A company is a separate legal entity under the Corporations Act 2001, taxed at 25% or 30%. It suits businesses that reinvest profits, take on staff, contracts or investors, and want limited liability. Companies miss the 50% CGT discount, and directors stay personally exposed for PAYG, GST and super. The right structure depends on your profit level, risk and exit plan, not the tax rate alone.
Choosing a company structure in Australia is one of the few decisions that follows your business everywhere: into every contract, every tax return and eventually your exit. At 30 June 2025 there were 1,207,814 companies actively trading in Australia, the fastest-growing legal structure of all, according to the Australian Bureau of Statistics.
Popularity is not the same as suitability. We meet founders who incorporated too early and now pay for accounts they do not need, and profitable sole traders who waited too long and paid 47% on income a company would have taxed at 25%. This guide explains how a proprietary limited (Pty Ltd) company works, how it is taxed, what directors sign up for, and the questions worth answering before you register anything with the Australian Securities and Investments Commission (ASIC).
What is a company under Australian law?
A company is a separate legal entity registered with ASIC under the Corporations Act 2001. It can own assets, enter contracts, sue and be sued, and it continues to exist when owners change. Shareholders' liability is generally limited to any unpaid amount on their shares.
That separation is the whole point. The business debts belong to the company, not to you personally, subject to the director exceptions covered below. The legal framework sits in the Corporations Act 2001, and ASIC administers registration, annual reviews and director obligations.
Registration costs $611 in 2025-26 and the annual review fee for a proprietary company is $329, both indexed each July under ASIC's fee schedule. Every director also needs a director identification number before appointment.
Source: ABS, Counts of Australian Businesses, including Entries and Exits (8165.0), 2023 to 2025 releases. Counts at 30 June each year.
Why do founders choose a Pty Ltd company?
Founders choose a proprietary limited (Pty Ltd) company for limited liability, a capped tax rate of 25% or 30%, easier investor entry through shares, employee share schemes and continuity beyond the founders. The trade-offs are higher running costs and no access to the 50% CGT discount.
For a growth business the share register does the heavy lifting. Investors buy shares rather than renegotiating a partnership, employee share schemes become possible, and ownership can change without disturbing contracts or the ABN. If more than one founder holds shares, a shareholders' agreement is not optional paperwork; our shareholder deed guide covers what it needs to say.
The honest counterweight: a company lodges its own tax return, prepares financial statements and pays ASIC every year whether it made money or not. We walk through that cost-benefit equation with founders as part of our startup accounting and advisory work, and more broadly in our guide to startup accounting in Australia.
How are Australian companies taxed in 2025-26?
For 2025-26, a company pays 25% tax if it is a base rate entity: aggregated turnover under $50 million in the prior year, with no more than 80% of assessable income from passive sources such as rent, interest and portfolio dividends. All other companies pay 30%.
The two rates come from the ATO's company tax rate rules. Most trading SMEs qualify for 25%. The 80% passive income test trips up investment companies: a company holding only rental property or a share portfolio pays 30%, not 25%, even with modest turnover.
| Entity type | Rate | Criteria |
|---|---|---|
| Base rate entity | 25% | Aggregated turnover under $50M and 80% or less passive income |
| All other companies | 30% | Turnover of $50M or more, or more than 80% passive income |
A flat rate cuts both ways. It is a ceiling for high earners, but there is no tax-free threshold: a company pays 25 cents on its first dollar of profit, where an individual pays nothing on the first $18,200. The structure only wins once profits are large enough, which is why we model the numbers before recommending anything through our business tax services.
How do franking credits work?
Franking credits pass company tax through to shareholders. A fully franked dividend carries a credit for the 25% or 30% tax the company has already paid, so the shareholder only pays the gap between the company rate and their own marginal rate, and may receive a refund if their rate is lower.
Australia's dividend imputation system has worked this way since 1987, and it is the reason company profits are not taxed twice. The flow looks like this for a base rate entity:
Two practical limits. The company can only frank dividends to the extent it has actually paid Australian tax, tracked through its franking account under the ATO's franking rules. And timing dividends against shareholders' other income is where the real value sits, which is a tax planning exercise, not a year-end afterthought.
How can a company distribute profits to shareholders?
