Choosing to incorporate an Australian company for your crypto affairs has a wide array of pros and cons, so let’s talk about a few of them.
Benefits of Using an Incorporated Australian Company
A company is an attractive option for crypto projects due to limiting liability of founders, sharing, and validating ownership via shareholders.
Limiting Personal Liability
Limiting the personal liability of founders is usually the core reason for wanting to incorporate an Australian company for the crypto project as it mitigates the exposure of risk to their personal assets. This is due to the company operating as its own legal entity compared to the founders who may be personally liable without a formal structure (which will usually be a form of a verbal agreement/handshake agreement partnership). Depending on the proposed project, it may be beneficial to consider incorporating a company before getting started.
Operating your crypto project through an incorporated entity enables you to attract external investors that can buy into the project through acquiring shares and owning a piece of the business. This allows the business to expand with the required funding without having to use debt from a financial institution, which can expose the business to interest-rate risks and having to deal with cashflow considerations in meeting minimal repayments, despite the interest likely being deductible.
Separately Assessed for Tax Purposes
As an incorporated Australian company operates in its own legal capacity, it is also assessed for tax purposes in its own right. This means that it will declare and pay for its own tax liabilities. The benefit of utilising a company in this manner is also to benefit from the flat corporate tax rate (25% for base rate entities and 30% for non-base rate entities).
This may be an unintentional negative of operating your crypto project through an incorporated entity as companies do not benefit from the tax-free threshold (currently $18,200 AUD) like individuals do. Therefore, consideration must be placed on the short-term profit projections of the project to determine whether a company structure is viable. However, usually the other benefits of incorporating a company medium to long term exceed this consideration.
Examining Some of the Cons of Incorporating an Australian Company
A company structure is complex and requires careful consideration, in particular with the management and reporting obligations. If directors aren’t wary and breach their duties as a director, they may become personally liable. Depending on your budget, companies are also more expensive to operate and will attract a larger compliance fee depending on what is involved.
Liabilities of Directors
You must be aware of your liabilities as a director if are operating your business through a company structure. You may be personally liable where you have signed as a guarantor for external financing, or where the company has incurred PAYG (Pay As You Go) withholding taxes and/or unpaid superannuation guarantee liabilities. Directors must also operate the company diligently to ensure that the company is not trading insolvent. Staying on top of your compliance obligations and receiving ongoing tax and compliance advice from your crypto tax accountant will assist you in getting to this point.
Expensive to Operate
Companies are expensive to operate and are time-consuming. It is important to consider whether the cost of ongoing support in meeting your obligations is worth the hassle. Generally speaking, the benefits of incorporating a company outweigh the costs by a significant amount, however, it is still important to factor this in and chat to your accountant to ensure you and any other founders are well-informed before pushing the start button.
From experience, many founders become disgruntled by not receiving proactive or the right advice from the inception of the business’s endeavours. It is important to consider a professional firm that is hands on and provides you with the advice you require to ensure that the businesses administration and compliance requirements are being met.
As one of the original crypto tax and advisory firms in Australia, Fullstack Advisory is committed to the ongoing tax compliance and advisory support to the crypto community. Fullstack Advisory’s Crypto Tax Team has gained extensive experience working with notable crypto projects that operate through incorporated entities.