Tag: LLC Series

Sole Proprietorship vs LLC

Posted on by Peter Harper

Sole Proprietorship Vs. LLC: What’s The Difference?

It is most likely for individuals and small business owners to structure their businesses as either sole proprietorships or LLCs. Suitability of structuring your business as one or the other arises because of slight differences in formations and protections of each entity.

Sole Proprietorship
  • The easiest business structure is the sole proprietorship, as it has minimal startup costs for entrepreneurs. The set-up of a formal structure is not required.
  • They are run by a single individual who owns all the business assets and is responsible for all the liabilities.
  • The IRS automatically considers a business structure operating in a natural person’s name as a sole proprietorship. 
  • A sole proprietorship’s owner is personally liable for any financial losses and debts that may arise during trading.
Limited Liability Company (‘LLC’)
  • An LLC is a business entity that can have one or more owners. A formal structure is required as owners must file articles of organization with the secretary of state to form the LLC.
  • An LLC provides its owners (referred to as members) with limited liability, meaning members are not personally liable for business debts and claims.
  • An LLC is a pass-through entity; by default, the IRS classifies single-member LLCs as sole proprietorships and multimember LLCs as partnerships for tax purposes. The members may also elect to have the LLCs taxed as S-Corporations or C-Corporations by filing the necessary forms with the IRS.
  • An LLC can be member-managed, or an election can be made to have third parties manage the entity.

Why Change A Sole Proprietorship To An LLC

Changing your business from a sole proprietorship to an LLC may be worthwhile if you’d like to grow your business and to engage in more risk than before. LLCs provide members with limited liability protection, which does not apply to sole proprietorships. 

Multiple owners can also own LLCs, while individuals may be more willing to invest in an LLC than a sole proprietorship as they will be entitled to some share of the business profits.

The Pros And Cons Of Each Business Structure

Sole Proprietorship
Pros of Sole Proprietorships
      • Forming a sole proprietorship is less expensive and requires less paperwork. (Licenses and permits could still be mandatory depending on the nature of the business)
      • The net business income of the sole proprietorship is included in the owner’s personal income tax returns. The tax rate applied to the business profits depends on the owner’s individual tax rate.
      • The owner of a sole proprietorship is solely responsible for all management decisions and responsibilities. Therefore, board/member resolutions are not required when any decisions regarding the business need to be made.
Cons of Sole Proprietorships 
      • Owners have personal liability for all debts and claims of the company, and their personal assets may be at risk to settle unpaid debts and other legal liabilities of the business.
      • Owners of sole proprietorships will be required to use their own resources (capital or credit facilities) to fund their startups, as they cannot provide external investors with any securities in the form of stocks.
Limited Liability Company (LLC)
Pros of an LLC 
      • An LLC is considered as a separate entity from its members. Subsequently, members are not personally liable for the business’s debts and other legal liabilities (i.e., they have limited liability protection). 
      • Members of LLCs include the business profits in their individual tax returns because the LLC is classified as a pass-through entity. Furthermore, members may be able to apply the 20% pass-through deduction to business profits.
      • LLCs may have fewer state-imposed filing requirements than corporations.
Cons of an LLC 
      • Forming an LLC is more expensive than setting up a sole proprietorship, and depending on the state requirements, ongoing fees may be imposed annually.
      • Members of LLCs receive units in proportion to their contribution/LLC agreement. These units are not as easy to transfer as stocks in a corporation. This difficulty in transferring ownership is one of the reasons that external investors/venture capitalists prefer investing in corporations over LLCs.

 

Where should I form my LLC?

An LLC typically forms in the state in which the business activities of the entity will be conducted. It is possible to create the LLC in a different state; however, the LLC will then be classified as a Foreign LLC, which may lead to additional filing requirements with the secretary of state and higher administrative costs in most states. The IRS has special rules for foreign LLCs and must be considered if this option is elected.

