No matter what stage your business is in or the type of business you operate, it is critical to have the right business structure in place for many reasons, including to safeguard your personal and business assets, minimise risk and tax implications and optimise returns. Each business structure has its own benefits and risks as well as criteria and regulatory requirements, which should be considered before adopting a business structure that is ideal for your business and personal needs.
Sole traders and partnerships
The more simple and less complex business structures are sole trader and partnership structures. They are generally quite easy and inexpensive to set up and maintain. While a sole trader structure involves an individual operating the business in their own name with unlimited liability, a partnership structure is between two or more parties and can be structured as a general, limited or incorporated limited partnership. Other than an incorporated limited partnership, each partner under a general or limited partnership is jointly liable with the other partners.
Unlike sole traders and partnerships, companies and trusts are often the preferred business structures for small to medium-sized enterprises. This is predominantly due to the numerous benefits, including limited liability capabilities associated with these structures that outweigh the often more expensive and complex set up and maintenance of these structures.
Companies
In Australia, companies are governed by the Corporations Act 2001 (Cth) and can be structured in a manner that is consistent with the nature of the business and its industry, intended number of shareholders and officeholders, the business plan, and the business’ annual turnover and profit. Generally, a company is either registered as a:
- private company (limited by shares or unlimited); or
- public company (limited by shares, limited by guarantee, unlimited or no liability).
A profound benefit of adopting a company structure is that a company is a separate legal entity, and in that capacity, is capable of owning assets and incurring liabilities independent from its shareholders and directors. A company in its own capacity is also able to sue and be sued.
Shareholders of a company generally have limited liability, which means that they are not in their personal capacity liable for the debts of the company. However, company directors have an obligation under the Corporations Act to prevent insolvent trading of the company. Therefore, under certain circumstances, company directors may be held personally liable for the debts of the company, potentially exposing their personal assets. These risks are further exacerbated where directors and shareholders have provided personal guarantees. This personal liability of directors prescribed under the Corporations Act and any personal guarantees provided by directors or shareholders can survive the cessation and deregistration of the company.
In order to minimise potential risks and optimise the benefits of a particular company structure, it is imperative to have proper documentation in place, which includes a company constitution and, in the particular case of a private company, a shareholders’ agreement.
Trusts
Similar to companies, setting up trusts can have the benefit of asset protection and tax minimisation. Establishing a trust involves the trustee or trustees (whether individuals or corporate trustees) to legally hold assets in trust and ultimately for the benefit of the beneficiaries of the trust.
There are many types of trusts used in Australia, such as discretionary or family trusts, unit trusts, hybrid trusts, bare trusts and others. Each type of trust has its distinct features and choosing the right trust is effectively contingent on the individual or business needs. Where a trust is required for business or investment purposes, often trusts that offer the most effective tax benefits, wealth accumulation and asset protection are preferred. With that said, there is some evidence of correlation between those benefits and discretionary (or family) trusts and unit trusts.
- Discretionary or family trusts are commonly established by families and small or family businesses, where the trustee has the power to allocate such of the trust capital and/or income to such of the beneficiaries or class of beneficiaries as the trustee in its discretion considers appropriate. Under a family trust, the trustee may hold the trust asset for generations before ultimately distributing the asset to the relevant beneficiary.
- Unit trusts involves the beneficiaries of the trust to hold certain number of units in the trust (unitholders) that are transferrable subject to the terms of the unit trust, similar to shares held in a company by its shareholders.
Unlike companies, a trust is not a legal entity. Instead, it is a legal relationship between the beneficiaries and the trustee, where the trustee owes legal and fiduciary duties to the beneficiaries.
Trusts are generally established through trust deeds, which must be consistent with the nature and type of the trust as well as the objective of the trust being created. In addition to trust deeds, in NSW, the Trustee Act 1925 (NSW) governs trusts to a certain extent.
Key Takeaways
It is important for businesses to ensure that they have adopted the right structure for their business to, amongst other things, maximise asset protection and minimise tax implications and limit liability. You may currently have a business structure that may not be right for you, limiting your ability to maximise on the benefits available under other business structures. In that case, you may want to consider restructuring your business to reap the benefits through a structure that is more appropriate for you and your business. Irrespective of the business structure, it is essential for businesses initially assess both the benefits and risks associated with any business structure.
Further information
As the information contained in this article is general in nature, and does not constitute legal advice, please contact Matthews Folbigg Lawyers – Commercial Law Team if you require specific advice or assistance relating to a particular commercial law issue.
Liability limited by a scheme approved under Professional Standards Legislation.
Geeti Chawla
Level 7, 10-14 Smith Street Parramatta NSW 2150
P: 02 9806 7427
E: geetic@matthewsfolbigg.com.au
