When setting up a company, you might be thinking to yourself, can I run multiple businesses through this? The answer you’re looking for is yes, however it does come with a few things to consider.
What is Corporate Personality?
Corporate personality means that a company is considered as a separate legal entity from its owners/directors. This legal separation is one of the main reasons companies are generally used to operate a business with. Similar to a real person, a registered Pty Ltd can do the following:
- Incur debts
- Enter into legal contracts
- Purchase and sell property
- Sue, and be sued
- Be criminally liable
- Liable in civil matters
The actions listed above, are attached to the company and not to the owners or directors. Provided the Directors of a company act in accordance with their obligations under the corporations act, they are generally protected at a personal level by this legal separation which is known as the corporate veil.
However, it is important to know that Directors may be held personally liable in particular circumstances like;
- nonpayment of GST, PAYGW, and Superannuation
- failure to comply with the corporations act
- fraud or other illegal activity
It is possible to run multiple businesses under one ABN, this is achieved by registering multiple business names through ASIC.
Should you run multiple businesses out of one company?
Whilst it is possible to attach an unlimited number of business names to a single company, there are pros and cons to running multiple distinct businesses out of a single entity.
- Operating out of one company leads to one company tax return being required (however it does require additional complexity)
- Registering additional business names to the one company is far less expensive than setting up separate companies
- It might be easier from an administration perspective
- Your company’s ACN and ABN will remain the same for all your business names
- You can easily ‘share’ employees between different businesses in the same company
- You only need registrations, licenses, and insurance for one company
- You only need one Xero File to manage the books of the businesses
- One business’s debts may extend to the other (a healthy business will be more at risk of being dragged down by an unhealthy business)
- There may be confusion between business names that operate under the one company
- Tax implications may be less favourable, depending on your business structure
- If one business goes bankrupt, the other business may be exposed to creditors
- You’ll need to have the necessary registrations, licenses, and insurance for each company
- From a financial and performance reporting perspective you’ll need a Xero (accounting software) file for each company
- When it comes time to sell one business, it can be more difficult to extract the necessary financial data if it's combined with other businesses in the same company
The rule of thumb
Whilst it is possible to run multiple businesses under one company, it does come with its limitations.
The general rule of thumb is;
- A separate company for each business, and
- Any valuable assets kept separate from a trading business – these are generally held in a trust
The choice as to whether to separate businesses into different entities will come down to risk, practicality, cost, and future plans.
Where two businesses are very different (ie a construction company and a café), it’s wise to keep them separate. Also, if your plan is to keep one business for a short time then sell it, it may be easier to keep it separate in its own company so you have a very clear set of books for a potential purchaser to look at.
On the other hand, if you had 2 outlets or very similar businesses (ie 2 different food trucks), it's not so important to have them separate as their risk profile is similar and it may be convenient to move staff in between businesses. In this case, you could have 2 business names attached to a single company. Of course, it is still possible to run them in their own company.
There is no right or wrong answer to the question of whether it's worth separating businesses into their own companies – but the decision should be made with a full understanding of the risks and practicalities involved along with the goals of the business owner.
If you want help structuring your business, and answering the questions in this article, contact Link Advisors and we can guide you through the process.