We can advise you in the relevant considerations in selecting and establishing the right structure for your business in Australia.

Sole traders and partnerships

Many small retail and service businesses are run by sole traders or partnerships. These are businesses owned and operated in the names of the individuals involved. 

Advantages:

• Simple and cost effective to establish
• Simple and cheaper accounting requirements
• Can be easier to change ownership
• Simpler tax arrangements

Disadvantages:

• Personal assets exposed to business and financial risks
• Reduced scope for effective tax planning
• Fewer opportunities for business succession planning
• Limited ability for growth (eg franchise, multiple locations)

While these are simple and relatively low cost structures to establish, they are not necessarily the best choice of entity for a business and are generally not suited to larger trading businesses.

If you intend to trade as a sole trader or partnership under a name other than your personal name, you will need to register a business name in each State or Territory in which you intend to operate. Registering a business name does not give you ownership of the name. To protect your rights in a business name, you should register a trade mark.

Trusts

A business can be operated through one or more trusts.  Trusts have their own legal status and offer significant advantages over simpler structures.

A trust needs to be established by a deed of trust and must have a trustee and beneficiaries.  While individuals can be trustees, we recommend using a company as trustee to avoid some of the problems which can arise when an individual trustee dies, is incapacitated or is made bankrupt. The certainty which a corporate trustee provides is particularly important when the trustee conducts a business.

There are four main types of trusts:

·         discretionary trusts

·         fixed or unit trusts

·         hybrid trusts

·         superannuation trusts

A discretionary trust is one where there are a number of named or possible beneficiaries (sometimes described as a ‘class’ of beneficiaries) but the trust deed gives the trustees the power to decide which particular beneficiaries receive the income or assets of the trust.

A fixed trust, on the other hand, gives each beneficiary a specific share in the income and assets of the trust.  The most common fixed trust is a unit trust in which each ‘unit holder’ receives a specific number of units – much like shareholders in a company.

Discretionary trusts are often used for families and small businesses while unit trusts tend to be used when there are a larger number of owners in the business.

A more complex business might operate as a unit trust, with each unit holder in turn being a discretionary trust which owns the units on behalf of the family of one of the business principals.  This can be a very effective structure for business partners who are not related to each other.

Hybrid trusts have a combination of features taken from discretionary and fixed trusts. For example, they can include a fixed entitlement to capital but a discretionary entitlement to income.

Superannuation trusts are used to operate superannuation funds. ‘Self managed’ superannuation funds are often used by professionals and business people who want to take control of the investment of their superannuation.

Companies

Companies are relatively easy to establish in Australia, although overseas owners need to meet certain regulatory requirements, such as having a resident director, and there may be tax requirements to meet where a local subsidiary is to trade using loans from its offshore parent company.

Private or proprietary companies are the most common type of company and can have from 1 to 50 shareholders.  If a company is not owned by family members but has a number of unrelated shareholders or investors, it is common for the parties to sign a Shareholders Agreement to set out how they will operate the company and what happens if a shareholder wants to sell their shares.

Public companies normally have a larger number of shareholders and are listed on the stock exchange.

Different regulatory requirements apply for public companies and large proprietary companies, although all companies are governed by the Corporations Act and must lodge documents and annual statements with the corporations regulator (‘ASIC’ - the Australian Securities & Investments Commission).


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