There are a plethora of issues which will confront a new business owner ranging from ascertaining the most suitable business structure for the business to operate under to ensuring that its business activities are compliant with all laws, rules and regulations. In starting a business one of the first issues to consider is to decide on its business structure. Under Australian law there are various types of business structures each attracting different legal and taxation consequences. Your decision as to the structure will depend on such factors as:
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A summary of the four main types of business structures are as follows:
- Sole Trader
A sole trader is the simplest form of business structure and in the circumstances there is no legal distinction between the individual and the business. The business may be able to operate either in the individual’s name or under a registered business name which is administered by the Australian Securities and Investments Commission (ASIC).
The advantages and disadvantages of operating as a sole trader are as follows:
- Advantages
- Simple establishment and low set up costs
- Total control of the business by the individual business owner
- Minimal compliance and reporting requirements
- Disadvantages
- Owner has unlimited liability exposing personal assets to business liabilities
- No tax planning opportunity as all income generated from the business will be deemed to be the income of the individual.
- Partnership
A partnership is formed where two or more individuals (up to 20 persons) have come together and agreed to conduct and carry on a business for the purpose of making a profit. In the absence of any written agreement, the key characteristics of this structure is that all partners are equally responsible for the conduct of the business and the partners will be held to be jointly and severally liable for the obligations of the partnership. A partnership is not a separate legal entity.
The advantages and disadvantages of operating as a partnership are as follows:
- Advantages
- Simple establishment and low set up costs
- Shared control of the business by the partners
- Minimal compliance and reporting requirements
- Ability to utilise skills and expertise of the partners
- Partnership dissolution is relatively easy
- Access to capital
- Disadvantages
- Partners are subject to unlimited liability exposing personal assets to the liabilities and debts of the business
- Minimal tax planning opportunity
- No asset protection
- Trusts
A trust is a structure which may be used for the purposes of conducting a business or trading. In this structure a trust deed sets out the property or business assets held by the trustee for the benefit of the beneficiaries of the trust. Usually, trusts take the form of being either (a) a discretionary trust or (b) a unit trust. The use of this structure is primarily driven by the ability of a trust to facilitate asset protection and provide for flexible tax planning and tax minimisation. The establishment of a trust is relatively easy, however, the laws of trust is quite complex and requires an experienced legal practitioner in the area to draft trust deeds.
The advantages and disadvantages of operating as a trust are as follows:
- Advantages
- Use of corporate trustee may reduce liability
- Asset protection
- Tax planning opportunity with flexibility in income and capital distributions
- Disadvantages
- Expensive to establish
- Increased compliance and administration costs
- Retained profits may be subject to the application of penalty tax rates
- Inability to distribute losses
- Company
A company is a distinct legal entity separate from its shareholders or members and is also capable of holding assets in its own name and has the ability to conduct a business. Companies in Australia are regulated under the Corporations Act 2001 (Cth) and by ASIC. It is a complex business structure requiring the satisfaction of various reporting obligations and for company directors fulfilling their director’s duties obligations. Shareholders own a company, however, are not liable for the company’s debts or liabilities.
The advantages and disadvantages of operating as a company are as follows:
- Advantages
- Limited liability for its shareholders
- Widely accepted business structure
- Ability to raise capital
- Ability to distribution or retain profits
- Easier transfer of ownership
- Competitive tax rate
- Disadvantages
- High set up costs
- On-going compliance costs
- Complex reporting requirements
- Inability to distribute losses to shareholders
Michael Stafford | Partner
Eakin McCaffery Cox
Michael joined Eakin McCaffery Cox Lawyers as a partner in 1999. With his extensive experience across all areas of commercial law, Michael heads the firm’s Corporate and Commercial team. His expertise ranges from preparing a wide range of commercial agreements including mergers and acquisitions to advising on ASX listings and fundraising. Prior to that he worked as an associate at Ernst and Young Law and as a legal officer in the Crown Solicitor’s Office.