Responsibilities As An LLC Owner

The members’ responsibilities will be decided in the LLC operating agreement. This will detail whether the owners have elected to have the LLC be member-managed or manager-managed. If the LLC is member-managed, the members will be responsible for the day-to-day management of the LLC. If the LLC is manager-managed, the members are responsible for electing suitable individuals to make management decisions and oversee the entity’s operations. 

Members also need to ensure that the business complies with the formalities and filing requirements of the relevant state to ensure that the LLC does not lose its limited liability protections.

How To Transition A Sole Proprietorship To An LLC

Dissolving or canceling any registered Fictitious Business Names or Doing Business As (DBAs)

If the sole proprietorship was trading under a different name, the necessary documentation must be filed with the state to dissolve or withdraw the current DBA. After that, you can use the same name to register your LLC if the name is not already registered to another LLC.

Choosing a business name

The new LLC name needs to be distinguishable from all other registered entities. You can start searching on the state’s business search tool.

Selecting a registered agent

A registered agent is an individual or company who will be responsible for receiving legal correspondence and documentation on behalf of the company. It may be one of the members or an attorney/accountant.

Filing Articles of Organization

While it may differ from state to state, this document needs to detail the name and address of the LLC, the contact details and names of the owners, the application date, and a description of the new business.

Drafting an operating agreement

The operating agreement is an internal document that needs to be drafted by members and will set out the rules for ownership and the management of the newly formed LLC. It will detail what will happen if additional members are introduced to the LLC, if the LLC will be liquidated, or if members leave the LLC.

Applying for an Employer Identification Number (EIN)

As LLCs are pass-through entities, an application for a new EIN number needs to be obtained if the LLC will be multimember or if the election is made by its members to be taxed as a corporation.

Opening a bank account

A bank account for any new business needs to be opened in the name of your LLC to ensure a clear separation between the LLC funds and the members’ personal funds. This also eases the management of assets and allows for more accurate recordkeeping.

Contacting licensing agencies

Suppose the nature of the business requires the LLC to obtain business licenses or permits to operate. In that case, the relevant agencies need to be contacted to ensure that the licenses or permits are transferred from the sole proprietor to the newly formed LLC.

Updating business information

Inform clients and other stakeholders of the new business to ensure they issue invoices and payments to the newly formed LLC and no longer to the sole proprietor. Insurance companies must be advised of the change from a sole proprietorship to an LLC to advise if a new business insurance policy may be required.

Reviewing your current contracts

Please review the current contracts between the sole proprietorship and its clients to ensure they can be transferred to the newly formed LLC. These contracts need to be updated between clients and your LLC and are no longer the personal name of the owner of the sole proprietorship.

Necessary Documents

Documents required for the transition from a sole proprietorship to an LLC include (but may not be limited to in some states):

  • Articles of Organization 
  • Operating Agreement
  • Form 8832 if the members elect to change the default classification of the IRS.

Stop using your Sole Proprietorship

Ensure that all the payments and checks have cleared and close the bank account of the sole proprietorship. Update all existing contracts and insurance policies to include the newly formed LLC, not the sole proprietorship.

Maintaining Your Limited Liability Protections

Members of the LLC need to ensure that they do not pierce the corporate veil by providing that business assets do not get mixed with their personal assets. Should this be the case, your LLC risks losing its limited liability protection.

 

If you would like a consultation on which is best for you, contact Asena Family Office.

Jean-dré Tombisa

Peter Harper

LLC Series: The US and Australian Tax Implications of Selling an LLC Interest vs Selling Stock in a US Corporation

Posted on by Peter Harper


How should an Australian resident investor hold their interest in a business that has a high potential for capital growth?

How you structure your business can have a tremendous impact on your ability to access income and capital distributions, your tax reporting and payment obligations (and in a cross-border context, the “global” effective tax rate), regulatory obligations, and how you eventually sell your interest in the business.

What are the tax implications for an Australian resident investor of a sale of an LLC interest vs the sale of stock in an US corporation?   

