginal tax rate of 45% plus 2% Medicare levy.

Directors Liabilities

The directors of companies can be held liable for the company’s debts. Depending on the circumstances, the directors of a company can be liable to pay losses suffered by the company, unpaid superannuation, tax and pay as you go withholding.

Limited Liability for Shareholders

The liability of shareholders within a company is limited to the amount of capital the shareholder has put it. Shareholders do need to be careful that they only act in their capacity as a shareholder and they don’t cross the line of directors duties as the courts to have the ability to deem shareholders as a shadow director if they are carrying out the same roles and responsibilities as a director.

Public accessible records

As companies are regulated by ASIC, the details of the company are available on a public register. This register is administered by ASIC and any changes you wish to make need to be submitted to ASIC.

Raise capital or debt

Companies can both raise capital and also raise debt. Companies can raise capital through the issue of new shares in the company. They can also source debt from lending institutions in their own right.

Upfront and ongoing costs

The costs involved in setting up a company can be expensive. The company is also required to pay an annual review fee to ASIC ($276 in FY2022). Depending on the assets held by the company and the activity the company participates in, the cost of administering the company can be expensive as well.

Retain Profits

One of the main differences of companies to many other entity structures is that they have the ability for the profits to be retained within the company. Other entity structures require all of the profits to be paid out in the year they are made otherwise tax on the income can potentially be assessed at the highest marginal rate. This can be an effective tax planning tool.

 

Flexibility of distributions

The ownership of a company is determined by who its shareholders are. In its simplest form, the profits paid out of the company, in the form of dividends, needs to be paid out in proportion to each shareholders percentage. For example, if you owner 50% of the shares in a company, you are entitled to receive 50% of the dividends declared. It is important to note that share structures can be more complicated where there are different classes of shares which can have different rights and entitlements.

Ease of ownership transfer

It can sometimes be easier and cheaper to transfer the ownership of assets by transferring/selling shares. One of the major cost benefits is the sale of shares generally does not attract either transfer duty (stamp duty) or Goods & Services Tax.

Entity name

Companies are all recorded on a register administered by ASIC who ensure that there are no two companies with the same name. This can also cause delays upon the establishment of a company if the name is similar to another company. The reason for this is it will be flagged for manual review by ASIC and can take a number of hours.

For example, as of July 2021, the costs for setting up a company from Quill Group is $1,712 (Inc GST) which includes the following:

How much does it cost to setup a company?

The costs involved in setting up a company include:

  • Legal and taxation advice on the best structure for your situation
  • Drafting of the constitution
  • Preparation and lodgement of the ABN and TFN applications
  • Setting up a bank account
  • ASIC incorporate fee
  • Preparation of Company Constitution (through our legal document provider)
  • ASIC incorporation fee which is currently $512, which indexes annually
  • Preparation and lodgement of ABN TFN applications

Please also note that the above fees are purely for the establishment of the company – it does not include any legal, accounting or taxation advice.

Frequently Asked Questions FAQs

The following are some common questions relating to the set up of a company:

Who can set up a company?

As we have discussed above, there are a few different elements to establishing a company. A corporate solicitor is best placed to assist with the drafting of a constitution and an accountant is best placed to assist with the facilitation of the company establishment process.

Accountants can provide you with a constitution however these are generally acquired through a legal document service provider who provides the legal sign off on the documents.

Do companies pay less tax?

This depends on your circumstances you should seek advice from an accountant to determine if this will be the case for you.

First of all, companies are tax using a flat rate vs a natural person who is taxed using a marginal tax rate system, which effectively means the more money you earn, the more tax you pay.

Note: This is a simplified illustration not including any deductions, offsets or surcharges.

You will notice in the illustration there are two types of tax rates, base rate entities are taxed at 25% and all other companies are taxed at 30% (FY2021-22). While we are not going into detail as to what a base rate entity is here, in simplistic terms, it is a company that is carrying on a business. You can view further information on what a base rate entity is on the ATO’s website.

Secondly, you need to consider whether the income you are receiving is Personal Service Income (PSI). PSI is income that is mainly a reward for an individual’s personal efforts or skills. There are rules in place which prevent people from diverting their income to a company in an effort to reduce their tax if the income they receive is PSI. We won’t go into any further detail on PSI here however you can read more about it on the ATO’s website or you can use their PSI determination tool to see if your income is PSI.

Can I still be personally liable for debts of the company?

This depends on whether you are a director of the company or not. As directors are the people charged with the responsibility of running the company, they can also be personally responsible for certain liabilities.