Business Structures in Australia
Selecting the right business structure for your business requires careful consideration. You need to consider the various advantages and disadvantages of different business structures, and match those considerations with the needs of your business. There is no perfect business structure, but choosing the best business structure can promote growth, profitability and save you from future hardships.
Business is a fluid environment and business structures are no different. The type of business structure suitable for your business today might change in the future. Leveraging the right business structure at the right time can help give you an advantage as your business grows and evolves.
Business Structure Types
It is important to understand that there are many types of commercial structures that are available. Some of these commercial structures are for specialised associations, not-for-profits and organisations. For most businesses, the main types of applicable business and commercial structures are:
- Sole Proprietor
- Unit Trust
- Discretionary Trust
- Joint Venture
The Right Business Structure
Choosing the right business structure involves balancing your circumstances and the needs of the business. A business is essentially a vehicle which has the purpose of bringing about transactions. Like a car, you need the right vehicle for the job. Your business structure needs to consider your business growth prospects and future revenue. Like a bigger vehicle, as your business grows, so too will your operational costs. It is important that when selecting your business structure, you consider all the features that are important to your business at present and into the future. Finally, you should also consider the resale value of your business structure, as different business structures are more valuable than others.
It may seem strange to compare a business to a vehicle, however, there are more to business structures than may be apparent. Choosing the wrong business structure can cause major hassles down the track. If you are starting a new business, then it’s important to get things right the first time. Choosing the right business structure allows you to focus on the growth of your business, rather than the distractions associated with choosing an ineffective business structure.
An Overview of Business Structure Features
The type of business structure chosen can affect the liability of the owner(s) and investor(s) in the business. Some business structures have no separate legal identity from the owner. This means liability from the business flows directly to the owner of the business and their personal assets. This means if the business is liable for an accident or mistake then the owner is also personally liable. Some business structures provide that the decisions of a partner create liability for all business partners. Other business structures create a separate legal entity for the business which restricts the liability of the owner(s) and/or investor(s). If the business is liable for an accident or mistake, in most cases the liability is restricted to the business. This can be effective in protecting your personal assets against liability in most cases.
Business Ownership and Management
The type of business structure you create effects what type of ownership there can be of the business and how the business is managed. Some business structures only allow a single owner who is also the sole manager, while other business structures allow one or many owners. There can be limits on the number of owners allowed for some business structures. Some business structures allow the owners to operate and manage the business, while other business structures separate the ownership and management of the business.
What type of ownership is right for you?
Here are a few important questions you will want to consider:
- Will you be operating the business alone or will there be other people or businesses involved?
- What position should the people or business have in the operation of business?
- Will there be other business partners or investors? If you want to take on business partners or investors in the near future this will affect the type of business structure you use.
- Will there be multiple structures such as a company and trust or a parent company and child company? For large businesses or where there are specialised business functions, products or services, it can make sense to harness multiple business structures.
Changing Business Ownership and Business Sale
In considering the type of business structure, a key consideration is being able to sell the business in the future. Business sale is common where a business wants to buy a competitor, where a business owner wants to retire or the business owner wants to change direction.
A merger usually occurs where two businesses are perceived to offer greater value as one merged entity or a related business structure, than as separate entities.
The type of business structure you choose can affect the value potential buyers see in your business. Your business structure and its perceived value, needs to be balanced against overheads and costs of running the different types of business structures. Some business structures allow flexibility in changing ownership without changing the underlying business structure. In the case where there are multiple owners of the business, you may want to consider how and when owners can sell their share of the business and how this could affect the operation of the business.
Business Succession & Continuity
Often not considered in business is what happens if you die or a business partner or co-owner of the business dies?
If you are running a small business you should consider business succession planning through your last Will and testament. You may want to consider whether anyone can take over the operation of the business if something happened to you, or if the business must be sold. If the business needs to be sold, you will want to consider the timeframe of the sale process. What powers would you need to grant to your executor and trustee to allow them to continue the operation of the business until its sold or handover occurs? What would happen to your customers and their products or services?
For other business structures, you may want to have succession rules through a contract or a shareholder agreement as to how the shares can be passed on. You might want the other business owners to have a right to purchase the deceased owner’s shares. How might death affect the operation of the business?
Business Tax Planning
Tax laws are very complex and frequently change. Our lawyers or associated tax specialists can provide specific advice about tax considerations. There are different tax rules for different business structures. Some of these tax rules can be advantageous or disadvantageous depending on the circumstances. A good place to start in business tax planning is to ask yourself how should I or the other people involved get paid? Do you need a salary or consistent stream of income or would occasional dividends or payments be better? Would it help to distribute the income to a few people or do you want to build up cash or capital in the business? Where should the value from the business flow to? What type of transactions will the business make? Will the business accumulate property and assets?
Tax factors that may need to be considered in a commercial structure include:
- Income tax including personal tax rates and company tax rates
- How and who is income to be distributed and what are the tax effects
- Capital gains tax and capital gains tax rollover availability
- Superannuation and whether this is tax deductible
- Goods and Services Tax
- Fringe Benefits Tax
- Can tax losses be distributed
- Payroll tax
- Duties and land tax
There are many considerations when it comes to choosing the right business structure. Our commercial lawyers provide business start-up legal advice and services to ensure you get the right business structure for you. In addition to business structure legal advice, our commercial lawyers can undertake changes to your business structure, or get your business setup so you can focus on growing and managing your business.
Our commercial lawyers can assist you with:
- Business structuring legal advice
- Incorporate a company including company constitutions and shareholder agreements;
- Create a partnership including partnership agreements;
- Create a sole trader structure;
- Create a joint venture;
- Creating trusts including family trusts and discretionary trusts;
- Ensure your new business name and trading names are trademark free; and
- Register trading names.
My Legal Crunch’s Commercial Lawyers will get your business setup fast, hassle-free and with strategic result driven advice to ensure your new business is given the start that it deserves.
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