Stock in a US corporation is a capital asset. Similarly, a membership interest in an LLC is usually a capital asset [see LLC Series: Selling or Converting an LLC Interest – the US Tax Implications: Partnerships, “Effectively Connected Income” and the US Non-Recognition Rules].

The US and Australian tax implications of a sale of an LLC interest (classified on capital account) vs stock would usually be the same for an Australian resident individual holding that interest  directly, or who receives a distribution of the gain through an Australian resident discretionary trust. However, the structuring of the interest can have an impact on income flow and effective tax rates [this is discussed in our blog LLC Series: The US and Australian Tax Effect of Holding Membership Interests in an LLC vs Stock in a US Corporation]

Structure can also affect the sale price as for US tax purposes, a purchaser acquiring stock in a corporation takes on the double layer of US corporate tax as the corporation is taxed on profits and the stockholders are taxed on dividends (with no US equivalent of the Australian franking credit). Additionally, a purchaser would have a fair market value tax basis in the shares of the corporation (a non-amortizable asset), but not in the assets of the corporation.  In contrast, if they were to purchase of an LLC interest, they would be able to obtain a fair market value tax basis in the underlying LLC assets and amortize those assets for tax purposes. Therefore, holding US corporate stock could result in a discounting of a future sale price.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.
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For the LLC member and for the corporate stockholder (who is an Australian resident individual or who receives the gain as beneficiary of an Australian resident discretionary trust), the numbers on a sale could look like this:

  • Assumptions:
    • AU Tax resident and US nonresident alien
    • $ Values are USD and do not account for FX rates
    • AU 2020-2021 resident tax rates applied
    • Membership interest held by AU resident individual or beneficiary of an AU resident discretionary trust


* This information is of a general nature only and does not take into account other possible structures. It should not be considered a substitute for tax advice specific to your particular circumstances.

 

For more information, please contact:

Renuka Somers
Head, US-Australia Tax Desk

LLC Series: The US and Australian Tax Effect of Holding Membership Interests in an LLC vs Stock in a US Corporation

Posted on by Peter Harper


How should an Australian resident investor hold their interest in a business that has high turnover and potential for significant income distributions? What does the cross border flow of funds look like?

How you structure your business can have a tremendous impact on your ability to access income and capital distributions, your tax reporting and payment obligations (and in a cross-border context, the “global” effective tax rate), regulatory obligations, and how you eventually sell your interest in the business.

An LLC provides a “flow through” structure to the members, with no additional tax disclosure or reporting obligations in the US (if the LLC has not elected to be taxed as a corporation).  For Australian tax purposes, income from an LLC is generally treated as partnership income and disclosed accordingly (see our previous blog: LLC Series: LLCs – US and Australia Classification and Tax Considerations).

A US corporation is treated as a separate entity for tax purposes, and is subject to tax at both the entity level, and the stockholder level. There are additional IRS disclosure and reporting obligations both at the entity level and the stockholder level, due to the double layer of corporate taxation. Unlike in Australia, dividends paid to stockholders are not subject to franking credits and are subject to US withholding taxes.

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.
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The table below indicates that for an Australian resident individual, it is more tax effective to hold an LLC membership interest personally or through an Australian resident discretionary trust. Holding a C-Corp interest can result in a tax leak due to the double layer of US corporate tax. The most tax inefficient result would be for an Australian resident company to hold a C-Corp interest, with the loss of the foreign income tax offset and the application of Subdivision 768-A resulting in the foreign sourced dividend being non-assessable non-exempt income.

The flow of funds in each scenario could look like this:

Assumptions:

Shareholders are AU Tax residents
$ Values are USD and do not account for FX rates
AU 2020-2021 resident tax rates applied
US Federal and NY State 2020 tax rate applied

For more information, please contact:

Renuka Somers
Head, US-Australia Tax Desk

LLC Series: Selling or Converting an LLC interest – the Australian Tax Implications: Hybrid Entities, Subdivision 122-B, and the Impact of Burton

Posted on by Peter Harper


For Australian tax purposes, an LLC is a “foreign hybrid company” and treated as a partnership for Australian tax purposes if it satisfies the requirements of section 830-15 ITAA 1997 (see our prior blog on “LLCs – US and Australian Classification and Tax Considerations”).

