What is an Incorporated Entity?

An incorporated entity is a business structure where the business is legally separate from its owners. Incorporation provides limited liability, meaning the personal assets of the owners or shareholders are generally protected from business debts. This can be beneficial when the business faces financial difficulties or legal issues.

Benefits of Incorporation

• Limited Liability: The personal assets of shareholders are usually protected from business debts and liabilities.
• Continuity: Incorporated entities can continue to operate even if ownership changes (e.g., if shareholders sell their shares).
• Professional Image: Incorporating can enhance a business's credibility with customers, suppliers, and investors.

Example:

Mary runs a consulting business and decides to incorporate it as “Mary Consulting Pty Ltd.” If the company faces legal action or significant financial debts, Mary’s personal assets (such as her home) are protected, as the company is a separate legal entity. This is in contrast to a sole trader structure where personal assets can be used to settle business debts.

When Should You Incorporate?

Incorporation can be beneficial for businesses that are growing or taking on significant risks, such as entering into large contracts or borrowing money. It’s also a good option if you plan to attract investors or sell shares in your company.

Steps to Incorporate a Business

Incorporating a business in Australia involves registering the company with the Australian Securities and Investments Commission (ASIC) and obtaining an Australian Company Number (ACN). You will also need an ABN for taxation and business operations.

Tax Implications

Incorporated entities are taxed separately from their owners, meaning that companies are subject to corporate tax rates. This can provide some tax benefits, particularly if profits are reinvested into the business. However, dividends distributed to shareholders are also taxed at the individual level, leading to double taxation in some cases.

Exceptions to Limited Liability

While incorporation generally provides limited liability, there are exceptions. Directors can still be held personally liable in certain situations, such as when they allow the company to trade while insolvent or engage in fraudulent activities.

Example:

John is the director of a company that goes into liquidation. If it is discovered that John allowed the company to continue trading while it was insolvent, he could be held personally liable for the company’s debts, despite the limited liability protections of incorporation.

For more information on incorporating your business and its benefits, visit our page on what ASIC does.