Choosing the proper business structure is a critical decision for entrepreneurs and business owners. The structure you select will have a significant impact on your business’s operations, legal obligations and tax implications. In Australia, there are several common business structures, each with its own set of pros and cons.
NOT A SEPARATE LEGAL ENTITY
Sole Proprietorship
A sole proprietorship is the easiest and least expensive business structure to set up. You can operate the business in your own name without needing to register a separate entity.
As the sole owner, you have complete control over all business decisions, allowing you to make quick decisions and steer the company as you see fit.
Sole proprietors are eligible for certain tax deductions and can report business income on their personal tax returns, potentially reducing their tax liability.
However, the owner’s personal assets are at risk in the event of business debts or legal issues. This means that if the business faces financial difficulties, your personal assets could be used to settle debts. Also, raising capital can be challenging for sole proprietors, as they are typically limited to personal savings or loans.
Partnership
Partnerships allow for shared responsibilities and decision-making among the partners, which can bring a diverse range of skills and expertise to the business. Partnerships are a tax-transparent entity, meaning that profits and losses are passed through to individual partners and taxed at their personal rates. Partnerships can pool resources and capital, making it easier to finance and grow the business.
Nevertheless, similar to sole proprietorships, general partnerships expose individual partners to unlimited personal liability. Moreover, differences in opinion or business direction can lead to disputes among partners, which may affect the smooth operation of the business. Finally, while partnerships are relatively easy to establish, they require a clear and well-drafted partnership agreement to define roles, responsibilities, and profit-sharing arrangements.
SEPARATE LEGAL ENTITY
Company
There are different types of companies. One of the primary advantages of forming a company is that it offers limited liability protection for its shareholders. This means that the personal assets of shareholders are generally protected from business debts and legal liabilities. Companies have more options for raising capital, such as issuing shares, attracting investors, or obtaining loans from financial institutions. Companies also have a perpetual existence, meaning that the business, run by directors, can continue to operate even if the ownership changes. If your company has two or more shareholders, the rights and obligations of the shareholders are to be governed by a shareholder agreement.
However, establishing and maintaining a company or a group of companies is more complex and costly than sole proprietorships or partnerships. It involves compliance with various regulations, reporting requirements, and ongoing administrative tasks.
Further, Companies are subject to double taxation, where profits are taxed at the corporate level, and shareholders may also be taxed on dividends or capital gains. Finally, companies are subject to more extensive government regulation and reporting requirements, including annual financial statements, director duties, and corporate governance.
Trust
Trust is not a legal entity. It is an arrangement where the trustee owns legal titles. Trusts offer tax advantages, such as income distribution among beneficiaries, which can lead to lower overall tax liabilities. Some trusts, like discretionary trusts, can provide asset protection for beneficiaries. Furthermore, trust structures can be adapted to suit different business and investment needs with, for example, a corporate trustee.
Nevertheless, trusts can be complex to set up and administer and not suitable for businesses that want to retain profit in the trust due to tax implications. Also, trusts cannot issue shares, making it more challenging to raise capital compared to companies. Finally, Trusts must meet specific regulatory requirements, and the trust deed must be carefully drafted to ensure compliance with the law.
CONCLUSION
Choosing the right business structure in Australia is a crucial decision with significant legal, financial, and operational implications. The IP House Lawyers has assisted many clients in choosing suitable business structures that align with their specific business needs, such as business goals, including cost and cash flow, risk profile and tolerance, tax considerations, and long-term growth plans. We can also act as your legal expert in preparing, reviewing and drafting legal documents such as partnership agreements, trust deeds, corporate constitutions and shareholder agreements, as well as company and business name registration.
For any further information or queries on the above content, please contact us.
The Author
Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: admin@theiphouse.com.au
Key Contact
Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: claire@theiphouse.com.au
Disclaimer
The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.
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