Business Structures

There exists a wide variety of business structures in which to operate a business; all of which encompass their own unique and specific advantages and disadvantages. Seeking advice from a Business Lawyer and Tax Solicitor about the right business structure for your business will give you an edge over your competitors. When starting a business or purchasing a pre-existing business, it is crucial that the most advantageous business structure is selected and implemented to ensure that the business goals are met and that the enterprise is running at optimum profitability. In determining the most appropriate business structure, a Business Lawyer will usually weigh the elements of each type of business structure against the objectives, purpose and unique character of the enterprise. It is very important that prior to establishing a business or purchasing an already existing business, you obtain reliable and comprehensive legal and tax advice.

Some of the forms of business structures are:

Sole Trader

A sole trader conducts business as an individual and without the benefit of a separate legal entity that is unconnected with the individual. Accordingly, all assets and liabilities of the business are essentially the assets and liabilities of the individual. The nature of the business of the sole trader, having no separate legal identity, exposes the individual to unlimited liability for the debts and liabilities of the business, meaning that in circumstances where the business fails, the sole trader will become directly accountable to creditors and the personal assets of the sole trader (which may not necessarily be involved with the business) may also become the subject of claims. From a tax perspective, sole traders are unable to reduce tax through income splitting and in their ability to claim business deductions (which must be substantiated as fringe benefits). On the other hand, the sole trader structure is simplistic in nature. As well as CGT advantages, the profits raised by the business forms part of the assessable income of the individual which can mean tax is paid at a lower marginal rate. Accordingly, in many circumstances, operating a business under a sole trader structure is not only suitable but the most appropriate.

Our Sydney Business Lawyers and Sydney Tax Lawyers can properly advise you if this structure is suitable in preference to a more complicated structure.

Partnership

Partnership is defined by the Partnership Act 1892 as “the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership”. There are three legal features of the partnership that are fundamental:-

• the non-existence of a distinct entity status for the partnership;
• unlimited liability of the partners for the partnership debts and other obligations; and
• generally limited to between 2 and 20 partners.

Unlike companies where there is a distinct legal entity able to incur debts and obligations in its own name (as well as to sue and be sued), in a partnership the partners retain personal joint and several liability for any debts incurred during the partnership, even if the partnership is dissolved.

The partnership enterprise itself cannot be convicted of a crime or sued in tort or contract in respect of acts done by the enterprise. Rather, the individual partners are usually directly liable for any wrongs committed by the partnership enterprise.

The Partnership Act 1982 and common law create a number of rights and duties upon partners in a firm, including the sharing of profits and losses, limited indemnity of partners against costs accrued, sharing of management rights, access to books and records, fiduciary duties between the partners, a principal-agent relationship applying to each partner and a duty not to compete with the partnership enterprise.

A partnership can be created in many ways; verbally, in writing (usually by way contract or a deed) or by conduct. While there is no set form a partnership agreement must take, it is important to ensure that it is compliant with the law. For instance if the partnership agreement is to last longer than 12 months, it must be in writing. Further, if the partners wish to trade under a business name, then that name must be registered under the Business Names Act 2002. The Partnership Act 1982 will also apply unless specifically excluded in the partnership agreement.

In New South Wales it is also possible to have a limited liability partnership. A limited partnership must be registered and have at least one general partner who has unlimited liability and management control and one or more limited partners whose liability is limited to the capital they have paid in or promised to pay in. Limited partners are not to take part in management and if they do they may be treated as general partners.

The tax benefits of a partnership are income splitting, allowing funds to retain their character. Partners may apply partnership losses against personal income from all sources. Rollover relief is available if a partnership wishes to change to a company structure. Small and CGT concessions may be utilised.

Our team of Sydney Commercial Solicitors can properly advise, draft and review your partnership agreement to ensure it complies with the law and reflects all the partners and the firm’s intentions. 

Company

A company is a distinct entity, able to be prosecuted, sue or be sued. A company is a separate entity that is able to accrue and dispose of assets and liabilities.

A company must be incorporated under the Corporations Act 2001 as either a proprietary company (limited by shares or unlimited with share capital) or a public company (limited by shares or guarantee, unlimited with share capital or a no liability company). A proprietary company is limited to 50 non-employee shareholders and are less regulated than public companies. They are normally used for the purposes of operating smaller businesses.

Most public companies are floated on the stock exchange and, while subject to greater regulation, have the general ability to raise greater capital due to the public being able to invest a larger number of shares in the company. Companies are run by directors (either executive or non-executive) who report to the shareholders on profits and loss and are responsible for ensuring the company remains solvent and legally compliant. Directors may be prosecuted personally for failing to carry out their duties or taking action injurious to the company so it is imperative that they act in good faith at all times and seek sound legal advice.

Perpetual succession and limited liability are amongst the greatest benefits to operating with a company structure. There are also a variety of tax benefits, including the following:-

• superannuation contributions made by a company for employees may be claimed as a tax deduction
• companies may be eligible to make retirement payments to employed family members
• ability to take advantage of fringe benefits tax (FBT)
• the company tax rate is lower than the highest marginal tax rate for individuals

For more information on the benefits of operating an enterprise through a company structure, contact a Commercial Lawyer today. We can conduct a business health check-up to help you determine whether running your business through a company is the most tax effective and profitable approach.

Trusts

Usually, an owner of property holds both the legal interest and the beneficial (or equitable) interests in the property. In contrast, trusts are complex legal creatures which have the fundamental characteristic of creating a separation of the ownership of the legal and the beneficial (or equitable) interests in the property. The entity that owns the legal interest is referred to as the trustee whilst the entity that owns the equitable interest is referred to as the beneficiary. There may be multiple trustees and/or beneficiaries and each may be a natural person or an artificial person (for example, a company).

Within the intricate web of law governing trusts, there are a number of varying types of trusts that can be instituted or are implied, including unit trusts, trading trusts, constructive trusts, implied trusts, express trusts and resulting trusts. One of the most common forms of trusts is the discretionary trust. The capacity to protect assets, effectively manage tax (by taking advantage of concessional tax treatment and income splitting) and provide for flexible distributions of profits are the factors driving the attraction and interest in discretionary trusts in Australian businesses (and it is notable that discretionary trusts are implemented more commonly amongst the high wealth bracket). One of the most advantageous features of the discretionary trust is that there is no specific apportionment or entitlement to income, profits, shares or interests to the trust assets. Unlike fixed trusts (where the beneficiaries are entitled to a designated portion of the trust profits), a discretionary trust gives the trustee “discretion” in the distribution of profits and assets to the beneficiaries. Accordingly, the assets of the trust are protected because the beneficiaries have no specific legal entitlement to them.

However, there is a downside; the law governing trusts is complicated and multifaceted, shrouded by layers of common law and various statutory instruments. To properly take advantage of a trust, it is necessary to obtain sound legal and tax advice. Our Trust Lawyers are highly experienced in establishing and maintaining trust structures.

Contact our office to speak to a Trusts Lawyer.We have branch offices conveniently positioned across the Sydney metropolitan area, including in Liverpool, Gordon and Baulkham Hills. For a full list of our office locations, with complete addresses, click on our Locations tab above or contact our main office line on (02) 9233 4048.

This webpage (and any material or wording appearing on this webpage) is provided for general information purposes only and does not constitute any Legal Advice. It does not take into account your objectives, your instructions or all of the relevant facts and/or circumstances. Navado accepts no responsibility to any person who relies on the information provided on this website. We further refer you to our Disclaimer.