Introduction to Companies

Establishing a corporate entity can offer several strategic benefits when trading, investing, or conducting a business in the crypto space. In the context of crypto, we turn our attention to private limited companies.

A private company, as a separate legal entity, offers a clear structure for conducting business or potentially a holdings vehicle to separate between your personal affairs and the company affairs distinctly

The directors of private company are effectively the decision makers of the entity, and the shareholders are the ultimate owners of the company. 

Similarly, private companies (as opposed to a public company) are unbounded by what they can invest in because the board of directors is also the shareholders in this type of private setting. Of course, the company would still need to comply with the Corporations Act 2001 which is subject to oversight by the Australian Securities and Investment Commission (ASIC).

Fun fact: busting a common misconception related to our previous blog on trusts, a trust is not actually a legal entity but rather, it is a fiduciary relationship where one party holds property on behalf of another. This is different to a company as they are considered a body corporate. There may be times where you would like to have a legally recognised corporation in your affairs in the crypto space.

Advantages and Disadvantages of a Corporate Structure

One of the main advantages of using a private company for crypto trading or investing is the attribute of limited liability protection. Creditors of the company typically cannot come after the shareholders for debts of the company. This structure acts as a legally separate entity holding assets or carrying on business compared to the shareholders owning personal separate assets.

Additionally, companies enjoy the flat corporate tax rate of 25 or 30% (depending on whether the entity is considered a base rate entity), which is potentially lower than personal tax rates for high-income earners. This can allow for proper cashflow planning and budgeting as you know what to expect when it comes to the provision and allocation for taxes.

Another advantage is that a company can retain profits inside the company and is not forced to pay out profits yearly (which is procedurally quite different from a trust for crypto investments). This effectively allows you to have a structure to reinvest profits indefinitely until the directors decide to return these earnings to its shareholders. 

So as a controller (director) it allows you to tax effectively choose when to make dividend payments. The added bonus is that the dividends can have franking credits attached to offset any potential taxes for the shareholder. Typically, companies are more synonymous with Crypto Traders rather than investors as crypto for traders is treated as normal income (as opposed to capital gains).  However, this does not limit the use of these companies to NFT artists, yield farmers, stakers and other organisations wanting to use a corporate vehicle.

Whilst a company can have many benefits, objectively it is not perfect either. The downside includes the complexity of regulatory compliance and the necessity for rigorous record-keeping and financial reporting. It can also be difficult to extract funds from a company as you simply cannot withdraw funds from it to your personal account or use funds for private use. Typically, the only methods to extract funds is through wages or through the payment of dividends to its shareholder.

If funds are extracted out of company profits to a personal bank account, this will trigger other tax issues and consequences under Division 7A – loans from private companies to their shareholders (a topic for another time).

Because companies have a flat rate of tax, another possible disadvantage is that companies are not eligible for capital gains discounting on any CGT assets that are sold after being held for more than 12 months. This means that all capital gains are essentially taxed at 30% (or 25% if they are considered a base rate entity). They don’t get a further 50% off the gross capital gain.

The last notable disadvantage is the inability to flexibly choose who the dividends go to as it can only be paid to the shareholders of the company.

However, this is where we can get a bit creative and possibly overlay or stack your structures! Here at Consensus Layer, we can guide you on the correct structure to use for whatever idea, task, or vision you have.

Let’s go over a case study again to demonstrate where a private limited company can help with your structure stack.

Case Study  – profits for retention and cap at corporate rate

David has a full-time job as Transport Engineer earning $200,000 per annum and after discovering Bitcoin and Crypto from ARK invest, he decides to start trading crypto as a side hustle. David sets up an office with a dedicated trading computer and multiple monitors in one of his rooms in his home.

Before he starts is crypto trading activities, he seeks professional tax advice from Consensus Layer, one of Brisbane’s leading crypto tax specialists and sets up a private crypto trading company (limited in liability).

He has $150,000 of his owns funds to invest and borrows through interest-free credit cards of another $60,000. He analyses the market developments daily using specialised crypto rating services and has a good understanding of trend lines and technical analysis through courses and materials he has read overtime.

David’s objective is to identify assets that will increase in value in the short time and take advantage of the massive volatility of the crypto market to turn a quick profit. David makes 350 buy transactions and 250 sell transactions within a short period of time. The average transaction size is $10,000. David uses a mix of crypto trading on exchanges and on-chain activity through his MetaMask account.

For the financial year, he makes around $250,000 in net profit which ultimately gets taxed at 25% instead of his marginal rates (almost 50%). This is a tax saving of around $55,000. David, on the advice of this accountant sets aside 25% of all net profits into cash or stable coins to ensure he has the funds to discharge he tax liability at tax time.

Overall, David is able to retain these net profits and continue to stack and grow his crypto wealth in the company at a more rapid pace until he can identify periods where he is able control the payment of dividends in the most tax effective manner.  He is also significantly better off due to the tax he has saved (50% better off). Ultimately, this leads to his goals of retiring earlier and starting up his own charity.

The crypto trading company can then pay fully franked dividends over a number of years when the individual shareholder isn’t earning a high income, allowing the individual to claim some franking credit refunds in their individual tax return. Over a number of years, the overall tax rate can potentially be lower than 25%.

Conclusion

Using a company for crypto trading can provide significant benefits, such as limited liability and tax efficiencies, however, it requires careful consideration of the regulatory landscape and a commitment to maintaining high standards of corporate governance. If you're considering this route or may feel that a company is appropriate for your private affairs (such as a ‘ bucket company’ or ‘ treasury company’), engaging with a knowledgeable cryptocurrency accountant like Consensus Layer can ensure that your business and investments are set up optimally and for success.

Click here to schedule your consultation and take the first step towards savvy and secure crypto tax structures.