 

Sale

A sale of an LLC interest, or a conversion of that interest to stock in a US corporation by an Australian resident member, would trigger capital gains tax (CGT) event A1 on the difference between the market value of the member’s interests in the LLC and the cost base of that interest. 

If the member has held the LLC interest for more than 12 months, then they could apply the CGT general 50% discount to a sale or a conversion.

The CGT roll-over relief would not be available under Subdivision 122-B ITAA 1997 for a sale of the interest.

Where the gain is subject to tax in the US (as with a sale – see “LLC Series: Selling or Converting an LLC Interest – the US Tax Implications: Partnerships, “Effectively Connected Income” and the US Non-Recognition Rules”) for Australian tax law purposes, it would be treated as being subject to foreign tax at that time, allowing for the application of the foreign income tax offset (FITO) in Australia (subject to the considerations in Burton v. Commissioner of Taxation [2019] FCAFC 141 that Australian taxpayers, to whom the 50% CGT discount applies are only entitled to a FITO in respect of half of the US tax paid in respect of gain, with Article 22(3) of the Australia-US tax treaty not operating to alter this result). Watch more about Burton v. Commission here.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.
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Conversion

The conversion of an LLC interest to stock in a US corporation by an Australian resident member would trigger CGT event A1 on the difference between the market value of the member’s interests in the LLC and the cost base of that interest. 

The CGT roll-over under Subdivision 122-B ITAA may be applied for a conversion if it involved a “rollover” from a partnership to a company, where the partners’ interests in all the assets of a business carried on by the partnership are disposed of to a company (in which they own all of the shares), for stock in that company with equivalent market value to the interests disposed of. For this to occur, the conversion of the LLC would need to be undertaken (for US tax purposes) as an “asset over” transfer to a corporation controlled by all of the members of the LLC.

The cost base and holding period rules (for application of the CGT 50% general discount) would be preserved with a Subdivision 122-B rollover. 

If the gain is not taxed in the US (as with a conversion for which the US non-recognition rules applied) it would be taxable in Australia, with no applicable FITO.

 

If you are considering selling or restructuring your LLC interest, please contact: 

Renuka Somers
Head, US-Australia Tax Desk

LLC Series: Selling or Converting an LLC Interest – the US Tax Implications: Partnerships, “Effectively Connected Income” and the US Non-Recognition Rules

Posted on by Peter Harper


An LLC is a popular entity for Australians investing, or carrying on business, in the US. What happens if your business has matured and you sell your interest in the LLC? What happens if you convert the LLC structure to a US corporate structure to do so? What are the US tax implications of doing so?

 

For US tax purposes, a sale could be subject to both capital gains and income tax, depending on the composition of the adjusted basis in the LLC interest.

Under the default classification rules for US tax purposes, an LLC is generally classified as a partnership in the absence of an election to be classified as a corporation.

A membership interest in an LLC is a capital asset. A sale of the interest would trigger a gain or loss on the difference between the amount received and the “adjusted basis” of the interest. Any resulting gain would be taxable at the long term capital gains tax rate (20%) if the interest was held for a period of more than one year prior to the Sale.  To the extent the gain is attributable to inventory items and “unrealized receivables” (receivables that have not yet been included in income if accounted for on a cash basis) and recaptured depreciation of the LLC, it would be recognized as ordinary income instead of a capital gain. 

The amount received includes cash, fair market value of property received, and the liabilities of the seller that are assumed or relieved.

The adjusted basis consists of the acquisition cost of the LLC interest adjusted for the member’s distributions from the LLC, contributions to the LLC, losses of the LLC, and debt and other allocable liabilities.  