A company can pay directors' salaries, declare franked dividends, lend to shareholders under strict Division 7A terms, or retain profits at the company rate. Different share classes can direct dividends to different shareholders, but solvency tests under section 254T and ATO integrity rules apply to every distribution.
This is where structure decisions earn their keep. Salaries are deductible to the company but taxed at marginal rates. Dividends carry franking credits. Loans to shareholders are the trap: unless they sit on complying terms, Division 7A treats them as unfranked deemed dividends.
Where families or multiple owners are involved, many companies issue more than one class of shares so dividends can be directed to particular shareholders. That choice deserves its own analysis: our guide to share classes vs a discretionary trust for distributing company profits compares the multi-class share structure against a trust in detail, including the proposed 30% minimum tax on discretionary trusts from 1 July 2028 and the ATO's view on dividend access shares.
A recent example from our practice. We structured an engineering business that designs and builds equipment for beauty salons with a holding company above the trading entity. Each year the trading company pays fully franked dividends up to the holding company. Because both companies sit on the same tax rate, the franking credits absorb any top-up tax, so no extra tax falls due on the way through. The commercial purpose is risk management: surplus cash moves off the trading company's balance sheet, away from operational and warranty risk, while staying available for reinvestment. The tax outcome is neutral; the asset protection is not.
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Contact Us Today →What are directors personally responsible for?
Directors must act in good faith, prevent insolvent trading, keep accurate records and meet the company's PAYG withholding, GST and superannuation obligations. Under the director penalty regime, unpaid PAYG, GST and super can become the director's personal debt, despite the company being a separate legal entity.
Limited liability is real, but it was never absolute. The ATO's director penalty regime makes directors personally liable for unpaid PAYG withholding, net GST and super guarantee. If the company fails to lodge on time, the penalty can become unavoidable even after liquidation. In our experience this is the single most misunderstood risk among new directors.
The defence is unglamorous: lodge everything on time, even when you cannot pay in full. Clean, current books make that possible, which is why we treat bookkeeping and lodgement discipline as risk management, not admin. Our 2026 ATO due dates guide lists every deadline that matters.
How does a company compare with a trust, partnership or sole trader?
A company offers limited liability and a flat 25% or 30% rate but no 50% CGT discount. Sole traders and partnerships are simpler and cheaper but expose personal assets and pay up to 47%. Trusts distribute income flexibly, though a proposed 30% minimum tax from 1 July 2028 narrows that advantage.
| Structure | Liability | Tax treatment | Typically suits |
|---|---|---|---|
| Sole trader | Unlimited, personal | Marginal rates, 0 to 47%; 50% CGT discount available | Freelancers, low-risk services |
| Partnership | Unlimited, joint and several | Flows to partners at marginal rates | Small professional teams |
| Discretionary trust | Trustee level; corporate trustee common | Flows to beneficiaries; proposed 30% minimum tax from 2028 | Family groups, investment holding |
| Company (Pty Ltd) | Limited to share capital | Flat 25% or 30%; franking credits; no CGT discount | Growth businesses, employers, investees |
No single structure wins on every line, and many established groups end up with a blend: a trading company, a holding company and sometimes a trust as shareholder. For the detail on each alternative, see our guides to the sole trader structure, the partnership structure and how trusts work in Australia.
What CGT concessions and R&D incentives can companies access?
Companies give up the general 50% CGT discount that individuals and trusts enjoy. What they keep is access to the small business CGT concessions in Division 152 of the ITAA 1997: the 15-year exemption, the 50% active asset reduction, the retirement exemption (capped at $500,000) and the rollover. The conditions, particularly the significant individual and active asset tests, are strict and reward early planning rather than retrofitting at sale time.
The other company-only concession is the R&D Tax Incentive. Under the ATO's current rates, a company with aggregated turnover under $20 million receives a refundable offset equal to its tax rate plus an 18.5% premium, an effective 43.5% for a base rate entity. Eligibility rules and registration sit with AusIndustry under the program overview at business.gov.au. Trusts and partnerships cannot claim it directly; this alone often settles the structure question for product businesses.
It settled the question for the beauty-equipment engineering client mentioned above. The R&D activity needed a company to claim the refundable offset, and the holding company layer then handled the cash that the offset and trading profits generated. Structure, concession and risk management were designed together, not bolted on later. That design work is the core of our R&D tax incentive service.
