When you are setting up or purchasing a business, you need to decide what is the most appropriate business structure to use to run your business. This is important because it not only has financial implications but legal consequences. The selection of a business structure raises questions relating to:
- control of the business
- asset protection
- estate planning
- business succession.
Which business structure is right for your business?
Choosing the most appropriate business structure is much more complicated than simply deciding to incorporate a company. Ideally, you should become familiar with the various options, and then discuss the matter with both your lawyer and financial adviser.
What is a sole trader?
A sole trader is the sole business owner. You trade in your own name, although you may register a business name.
From a legal perspective, a sole trader is the simplest business structure. There is no distinction between the owner and the business itself. However, you need to be aware that you are legally responsible for all aspects of the business, which means you cannot share debts and losses. Your personal assets will be at risk from any liabilities the business incurs.
Like any other business, as a sole trader you can have employees.
Upon the death of the sole trader, the business is dealt with according to the will of the deceased sole trader.
The two main advantages of being a sole trader are:
- the low start-up costs involved
- the reduced regulations in comparison to other structures.
What is a partnership?
A partnership involves two or more persons engaging in business together with a view to making and sharing profits. It is a relationship, not a separate legal entity. Each partner jointly owns the business assets and liabilities.
If you set up a partnership, you generally need to register a business name.
Partners are personally jointly and severally liable for the debts and liabilities of the partnership. Each partner is liable to the creditors for the full amount of the debts.
Partnerships can be formed using a verbal agreement. This is common when friends are setting up partnerships. In such cases, the law assumes everything is shared equally. However, this can be problematic if issues between the partners arise. Therefore, it may be more sensible to prepare a partnership agreement that states clearly the obligations and rights of each partner.
Partnerships are simple and inexpensive to set up. They also have minimal reporting requirements. Too, they allow shared management responsibilities and provide more opportunities for tax planning than does being a sole trader.
At the same time, partnerships can run into problems over issues such as profit sharing, administrative control and business direction. The joint and several liability of partners can mean that each partner is fully responsible for the debts and liabilities incurred by the other partners.
Partnerships are governed by the Partnership Act 1892 (NSW) and the terms of any partnership agreement.
What is a company?
A company is the most common business structure used by small-to-medium-size businesses in Australia. It is more complex structure than a partnership or sole trader.
A company is a separate legal entity that is distinct from its owners (shareholders or members). This means that the company will have its own assets and liabilities.
A company has the same rights as a natural person, which means that it can incur debt, and, like a person, can sue or be sued.
Companies are managed by company officers who are called directors and company secretaries.
The shareholders of the company are not personally liable for the debts of the company.
Companies are perpetual and do not cease existing with the death of a shareholder.
Small-to-medium business owners often use a type of company structure called a proprietary limited company. This type of company does not sell its shares to the public and has limited liability.
Larger companies that want to sell shares to the public can still limit their liability by setting up a public company.
You may wish to incorporate a company to protect your personal assets. It is important to note that, in some cases, the owners (shareholders) of companies may be liable for a company’s debts, such as when they have provided personal guarantees to borrow money.
Another benefit of incorporating a company is that income generated by the company attracts a company tax rate (currently, 30 per cent).
All companies must be registered with the Australian Securities and Investments Commission (ASIC).
In Australia, the activities of companies are regulated by the Corporations Act 2001 (Cth).
What is a trust?
A trust is a business structure where the trustee hold the trust property (and runs the business) on trust for the beneficiaries of the trust. This means the trustee is responsible for holding income, assets or property for the benefit of others (the beneficiaries).
A trustee can be an individual person, a partnership or a company.
Trusts are regulated by the terms of the trust deed and the general law.
A trust is not a separate legal entity.
A trustee is liable for the debts incurred in respect of carrying on the trust business and its liability is not limited to the assets of the trust.
One of the main reasons behind setting up a trust is to protect assets. In addition, there may be tax advantages associated with setting up a trust.
What is a discretionary trust?
A discretionary trust (or a family trust) is where the trustee has discretion according to the terms of the trust deed to distribute income and/or capital among the nominated beneficiaries.
They are generally set up to hold a family’s assets for the benefit of providing asset protection and tax planning for family members.
What is a unit trust?
A unit trust is where the beneficiaries hold an allocated number of issued units in the trust. It is like a company where the trust’s property (business or investments) are divided into a number of shares called units. The number of units you hold will determine your entitlement to your share of income, capital gains and voting power.
How do Monardo Solicitors approach finding the right corporate structure for your business?
Understanding the legal effect of your proposed business structure is vital in making effective plans for your business. If you don’t understand the implications of the structure you have selected, there could be adverse tax implications or you could inadvertently transfer ownership of the business to the wrong hands.
At Monardo Solicitors, we also understand that your choice of business structure may depend as well on the industry in which you are working. Therefore, we will always take the time to become familiar with, and obtain a deep understanding of, your industry.
We can help you with:
- sole trader set up
- limited liability companies
- family trusts
- discretionary trusts
- unit trusts
- joint ventures
- business succession planning.
We can prepare:
- trust deeds
- partnership agreements
- joint venture agreements
- shareholder agreements.
Are you thinking of setting up or purchasing a business? Would you like to talk to an experienced commercial lawyer about the most appropriate structure for your business? Call 02 8006 5244.