For an LLC member who is a non-resident alien for US tax purposes, your gain on the sale of your LLC interest would be “effectively connected income” of a “foreign Partner” and the Purchaser may have to withhold tax on the amount realized on the sale for that partnership interest if the partnership is engaged in a trade or business in the US. 

The LLC operating agreement should be reviewed in order to determine the terms and conditions for selling a percentage interest in the LLC to ensure that any pre-emptive or approval rights of existing LLC members are appropriately addressed.

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Transfer / Conversion

The process of converting an LLC interest was discussed in our previous blog on Restructuring Your US Operations: Why and How You Would Convert and LLC to an INC

A conversion would trigger similar capital gains tax implications in the US (as that of a sale).

However, if the IRC section 351 non-recognition rules for transfers to a corporation controlled by the transferor are satisfied, an LLC member would not recognize a gain or loss on the conversion. Further, the basis in the stock received would equal the basis of the property transferred and the holding period of the property transferred would carry over to the stock received, allowing the member to access the US Federal long term capital gains tax rate (20%) if the stock is subsequently sold.

If a conversion otherwise qualifies for non-recognition under IRC section 351, it would not be taxed in the US, even if the member is a nonresident alien (Treasury Regulations provide that the IRC provisions that tax the “effectively connected income of a non-resident alien does not override the non-recognition provisions of the IRC).

In order for the IRC section 351 non-recognition rules to apply, a conversion would need to satisfy the US anti-avoidance rules – see our prior blogs on Restructuring Your US Operations: Corporate Reorganization on Relief and Restructuring Your US Operations: Anti-Avoidance Rules in the Internal Revenue Code.

Further, if a conversion occurs as part of a broader restructure or planned sale of corporate stock, then, it is possible that it could be treated by the IRS / US courts as a taxable transaction under the “Step Transaction Doctrine” where a series of transactions designed to achieve an intended result could be viewed as a whole.  

 

State Taxes

State taxes could also apply to a sale and conversion of an LLC interest if the business derives income sourced in that State.

 

If you are considering selling or restructuring your LLC interest, please contact:

Renuka Somers
Head, US-Australia Tax Desk

LLC Australia

Posted on by Peter Harper

LLC Australia

With ties and clients in Australia, we here at Asena Family Office often get questions about how to set up an LLC there, including if there are differences that one should know about between Australia and the U.S. Today, we will be going over what an Australian LLC looks like, operates, and the people behind it.

What does LLC Company mean?

In the U.S., you can set up an LLC, which is short for a Limited Liability Company. However, in Australia, it is a company that is primarily called either a Proprietary Limited Company or a Private Proprietary Company.

What is Limited Liability Company in Simple Words?

It is the Australian equivalent of a US LLC, a Proprietary Limited Company, or a Private Proprietary Company.

What are the Characteristics of an LLC in Australia

Some of the most essential requirements for both public and private limited companies in Australia are:

    • Shares – Private companies can privately issue shares, while public companies can offer their shares to the public if the company operates as a listed company;
    • Directors – Public companies must have three or more company directors, and two must be Australian residents, while private companies must have one or more directors who are Australian residents;
    • Corporate meetings – Also known as annual meetings;
    • Taxes – The rates for two corporate incomes are considered applicable as 30% and 27.5% for small companies, but beginning in 2021, the reduced corporate tax has been charged at a lower rate. 

Why Would A Company Be An LLC?

Australia does not have a check-the-box regime (CTB rules) as the U.S. does. 

For Australian purposes, an LLC is incorporated as per the Corporations Act; investors can incorporate a private or a public company when the company first goes into operation. There is no separate definition or election for tax purposes in Australia.  

Is An LLC The Same As A Company?

It is similar to a US LLC to limit the business owner’s risks. However, for Australian purposes, it is a Company called either a Proprietary Limited Company or a Private Proprietary Company in Australia.

Can An LLC Be A Private Company?

Absolutely. With various options, please speak with one of our advisors about which option will be the best for you.

