A Brief Outline of Australian Business Structures

In Australia, there are four common legal structures for start up businesses: sole proprietorship, partnership, company and trust. In deciding which business structure to adopt, an entrepreneur needs to consider a number of issues including the following:
* the entrepreneur's vision regarding the size and nature of the business including the expected profit or loss in initial years, whether the entrepreneur will need to re-invest earnings into the business and whether the entrepreneur will need to take cash out of the business;
* the level of control the entrepreneur wishes to have over the business;
* the level of compliance and reporting with which the entrepreneur is prepared to deal;
* the tax and other financial consequences of the different ownership structures;
* the legal risk associated with the business including whether the industry in which the business will operate is subject to high levels of litigation.

Given the long term implications of the business, it is worthwhile consulting with an accountant (or other financial adviser) and a lawyer before settling on a business structure. However, from a purely legal perspective as a general rule, it is preferable for a startup business to establish and operate as a company or a trust which has a company as trustee. The main reasons for this are the separation of assets of the business of the company or trust from the shareholders and beneficiaries and limitation of liability of shareholders and beneficiaries.

A sole proprietorship is owned by one person (usually the individual who has day-to-day responsibilities for running the business) and is usually operated under the person's own name or a registered business name.

The advantages of a sole proprietorship are:
* it is the easiest and least expensive form of ownership to establish;
* a sole proprietor is in complete control, and within the parameters of the law, makes decisions as the proprietor considers appropriate;
* a sole proprietor receives all income generated by the business to keep or reinvest;
* profits from the business flow directly to the proprietor's personal tax return; and
* the business is easy to dissolve.

The disadvantages of a sole proprietorship are:
* a sole proprietor has unlimited liability and is legally responsible for all debts of the business. This means that the proprietor's personal assets are at risk as well as the business assets;
* it may be difficult to raise funds to expand the business;
* it may be difficult to attract high-calibre employees or those that are motivated by the opportunity to own a part of the business;
* it may be difficult to sell the business;
* taxation consequences as income of the business will be treated as income of the sole proprietor. Sole proprietors pay income tax at personal tax rates and may also have to pay provisional tax.

A partnership is a legal structure which is regulated in Australia at State level by the Partnership Acts of the various states (which although not identical are similar). Generally, a partnership is formed when two or more people go into business together with a view to making a profit. The size of a partnership is limited to 20 partners (with some exceptions).

Like sole proprietorships, the law does not distinguish between the business and the partners who own the business. The partners should have a legal agreement that deals with establishment, operational and dissolution of the partnership. The agreement should include how much capital each partner will contribute in the start up phase and how a partner's capital contribution will be determined during the operational phase; how decisions will be made; how profits will be shared; how disputes will be resolved; how future partners will be admitted to the partnership; how partners can be bought out; and what steps will be taken to dissolve the partnership when needed.

The advantages of a partnership are:
* partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement;
* with more than one owner, the ability to raise funds may be increased;
* the profits from the business flow directly through to the partners' personal tax returns;
* prospective employees may be attracted to the business if given the incentive to become a partner; and
* the business usually will benefit from partners who have complementary skills.

The disadvantages of a partnership are:
* partners have unlimited liability for the debts of the business and partners are jointly and individually liable for the actions of the other partners (which means that a partner may be responsible for an entire debt if the other partner does not have assets);
* profits must be shared with others;
* as decisions are shared, disagreements may occur;
* some expenses of the business may not be tax deductible or only partly deductible and the income of the partnership is distributed to each partner in proportion which has an impact on the tax position of a partner; and
* the partnership may have a limited life; it may end upon the withdrawal or death of a partner.

A company is considered by law to be a unique entity, separate from its shareholders (ie, the business owners). It has a life of its own and does not dissolve when ownership changes.

In broad terms, companies can be either:
* a proprietary company which is a company that is that is limited by shares or an unlimited company with share capital, has no more than 50 shareholders and which does not do anything that would require disclosure to investors under (except in limited circumstances); or
* a public company which can be limited by shares, unlimited with share capital, limited by guarantee or a non-liability company (which is only available to mining companies as long as the company does not have the right to call up the unpaid issue price of shares).
A proprietary company must have a minimum of one director who must ordinarily reside in Australia and one shareholder. If a company does not qualify as a proprietary company, then it is a public company. A public company must have a minimum of three directors, two of whom must ordinarily reside in Australia.