When should you incorporate?
Most businesses consider incorporating once profit exceeds what the owner needs to live on, commonly above $150,000 to $200,000, or when hiring staff, signing significant contracts, taking on investors or holding valuable intellectual property. Below that point, the running costs often outweigh the tax benefit.
The tax logic is simple: a company only saves tax on profit you can afford to leave in it. If you draw every dollar to live on, those drawings are taxed at your marginal rate anyway and the company adds cost without benefit. The non-tax triggers matter just as much, and they tend to arrive together.
Moving an existing business into a company has its own tax consequences, including CGT on the transfer and possible rollover relief. We model the before-and-after position through our business advisory and 3-way forecasting service so the decision is based on numbers, not instinct, and our tax compliance team handles the lodgement side once the structure is live.
Key takeaway
A company is the right structure when limited liability, retained profits, investors or the R&D incentive matter more than simplicity and the CGT discount. It is the wrong structure when every dollar of profit is drawn to live on. The decision deserves modelling against your actual profit, risk and exit plans, and it should be reviewed as those change. Our CPA accountants and business advisors do exactly that work, from first registration through to holding-company restructures.
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Schedule a meeting →Disclaimer: The information provided in this article is general in nature and does not constitute specific tax, legal, or financial advice. We recommend seeking professional advice tailored to your individual circumstances. 42 Advisory is a CPA firm and Registered Tax Agent.
Frequently asked questions
How much does it cost to set up a company in Australia?
ASIC's registration fee is $611 for 2025-26, and a proprietary company then pays a $329 annual review fee each year, both indexed every July. Professional fees for the advice, constitution, share structure and registrations are additional and vary with complexity.
What is the difference between Pty Ltd and Ltd?
A Pty Ltd (proprietary) company is privately held, limited to 50 non-employee shareholders and cannot raise funds from the general public. A Ltd (public) company can list and raise public capital but faces heavier reporting and governance obligations. Almost all Australian SMEs are proprietary companies.
Does a company get the 50% CGT discount?
No. Companies are excluded from the general 50% CGT discount available to individuals and trusts. Eligible companies may instead access the small business CGT concessions in Division 152, including the 15-year exemption, the 50% active asset reduction and the $500,000 retirement exemption.
Can I pay myself dividends instead of a salary?
Yes, if you are a shareholder and the company satisfies the section 254T solvency test and has franking credits to attach. Salary is deductible to the company and counts for super; dividends carry franking credits. Most owner-operators use a mix, set with advice each year.
Can a company own shares in another company?
Yes. A holding company owning a trading company is a common structure. Fully franked dividends paid between companies on the same tax rate carry credits that absorb the tax, so cash moves to the holding company without additional tax while leaving operating risk behind.
Sources: Corporations Act 2001 (Cth) s254T; Income Tax Assessment Act 1997 Div 152, Div 203; ATO guidance on company tax rates, Division 7A, director penalties, franking and the R&D Tax Incentive; ASIC fee schedule 2025-26; ABRS director ID; ABS Counts of Australian Businesses (8165.0), June 2025; Parliamentary Budget Office, dividend imputation explainer; business.gov.au R&D Tax Incentive overview.
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Sergiy Kucherenko
Sergiy Kucherenko is the founder and director of 42 Advisory and a member of CPA Australia. His professional career has been built in public practice and business advisory — working alongside business owners to simplify financial complexity, strengthen structure, and support growth at every stage. Originally trained as an engineer with a background in computer science, Sergiy brings an analytical and systems-oriented mindset to accounting and advisory — one that translates directly into the practice's emphasis on automation, process design, and technology-driven client solutions. It is the foundation behind 42 Advisory's cloud-first operating model and its ability to serve technically complex businesses with precision. Throughout his advisory career, Sergiy has served clients across medical technology, telecommunications, SaaS and technology businesses, construction and trades, and healthcare — including general practice and dental groups. That depth of sector exposure informs advice that is commercially grounded, not generic — calibrated to the specific operating realities of each industry. He has supported businesses at every stage of the growth cycle — from incorporation and early-stage structuring through to acquisition, restructure, and exit — with particular depth in service trust structures for medical practices, SaaS revenue recognition, and construction industry cash-flow management.