What is the Difference Between LLC and LTD Company?

To simply put, there is no difference. An LTD Company is a type of LLC, and when registering an LLC in Australia, it is registered as a company. On the other hand, an LTD Company is a type of LLC in Australia, which is a public limited company, and shares are open to the public. 

What is an S Corporation in Australia?

Australia does not have the option to elect your company as an S Corporation as the U.S. does for federal tax purposes. There are no CTB regimes in Australia as there are in the U.S. 

What is the Difference between PTY LTD and LTD?

Some key points to note when understanding the differences between these two forms of company are:

  • Shares – a private company can privately issue shares, while a public company can provide its shares to the public if the company decides to operate as a listed company; and
  • Directors – the public company is required to have at least three, preferably more, company directors, with two required to be Australian residents. Meanwhile, the private company must preferably have one or more directors who are also residents;
Is PTY LTD a Limited Liability Company?

Yes. A Limited Liability Company is often incorporated according to the Corporations Act, and when registering the company, investors can either incorporate a private or a public company. 

What is a PTY LTD Company in Australia?

Pty Ltd is a Private Limited Liability Company and is the most common company used by business owners in Australia. It is often considered restricted by current and future entrepreneurs as it is not allowed to have more than 50 non-employee shareholders. A Pty Ltd is also limited by one or more shares, as it is usually incorporated along with a share capital that is made up of shares claimed by each initial member upon the company’s incorporation. Members are also legally liable only to the point of any unpaid amounts that are on their shares. That is, their personal assets are not at risk in the event of the company being wound up. And it’s prohibited from offering shares to anyone other than existing company shareholders, employees, or a subsidiary company.

Why Do Companies Have PTY LTD?

A proprietary company with a limited liability decreases the risks of doing business because it is regarded as wholly independent from the company’s founders and members, and liability limits its share capital. 

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Can You Make An LLC in Australia?

The short and direct answer is yes. A Limited Liability Company is to be incorporated according to and under the Corporations Act. When first starting the company, investors can include private or public companies. There is no need to subscribe to a minimum paid-up company for either business form. However, there are specific provisions: the public company cannot have a maximum number of specified shareholders. However, the private one must have a maximum of fifty shareholders who are under employment within the company. For both Australian LLCs, the minimum number of shareholders is one.

What Is A Limited Liability Company Australia?

It is a company that is incorporated in terms of the Corporations Act 2001, and when first opening the company, investors can either incorporate a private or a public company. 

What are the Basic Steps for Company Incorporation in Australia?

Typically, your first step to forming an Australian company is choosing your business type. Suppose you’ve decided to start a Proprietary Limited Company (LLC) in Australia. In that case, the next steps are as follows: 

  • Reserve your company and/or business name;
  • Appointing a Company Director and other statutory officeholders;
  • Drafting and signing any bylaws for your LLC in Australia;
  • Registering your Proprietary Limited Company (LLC) in Australia;
  • Get your business and tax identification numbers and
  • Open a corporate bank account.

What Are The Bylaws of an Australian Limited Liability Company?

There’s more than one way to choose the kind of governance of your Australian Proprietary Limited Company (LLC) will have. To do this, you can choose to either:

  • Operate your company under the replaceable rules that are listed under the Corporations Act;
  • Create a unique constitution or incorporate elements from the replaceable rules and include your own; and
  • Appoint a sole director to your Proprietary Limited Company who is also a single shareholder and doesn’t need a formal internal governance system.

Opening an LLC in Australia

Each initial startup steps are unique for every Australian. Below are common courses of action to consider unless there is another that would be the most beneficial for you and the structure of your business.

Requirements for an LLC in Australia

When starting a Proprietary Limited Company or Private Proprietary Company in Australia, the minimum requirements include the following:

    • Zero minimum share capital;
    • One shareholder;
    • One company director; and
    • One resident director.

