Business Start Up

There are all kinds of things to consider when you are starting up a business, but the most important thing is to get the structure right. Choosing the right structure will depend on the kind of activities you intend to undertake, what kind of assets will be involved and what form of income will be generated.

The different structures that are available for running a business vary in complexity, administrative costs and compliance obligations. They have different consequences for taxation and asset protection and allow different kinds of control and involvement.

Sole traders

This is probably the simplest form of business structure. There is no separate legal entity and all the assets and liabilities of the business belong the individual personally. It is the simplest to establish, control and manage. A major disadvantage is that the sole trader structure offers no flexibility in tax planning. It does however allow for tax losses to be offset against the income of the individual and has significant Capital Gains Tax benefits.

As with all businesses, if a sole trader wants to use a business name he or she needs to register the name with the Department of Fair Trading. Depending on the nature of the business, business licenses may need to be obtained. A sole trader also needs to consider PAYG and GST obligations. Setting up as a sole trader is relatively straight forward, but you still need good advice, particularly as this structure is the most likely to leave any personal assets you have unprotected should the business get into trouble or fail.

Partnerships

Partnerships range from the very simple to the very complex, anything from a partnership of two individuals, set up to run a small business, to partnerships of large corporations carrying on a joint venture, to organisations such as some legal and accounting firms with hundreds of partners supported by complicated structures. A partnership is not a separate legal entity and the partners own the assets of the partnership jointly. Partnerships are governed by partnership legislation in each state. The legislation imposes certain compliance obligations on partnerships. Generally a partnership of individuals has the same problems for asset protection as the sole trader structure, although there are provisions allowing for limited liability partnerships. While a partnership can be established without any formal documentation, it is a good idea to have a written partnership agreement in order to define the rights and obligations of the partners. The administrative costs associated with a partnership will depend on the complexity of the structure.

Trusts

The main participants in a trust are the trustee and beneficiaries. The trustee owns the assets of the trust, not on its own behalf but for the benefit of the beneficiaries. The trustee need not be an individual, often corporate entities whose only role is to act as trustee are employed. There are two main kinds of trust which are used as business structures, the unit trust and the discretionary trust.

The beneficiaries of a unit trust are the unit holders who have a proprietary interest in all the assets of the trust. It is possible to set the trust up in such a way that different unit holders have different rights to the income or capital of the trust. The main advantage of a unit trust is the tax flexibility that it allows. The trust does not pay tax, but the unit holders incur tax on the profits.

The trustee of a discretionary trust has discretion about how the income and capital of the trust is distributed. A discretionary trust allows a high degree of control over the distribution of profits. Family businesses are often set up using discretionary trusts. The main advantage of a family trust is the ability to split income among family members and particularly to vary the distribution from year to year for tax planning purposes.

Trusts set up for the purpose of establishing and running businesses are set up using a trust deed. The trust deed needs to be carefully drafted to take full advantage of the benefits of the structure and to the give the trustee the power it needs.

Company

The main advantage of a company structure is that it is a separate legal entity and provides limited liability for shareholders and therefore protection for individuals involved in the business.

Another advantage is that a company is the most well recognised and commercially understood structure. This can prove very useful when dealing with clients and potential creditors, eg when trying to get finance from banks. This can be a distinct advantage over a trust or partnership structure.

The main disadvantages of a company structure are the compliance obligations and associated ongoing costs of running the business. Companies must comply with the Corporations Act 2001 and the company structure has the most formal requirements in terms of management, accounting and reporting obligations . Directors of companies have a high level of responsibility and accountability and can be held personally liable if for example the company trades while insolvent.

To establish a company you will need to decide who the directors and shareholders will be. This is an important decision that will affect the management of the company and impact on asset protection and tax planning. The appropriate forms will need to be lodged with the Australian Securities and Investments Commission and you will need to be aware of the ongoing compliance obligations.

There are also almost numerous possibilities for using a combination or two or more of these structures. For example, a business could be set up using a partnership supported by a series of trusts or companies, or a family trust, rather than individuals, could own shares in a company. There is no one structure that is necessarily better. It will depend on the nature of the business and the individual circumstances of the people setting the business up. Deciding what structure will work best for you and your business is not a simple task. Good advice from a lawyer can help you assess the advantages and pitfalls of each structure and help you decide what will work best for the particular business, ensuring its success while protecting your assets.

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You should consult a lawyer for individual advice regarding your own situation.