In this article, we consider the pros and cons of registering a company for your proposed venture.
Pro – Limit your liability
Incorporating a company protects your personal liability. Setting up a company creates something called the “corporate veil”. The corporate veil provides a degree of separation between you and the liabilities of your business. Generally speaking, the shareholders and directors of a company are not liable for its debts (please note that there are exceptions to this). Compare this to a sole practitioner or a partnership, which are both alternative structures for running a business, in which the sole practitioner or partners are liable for their business debts.
Pro – Shared ownership and raising funds
Incorporating a company to operate your business allows for the growth and expansion of through the issuing of shares. This can yield a number of benefits for your startup.
For starters, it provides a means of raising capital for your business. Investors can come on board as shareholders which, for startups, is almost always an essential part of your journey. If you are a sole practitioner on the other hand, the only means you have to bring on investors is through a loan. While a loan can be useful, it is more onerous on your business than shares, as it creates debt that you are legally required to repay.
Shares also allow for flexible means to grow your business. There are various classes of shares that can designate different rights to their holders. For example, some shares may carry voting rights, where as other shares may only carry an entitlement to dividend payments. This is useful as it allows you to retain or share control of your company according to what suits you best.
Pro – Legitimise your business
Having a company to operate your startup also makes your business look more professional and commercial. Certain industries have different professional expectations. It is common for lawyers or accountants, for example, to operate as partnerships or sole practitioners. There is a generally an expectation for other commercial ventures, however, to operate their business through a company. Incorporating early sends a message that your business is a legitimate entity that is ready for market.
Pro – House your intellectual property
If you are involved in an innovative venture, you should be particularly interested in incorporating a company to secure your intellectual property and other material assets. Many of our startup clients have developed a unique offering with the help of various members of their team. Broadly, in the absence of an agreement to the contrary, the intellectual property in a new product may belong to the persons who developed it, and not the business who is trading with it. This poses a number of problems.
First of all, the security of the IP is uncertain in the event of a disagreement between the founding team. Who owns the name? Who owns the code? Who has the right to continue developing the idea if the team breaks up? All of these questions and more will go unanswered when IP remains unsecured. By incorporating your company and having each person who worked on the product assign their IP rights to the company, you can greatly reduce the risk associated with these variables.
Further, in most usual circumstances, a startup’s most valuable, and often only asset, is its intellectual property. Investors will also want assurance that the business they are investing in can demonstrate ownership of its most valuable asset.
Pro – Incentives and grants
If you are operating in the innovative space, as almost all startups are, you should be looking to see what grants and rebates you qualify for. Most of the incentives and grants offered in Australia are only available to registered companies. Furthermore, if the incentive you are applying for is a tax rebate, such as the R&D incentive, these rebates apply to your company’s historical spend. If you are personally incurring expenses you will have a much harder time demonstrating your historical spend for purposes of the R&D incentive than if your company is incurring these expenses.
Pro – Its quick
A lot of founder’s delay incorporating because they don’t want to deal with the hassle. Contrary to popular belief, it is not an overly onerous task. It’s especially easy if you’re being assisted by a legal adviser or accountant. Our startup lawyers have companies up and registered within a matter of hours.
Con – Registration fees
While registering your company isn’t the most expensive thing in the world, it’s also not free. If you’re looking at more complex company structures, such as dual structure, your costs are going to increase as well. You can find a full list of ASIC fees that may apply to your registration here.
Con – Corporate responsibilities
Being a director and shareholder of a company comes with responsibilities. The Corporations Act 2001 imposes numerous obligations on company office holders. The four “general duties” for directors under the Corporations Act are:
- Act with care and diligence;
- Act in good faith;
- Do not improperly use your position; and
- Do not improperly use information.
There are serious consequences for breaching such duties. If you are registering your company it is important that you understand and comply with such obligations.
Furthermore, having a company is likely to increase your annual paperwork. You will (among other things) have to file a tax return for your company, and maintain financial records.
Need help?
Allied Legal’s commercial lawyers can help you determine what business structure is best for your venture. Give us a call on 03 8691 3111, or send us an email at hello@alliedlegal.com.au to talk about how you should structure your business.