Once you have the proceeding, you’ll need to produce annual financial statements. However, you won’t need to register for a GST (Goods and Service Tax) unless your sales exceed A.U. $75,000 in the year.

What Licenses Are Necessary To Open A LLC In Australia

Standard Australian licenses and permits for any business either:

    • Give approval to your business to do an activity; or
    • Protect your business and employees with additional legal security.

Licensing and permit requirements will often vary by local laws, state, and industry; what you’ll need depends on your business type, business activities, and location.

What are the Main Steps in Registering an LLC in Australia?

Once you have selected the LLC type (either the public or the private one), you need to consider conserving a suitable trading name. Just like within other jurisdictions around the world, the Australian company’s trade name that is soon to go onto the market has to be unique nationwide. When deciding on a trading name, verifying if the chosen name has not already been activated or if it is already registered as a trademark in Australia is compulsory. You can always find experts at Asena Family Office for cases concerning intellectual property regulations.  

Another critical step is to prepare the company’s statutory documents. It is required that the documents are to be processed through which the legal entity will inherit a legal personality, being a separate entity from its founders. It is also vital to choose directors, followed by registering with the local institutions for tax purposes, per the law’s regulations. Another legal obligation to check off your list is to have an official business address, including your company’s headquarters and the development of its activities. This is a critical step for all companies registered in Australia, not only for LLCs. 

One thing to note about LLCs is that they are suitable for most of Australia’s development of economic activities, including importing and exporting raw materials and other goods. Regarding its taxation, investors must know that your company will be liable for all corporate taxes applied under your local tax law and benefits from the treaties signed to avoid double taxation. 

An Australian Private Limited Liability Company is not always required to finalize and turn in an audit. When drafting any statutory documents, you will be required to add provisions concerning the internal management rules of the company, its shareholding structure, and the rights and obligations of any parties that are involved with or in the company, such as shareholders and directors.

How Do I Form an LLC in Australia?

I like to recommend the following six checkboxes for clients when beginning the process of starting a Proprietary Limited Company or a Private Proprietary Company.

Reserve Your Company and/or Business Name

Each company in Australia must have its unique company name that does not infringe on another. 

If you don’t decide on a company name when forming your Australian LLC, the Australian Company Number (ACN) will be your company name during the formation process.

It is important to note that Business names don’t create new, separate entities, and your business name is your trading name.

Draft and sign bylaws for your LLC in Australia

Following the name selection, you need to make a decision on the governance of your Proprietary Limited Company (Australian LLC). Multiple courses of action are available, as you can choose to:

    • Operate your company under the replaceable rules that are listed under the Corporations Act;
    • Design a unique constitution;
    • Add elements of the replaceable rules and include your own; and
    • Select a Proprietary Limited Company with a sole director (who also acts a single shareholder) and doesn’t need a formal internal governance system.
Appoint a Company Director and Other Statutory Officeholders

First and foremost, you’ll need to hire on a legal representative currently residing in Australia to create your LLC. Usually, another name for their role in Australian entity formation is the Company Director, with every proprietary company requiring at least one for initial and long-term needs. The reason why is that the Company Director, as the resident legal representative, is responsible for overseeing the affairs of the new local company.

Foreign companies can also appoint a Nominee Director. They are an external legal expert hired onto the company but are authorized, similar to the Company Director, to make legal decisions on its behalf. Both directors are responsible for ensuring the company fully complies with all Corporations Act obligations.

Register your Proprietary Limited Company (LLC) in Australia

It’s possible to register your company either on paper or online, with Australia’s Business Registration Services providing an online portal for application completion if you are unable to be at their office in person. 

There are, however, certain cases where a company can’t register online. 

Once it is approved, your Proprietary Limited Company will be sent its Australian Company Number (ACN), Australian Business Number, registration certificate, and a corporate key to securely update your company information.

Get Your Business and Tax Identification Numbers

Following your initial registration, you will need to file for the appropriate taxes for your Australian LLC. One example is that every business must have a tax file number (TFN) to start tax filing, which is automatically produced when you obtain your Australian Business Number (also known as ABN for short).

