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Should I switch from partnership to a company?

Friends of mine have noticed how my business has grown and have recommended I change from being in a partnership with my wife to a company. What should I know before making the jump to being a company?

Running your business through a company will have advantages and disadvantages.

Personally, I think the tax laws are gentler on companies but it’s more costly to operate a company and there are more red tape issues. You will be a director of your company, which is a legal entity in its own right.

You will become an employee of your company and will have to take out insurance on yourself as you would for any employee.

You will also have to pay super of nine per cent on your own wage. The books will have to be audited each year by an accountant. Imagine a plumbing business run by a couple with two employees. With a turnover of say $500,000 the accounting bill might be $5,000 but as a company it might go to $10,000.

A big appeal of a company is the company tax rate of 30 per cent, especially if you are in the top tax rate of 45 per cent.

That said, many individuals after tax planning and deductions often have an average tax rate of 30 per cent. Remember this, any money you take out of your company over and above your wage will have a tax of 30 per cent paid so if you take the money out you only have to pay the extra 15 per cent. (I am ignoring the Medicare levy.)

This extra money does not have to attract super or workers compensation payments. Also it could be good for you to leave your money in the company to grow your business and then it only is taxed at 30 per cent. One downside is that a company does not receive the CGT 50 per cent discount which is only available to an individual. Once again, a great accountant is needed when deciding on making the big jump into taking on a company. Good luck.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Published on: Wednesday, April 07, 2010

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