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No ‘one size fits all’ model for business structures

06 Apr 2015

Topics

  • Business Law

There is no “one size fits all” approach to your business structure. We will tailor a structure to best suit your needs, often in conjunction with your accountant.

Snedden Hall & Gallop has an experienced Business Team, and can provide assistance with establishing the correct business structure for your needs. Typical business structures include:

Sole Trader

This is the most simple of all structures. It consists of a single person carrying on a business in that person’s name, or using a business name that that person has registered.

The sole trader owns and controls the business and the business assets. The trader also, therefore, bears all of the business liabilities and is responsible for any debts of the business.

This is a simple approach for anyone looking at starting a business or dealing with a relatively small per annum profit. We would not recommend it for more complex business dealings or potential high-wealth businesses.

Partnership

This is generally a situation where two or more sole traders wish to conduct their business together. The general definition of partnerships is a relationship between two or more persons carrying on business with a view for profit. The partnership will need to acquire a business name in order to operate.

Partnerships are governed by each specific jurisdiction in Australia. In the Australian Capital Territory, they are governed by the Partnerships Act 1958.

Essentially, every partnership should have a partnership agreement, which sets out matters including:

  • duties of partners;
  • activities of the partnership;
  • personal liabilities; and
  • decision making roles.

Company

Many people will opt to incorporate a company in order to carry on business. A company has a separate legal entity from the person who incorporates it.

Companies are regulated under the Corporations Act 2001 and its corresponding regulations. Companies have shareholders, directors, general meetings and must report annually to the Australian Securities and Investments Commission.

There are many advantages to having a separate legal entity to carry on business, as that entity can deal with matters as though it were a person. That means it can sue or be sued in its own name, it can enter into contracts, and its profits and losses can be retained within the company structure. Furthermore, the liability of shareholders for the acts of the company is limited by their shares.

Unfortunately, companies do have drawbacks. They are more expensive than the simpler structures, and have annual reporting obligations. They also require the election of directors and maintenance of a company register, as well as a comprehensive shareholder’s agreement.

Joint Ventures

The parties who are part of a joint venture project usually come together for a particular purpose. Generally, parties would have a joint venture agreement that clearly sets out the specific venture on which they are joining, and specifies that their dealings will go no further than that. Each of the parties will usually bring its particular skills, equipment, capital and know-how to the venture. As a result, a joint venture is more for one-off arrangements rather than a continuing business arrangement.

Trusts

Trusts are a creature of equity dating back to law in the United Kingdom. They are also now governed by legislation in most jurisdictions.

A company can be set up to hold its profits and assets on trust for specific people (often a family in a Family Discretionary Trust). It can then deal with the profit and assets only for the benefit of the members of the trust (the beneficiaries). A trustee has very specific obligations to its beneficiaries.

As a result, there is a degree of separation between the assets, the company carrying on the business, and the people who will ultimately benefit from that. This is beneficial for tax purposes and also to protect assets should anything go wrong and people seek to recover debts from the company.

There are a number of different types of trusts:

  • Discretionary Trust
  • Fixed Trust
  • Unit trust

Please contact our Business Law team to assist you with an assessing the best options for your business on 02 6285 8000.