The ABN is a distinctive 11-digit number that is used to identify your business to not only the government but your local community, too. Done on paper at the office, the process can also be completed over the Internet through the Business Registration Service website.

Depending on your circumstances and industry, you may be required by the BRS to register for any goods and services (GST) withholding, income, and fringe benefits taxes. 

Open a Corporate Bank Account

Once the above steps are completed and your company has been registered, you can get started on setting up a corporate bank account. 

Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act in 2006 has set up rigid regulations for banks to undertake their due diligence with new applicants. For this reason, you can expect to provide a wide range of documentation confirming information, identification, and details of your newly-registered company.

Important Things to Know When Setting Up an LLC in Australia

Your Australian LLC (Proprietary Limited Company or Private Proprietary Company) will need an official business building or office, such as a registered address where it is to have a physical place of business for meetings (most often optional) and receive all official documents. 

This is part of the registration process; all Australian LLCs are required to have a physical address that can be used for business purposes and activities. During the registration, all institutions involved with the procedure will be required to provide information and all evidence that confirms where your company’s headquarters will be. 

The official business address can be any location that works best for your structure, such as an apartment, an office building, or another type of premises. Your final decision will depend on the needs of the business, such as necessary space and the type of activity carried out, whether administrative or otherwise. One can also build an office if one finds it necessary and more affordable than buying or renting a space. 

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How Much Is A Business License In Australia?

It will depend on the type of industry you are categorized in, with some starting at AUD $300. 

What are the Registration Costs for a Company in Australia?

The most common cost often ranges from AUD $443 to AUD $538. Your final amount will be dependent on the type of company you register. 

How Much Does an LLC Cost in Australia?

Same as above and will be dependent on the type of company and industry. 

How Much Does a PTY LTD Cost?

Pty Ltd costs are similar to the typical company numbers for registration. However, there are cases where it can go at a lower number, such as AUD $400 to AUD $500.

Australia – Classification and Tax Considerations

Reviewing your thoughts on what we’ve discussed and how it may factor into your company, there are additional base notes to understand Australia’s tax and classification system and expectations before coming to a conclusion.

What are the Main Taxes for a Limited Liability Company in Australia

A crucial consideration for companies in Australia is the country’s taxation system that applies to them. Companies often recognized as corporate structures, including an L.L., whether private or public, will be taxed following the Australian corporate tax system. 

If the company has an annual turnover that is above AUD $75,000, it is crucial to obtain an Australian Business Number (ABN).

How is an LLC taxed in Australia? 

If the company has an income below a certain threshold in a financial year, it will be taxed using a 27.5% corporate tax rate, representing a corporate tax that has been reduced.

However, for the last year (2021 as of this posting), the lower tax rate has been reduced to only 26%. It is predicted to further reduce in the next financial year (2022 as of this posting) to 25%, as according to the Australian Taxation Office, as the standard corporate tax rate charged to Australian companies is 30%. And in 2017-2018, the threshold in which the reduced corporate tax rate had been applied summed up to a total of AUD $25 million. However, beginning in 2018-2019, the threshold increased to a total of AUD $50 million.  

Please take into consideration that the Australian financial year is different from the standard financial year in other countries (from 1st January to 31st December). In Australia, the financial year begins on 1st July and ends on 30th June, but companies can decide to follow the worldwide financial period. 

Is An LLC Company Good?

An LLC in Australia is a company type suitable for those who want to form a small or medium-sized entity. For those interested in a public limited company, it is vital to find out that the legal entity can be listed on the Stock Exchange. 

Contact the Experts to Form Your LLC in Australia

Our experts at Asena Family Office have extensive experience advising entrepreneurs and setting up businesses in Australia that suit their needs. Please do not hesitate to contact us if you require assistance.

 

Connect with us in the righthand column to learn how to get started on your own LLC in Australia.

Shaun Eastman

Peter Harper