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Can
have any number of business owners (shareholders) providing varying levels
of investment capital and personal services. A sole trader is
limited to one and a partnership normally will have fewer partners
than the business owners of a company.
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Provides
limited liability, Claims against the company fall on the
company, not the shareholders
. That is there can be a separation of business risk from
the shareholders personal assets. A company allows
shareholders to limit their maximum possible liability for the debts of that
company. If a shareholder holds 50 $1.00 shares in a
company, that shareholder's liability for the company's debts is limited to
$50.00 (liability can be increased in situations where shareholders and
directors provide guarantees to Banks or other Financial Institutions to
cover the company's borrowings) Similarly,
shareholder's loans to the company can also increase the potential risk in
the event of financial collapse of the company. This
situation is to be contrasted with the position of a sole trader or partner
in a firm, where their liability for the debts of that business is
unlimited.
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Registration of the Name. Once a name is approved by the
Registrar of Companies no other company can be registered with an identical
or near identical name. There is no register for
unincorporated bodies such as sole traders or partnerships.
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Separate legal entity. An individual can not enter into a
contract with himself but a shareholder can enter into a contract with the
company. As a consequence of this a shareholder may be
employed by the company and may also loan money to the company on the same
basis as any unrelated party.
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May offer tax advantages when the tax rates for companies and individuals
differ e.g. tax rate for companies is 33c in $, whereas tax rates for
individuals differ (19.5c to $38,000, 33c $38,000-$60,000, 39c over
$60,000).
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Taxation and employing Relatives. By introducing
family members as employees and/or as shareholders income splitting is
possible to enable tax less tax to be paid at the higher rates.
Approval from the Inland Revenue Department is required to allow a claim for
wages paid to a spouse of family of a sole trader or of a partner in a
partnership. Restrictions are placed at the hourly rate which
can be paid. With a company there is no such
restriction. The amount of remuneration paid is to be in
keeping with the value of the work undertaken.
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Tax-Dividend Imputation. With the introduction of
dividend imputation from the 1st of April, 1988, double taxation has been
removed. Companies now pay tax at 33c in the dollar
on any profit earned after allowing for shareholders salaries.
If the company's tax paid profit is later distributed to shareholders as
dividend they get an imputation credit for the tax the company has already
paid on their behalf.
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May confer the impression of greater credibility and that the business is
“serious” and there for the long term.
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Continuity. If a director pulls out, or a
shareholder wishes to sell part or all of his or her shares, the company is
not affected with a new director or shareholder.
This would be different with a sole trader or partnership.
Both of these business forms would have to create a new entity.
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Provides more options for funding e.g. raising of equity, venture capital.
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Borrowing. Arranging security for a loan can be both
cheaper and easier for a company than an individual. A
company may grant a floating charge over its assets, both present and
future, by the granting of a debenture. Individuals,
on the other hand, cannot do this and must grant specific charges over
specific assets. A company can grant a charge over its
undertakings whereas an individual would have to provide a detailed schedule
of all assets to be charged for the charge to be effective.
Under the debenture, new assets acquired by the company would automatically
be covered by the charge and existing assets sold in the course of the
business would be released from the charge. In the
case of an individual where a new asset was acquired a new charge would have
to be prepared. Similarly where an asset was sold a release
would have to be executed to release the asset from the charge.
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Security for Shareholders Loan. It is possible for a
shareholder to have their lending to the company secured by way of a
debenture. In the event of the company experiencing
financial difficulties, eventuating in a wind up of the company, the
debenture holder would stand to rank ahead of the unsecured creditors in
distribution of the residual assets.
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Easier to sell part of company than a sole trader or partnership business
structure- just sell some of the shares.
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Distribution of the Company's Loss Amongst Shareholders. It is
possible to separately register the company with Inland Revenue Department with
Loss Attributing Qualifying Company (LACQ) status. In
the event of the company experiencing a tax loss in a future year, this loss can
be distributed to the shareholders (in the same year).
The result is, losses which would otherwise be held within the company, awaiting
future profits to offset these losses, can be used immediately by the
shareholders to reduce their individual personal tax liabilities.
An example of the use of an LACQ company is the purchase of a rental property
which is heavily mortgaged or a forestry company from its start up.
In the early years both situations are likely to have losses. These
losses would be able to be distributed year by year to the shareholders-
with LACQ status these distributions would not be possible.
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