Company Structure in Australia

Why Founders Choose Pty Ltd (and How to Optimise for Tax Efficiency)

Choosing the right business structure shapes your future growth, tax strategy, and investor readiness.
For Australian founders, the Proprietary Limited (Pty Ltd) company remains the gold standard for balancing protection, credibility, and tax efficiency.

What is a company under Australian law?

A company is a separate legal entity that owns assets, enters contracts, and operates independently from its shareholders and directors under the Corporations Act 2001.

A company exists as its own “legal person.”
It can:

• Own property

• Enter contracts

• Sue and be sued

• Continue indefinitely regardless of ownership changes

It’s regulated by the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission (ASIC), ensuring directors act lawfully and maintain compliance.

📊 As of July 2025, more than 2.5 million actively trading Australian businesses operate under a company structure (ABS 8165.0).

Why do startups choose a Pty Ltd company in Australia?

Startups choose a Pty Ltd structure for limited liability, investor appeal, tax advantages, and scalability, making it ideal for long-term business and capital growth.

A Pty Ltd company (“Proprietary Limited”) is privately held and limited by shares. It’s the most common choice for growing businesses due to its flexibility and protection.

Key advantages:

• Limited liability for shareholders

• Easier to attract investors or partners

• Tax rate capped at 25% for small businesses

• Separation between personal and company finances

• Continuous existence regardless of ownership changes

Shareholder deed guide for founders →

The structure also supports employee share schemes, dividend flexibility, and succession planning—making it ideal for founders planning long-term exits or investor rounds.

Startup accounting advisors in Melbourne →

How are Australian companies taxed?

Australian companies pay 25% tax if classed as a base rate entity or 30% for larger corporations, depending on turnover and income composition.

Under the Income Tax Rates Act 1986, company tax depends on two categories:

The Base Rate Entity test allows SMEs to benefit from reduced taxation, providing significant long-term cash flow advantages when profits are reinvested.

Example: A company earning $200,000 profit pays $50,000 tax at 25%, leaving $150,000 to reinvest or distribute.

Business tax services in Melbourne →

What are franking credits, and how do they work?

Franking credits let shareholders use the company's paid tax as a credit against their own tax, preventing double taxation of dividends.

Australia’s dividend imputation system means that tax already paid by a company is passed through to shareholders as a credit.
When a company issues a franked dividend, the attached credit reflects the company tax already paid.

Example:

• The company earns $100,000

• Pays $25,000 company tax (25%)

• Distributes $75,000 dividend

• Shareholder declares $100,000 income but receives a $25,000 credit

If the shareholder’s marginal rate is 30%, they only pay 5% additional tax. If their rate is lower, they may receive a refund.

What are company directors responsible for under Australian law?

Directors must act in good faith, maintain accurate records, prevent insolvent trading, and meet tax and superannuation obligations under the Corporations Act.

Directors hold fiduciary duties to act in the best interest of the company.
They must ensure:

• The company remains solvent

• Financial reports are accurate

• PAYG, GST, and Super obligations are met

• No misleading conduct occurs

Under the ATO’s Director Penalty Regime, unpaid taxes (e.g., PAYG, super) can make directors personally liable.
While a company provides asset protection, personal responsibility still applies if directors breach duties.

How does a company structure compare to a trust or partnership?

Companies offer limited liability, lower flat tax rates, and easier capital access compared to trusts and partnerships, which have flow-through taxation and higher risk exposure.

Takeaway: Companies are preferred for scaling, investor funding, and limiting personal exposure.

Partnership structure in Australia →

What CGT concessions are available to companies?

Companies can access CGT relief including 15-year exemptions, 50% active asset reductions, and retirement exemptions under Division 152 of the ITAA 1997.

Eligible concessions:

• 15-year exemption: Full CGT relief for significant individuals aged 55+ on retirement

• 50% active asset reduction: Reduces CGT liability for active business assets

• Retirement exemption: Up to $500,000 CGT-free when rolled into super

• Rollover relief: For reinvesting in new active assets

These benefits require careful planning to ensure your company meets the “significant individual” and “active asset” criteria.

Can companies claim the R&D tax incentive?

Only companies can access the R&D tax incentive, which provides refundable tax offsets for eligible research and innovation activities.

The R&D Tax Incentive encourages innovation by offering:

• Refundable offset: Corporate rate + 18.5% premium for turnover under $20M

• Non-refundable offset: For larger firms based on R&D intensity

This is especially valuable for tech and medical startups developing new intellectual property or software.
Partnerships and trusts are not eligible unless acting through a company entity.

When should a business incorporate in Australia?

Incorporate when your business earns over $200k, employs staff, attracts investors, or needs liability protection through a company structure.

Indicators it’s time to incorporate:

• Revenue > $200,000 per year

• Hiring staff or entering large contracts

• Seeking external investors

• Desire to protect personal assets

• Holding valuable IP or long-term projects

Transitioning to a company enables better tax management, asset protection, and succession planning, especially for founders expanding beyond the startup phase.

Sole trader structure in Australia →

How does 42 Advisory help businesses structure effectively?

42 Advisory helps founders design compliant, tax-efficient company structures using fixed-fee advisory, Xero automation, and ASIC registration support.

Our team simplifies setup and compliance for startups and SMEs by integrating technology and strategy:

• ASIC registration and setup

• Xero-connected accounting systems

• Franking credit and dividend planning

• R&D tax support and forecasting

• Base Rate Entity tax eligibility assessment

Startup Accounting in Australia guide →

💬 “Our mission is to make business structuring intelligent, calm, and precise — giving founders clarity and confidence from day one.”

📍 42 Advisory, Chadstone VIC — specialists in startup accounting, tax strategy, and business structuring.

Final thoughts: Why the right structure matters

Your business structure determines how you pay tax, attract investment, and protect your future wealth.
Choosing the right setup early prevents compliance risk and maximises profitability later.

Together, we’ll design a structure that grows with you.