Considering each of the types of companies:
* A company limited by shares is a company in which each shareholder's liability is limited to the price it has paid for shares. Shares can either be issued fully paid (which means that no part of the issue price is owing on the share) or partly paid (which means that there is some part of the issue price owing on the share which is payable at some point in the future or when payment is requested by the company).
* An unlimited company is a company whose members have no limit placed on their individual liability to contribute to the debts of the company.
* A company limited by guarantee is a company in which members give a guarantee on the company which may only be enforced on the winding up of the company and is not an asset of the company which may be charged during its life. These companies do not have share capital. This type of structure is generally adopted for charities, sporting clubs and other not-for profit organisations.
* No liability companies are only available to mining and resources companies. A company can only be registered as no liability if the company has share capital, b) the company's constitution states that its sole objects are mining purposes and the company has no contractual right under its constitution to recover calls made on its shares from a shareholder who fails to pay them.

Proprietary companies are further divided into small proprietary companies and large proprietary companies. Generally, the only significant difference between the two types of proprietary company is that a small proprietary company has less onerous reporting and compliance obligations.

A proprietary company is a small proprietary company for a financial year if it satisfies at least two of the following paragraphs:
* the consolidated revenue for the financial year of the company and the entities it controls (if any) is less than $25 million, or any other prescribed amount ;
* the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million, or any other prescribed amount ;
* the company and the entities it controls (if any) have fewer than 50, or any other number prescribed by the regulations for the purposes of this paragraph, employees at the end of the financial year.

A proprietary company is a large proprietary company for a financial year if it satisfies at least two of the following paragraphs:
* the consolidated revenue for the financial year of the company and the entities it controls (if any) is $25 million, or any other prescribed amount;
prescribed by the regulations for the purposes of paragraph (2)(a), or more;
* the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million, or any other prescribed amount, or more;
* the company and the entities it controls (if any) have 50, or any other prescribed number, or more employees at the end of the financial year.

If a company is listed on the Australian Stock Exchange the public can buy shares to invest in the company.

In practical terms, a start up company is almost always a proprietary limited company.

The taxation system can be regarded as both an advantage and a disadvantage. It is advantageous to the shareholder because a company is taxed separately from its shareholders and each shareholder receives a credit towards the tax on dividends equal to the relevant amount of tax paid by the company. There are practical disadvantages for the company because of the quarterly tax obligations.

The advantages of a company limited by shares are:
* shareholders have no liability for the company's debts or judgments against the company other than payment for the shares issued to them. (but note, that officers can, in some circumstances be held personally liable for their actions, such as the failure to withhold and pay employment taxes);
* a company can raise additional funds through issuing new shares;
* a company can enter into contracts in its own name;
* a company can own property in its own name,

The disadvantages of a company are:
* the process of incorporation is more complex and requires more time and money than establishing a business as a sole proprietorship or a partnership (excluding the costs associated with drafting a partnership agreement) and the legal requirements are more complex;
* companies have strict ongoing reporting and compliance obligations which are more consuming and costly than sole proprietorship or partnership; and
* shareholders in proprietary limited companies may have difficulty recovering their investment due to limitations on who can buy shares.

A trading trust is usually an entity that holds property (capital) for certain beneficiaries. This type of business structure is formed when a gift or settlement is made to a trustee (which can be either a person or a company) on behalf of a yet-to-be-formed trust. A lawyer is usually required to draft the document (which is usually called a Trust Deed) which establishes the trust and sets out the trust's powers.

If a business is operating through a trust structure, it is usual to appoint a company as trustee. The trust has beneficiaries who are entitled to distributions of capital, income or both capital dependent upon the type of trust.

A trust may be a discretionary trust, unit trust or a combination of discretionary and unit trust. In a discretionary trust, the trustee has discretion as to how it distributes capital or income between beneficiaries. In an unit trust, each unit will be entitled to a particular level of distribution and the trustee will generally be required to distribute capital or income by reference to the number of units held by each beneficiary. These distributions are controlled by the trustee and form part of a beneficiary's personal income.

The advantages of a trust are:
* tax minimisation in very limited cases; and
* ease of succession.

The disadvantages of a trust are:
* trading trusts are a complex and expensive business structure;
* subject to higher compliance costs; and
* can be very difficult to dismantle.