Business and Commercial Lawyers

The success and failure of businesses are decided before operations are even started. That said, it is imperative for an entity to not only give importance in deciding which industry one will participate in and how day-to-day operations will be carried out, but to also give ample time in deciding which business structure is most beneficial in respect of the activity.

 

While not ignored, selecting the optimum business structure is not given the consideration it should by an entity which which may prove costly in the long run as the structure chosen will determine the following:

• the amount of taxes  paid by an entity and how its paid
• which ATO provisions are applicable including concessions, deductions and offsets
• superannuation obligations
• record-keeping requirements to successfully comply
• an entity’s liability for the operation of the business

 

Types of business structures in Australia

In Australia, there are generally four types of business structures which an entity may operate as, this includes:

• sole traders or sole proprietorship
• partnerships
• companies
• trusts

Each business structure has its own pros and cons and its efficacy will be determined by the circumstances of an entity’s business activity.

 

Sole traders
A business being operated as a sole proprietorship is owned and operation by the same entity where there is no legal distinction between the owner and the business. The entity is entitled to all the profits made by the activity, and consequently since the entity has total control of the business, he or she will be liable to pay for debts or losses should the business fail to make profit.

 

Under this business structure, the entity will continue to be regarded as an individual where income derived from the business must be declared along with other sources of income for that financial year.

 

Partnerships
A partnership is a business that is owned and operated by at least two different individuals. Entities that own a portion of the business activity are known as partners or members. Entities within the partnership receive the income jointly where the amount of money received or entitled is typically apportioned to the capital provided to give life to the business. Assets owned by the partnership are also jointly shared by all members as well all legal responsibilities that is in relation to the partnership.

 

That said, liabilities are also shared by partners where a particular entity may be liable for debts and other expenses even in situations where the entity was not the cause of it.

 

Companies
A business being conducted as a company allows an entity or entities to classified as a separate legal entity from the business unlike sole traders and partnerships. Unlike partnerships, the company itself will be liable to pay the debts and other liabilities incurred by the company in its operation. That said, assets of the company and the owners’ are treated separately as well.

 

A company – should it choose to offer shares to the public – can generate income from the disposal or trade of company stakes, allowing for a greater access to capital.  However, the costs to set-up and run the company will be considerably higher as its structure is highly complex and tax reporting requirements will be considerably more onerous.

 

Companies in Australia are taxed on its net profit for that income year at a flat rate of 30%, which could be favourable or detrimental, all depending on the business’ own circumstances.

 

Trusts
For a business to operate as a trust, an entity must be the trustee – the entity responsible for the distribution of the income to the trust’s beneficiaries as well as the management of the assets owned by the trust. There several types of trust in Australia such as:

• discretionary trusts
• fixed trusts
• unit trusts
• hybrid trusts and;
• superannuation managed funds

Contrary to popular belief, a trustee is not entity in itself but is an agreement between the trustee and the trust’s beneficiaries. Having said that, a trustee will often be liable for losses incurred; however, the liability against a trustee will be limited tremendously if the trustee is a company and not an individual.

 

Unlike the other business structures, the beneficiaries of the trust are the entities liable to pay taxes for income or assets received from the trust where any distribution given by the trust must be included in a beneficiary’s annual income tax return. A trust of any sort will only be liable to pay taxes to the ATO is when it has any undistributed income for that financial year.

 

If you are unsure of what the business structure to apply for your business or have any concerns that is related to Australian business law, contact a business and commercial lawyer for legal assistance and advice.