We are often asked by clients about what type of entity they should use to run their business. Whilst this is a question that should be put to your accountant as well, we can explain the legal aspects of the main structures together with the advantages and disadvantages of each.
The main business structures used in Australia are sole trader, partnership, trust and company. Outlined below is a simple summary of each structure:
When a person runs a business on their own behalf they are known as a sole trader. Sole traders can trade under a business name (which should be registered with ASIC, this link will guide you on how to do this http://asic.gov.au/for-business/registering-a-business-name/ ). Generally income earned by a sole trader will be taxed at the same rate as an individual tax payer.
Advantages – very simple with minimal establishment costs.
Disadvantage - a sole trader is personally liable for the liabilities that they incur.
A company is a separate legal entity and can only act through its directors. Directors are the people who make decisions for the company and can bind the company when entering into contracts. The owners of the company are the shareholders.
The Corporations Act 2001 governs the operation of companies. Directors have significant duties and obligations under this act.
Advantages - Shareholders can limit their personal liability and are not generally liable for the company debts and the financial liability of the company is generally limited to the company assets.
Disadvantages – The establishment costs and ongoing administrative and compliance costs can be high.
A partnership refers to two or more people engaging in business together with a view to making a profit. The Partnership Act governs the operation of partnerships. It is important that the partners have a partnership agreement in place that clearly outlines the duties and responsibilities of each partner.
Advantages – they are relatively inexpensive to form and operate. A partnership itself is not taxable, each partner pays tax on their share of the net income of the partnership.
Disadvantages – each partner is jointly and severally liability for the obligations of the partnership. It can also get very messy when there are disputes between the partners.
A trust involves the trustee, usually either an individual or company, holding certain assets in his, her or its own name but for the benefit of a group referred to as beneficiaries. Put simply, a trustee owns the property or assets of the trust and carries on the business on behalf of the beneficiaries of the trust.
A formal Trust Deed is required in order to set up a trust that governs the operation of the trust and outlines the powers of the trustee (ie to run a business, hold assets and distribute income).
Advantages – the flexibility they allow in tax planning and asset protection. They also allow a flexible means of distributing income and assets.
Disadvantages - the law of trusts is quite complex and it can be expensive to set up and administer it due to compliance and legal requirements that need to be met.
When setting up a business structure, it is important to consider factors such as:
how many people will be involved in the business;
what the business will do;
how much income is likely to be earned from the business; and
the intended growth of the business.
Everyone’s circumstances are different, accordingly it is important to talk to your solicitor about the costs and risks of each business structure and how it relates to your situation.
If you are considering setting up a business and would like our assistance please contact us on 03 6332 9353 or use our simple Contact form that can be found at https://www.cormistonlegal.com.au/contact-us.
Cormiston Legal is a Launceston based Tasmanian Law Firm specialising in Property and Business Law. We can be found working hard in the Branch Office Building, 45 Cameron Street, Launceston.