The first and probably the most important legal requirement for your new business is deciding on its legal structure. Each type of structure has its own advantages and disadvantages.
You should think carefully about which structure would best suit your circumstances. Such considerations may include your personal relationships, finances or the level of control that you wish to have over the day to day running of the business.
There are 4 main types of legal entities available to structure your business:
What is a sole trader?
A sole trader operates a business on their own and that person will be solely and personally responsible for all assets and liabilities related to the business. A sole trader is responsible for their own superannuation and tax.
Some legal requirements of a sole trader
You use your own Tax File Number (TFN) and report your business income using this tax number.
There is no legal requirement to register a business as a sole trader. However, it would be prudent to register your business name and you must obtain an Australian Business Number (ABN). A sole trader only needs to register for GST if their annual GST turnover is $75,000 or more.
Advantages and disadvantages of a sole trader
You are the sole owner - all profits and debts/responsibilities are yours and you are personally responsible
There are fewer statutory and government obligations to meet
There is greater privacy - you do not need to disclose profits to the public
There is no separate legal entity - you have sole ownership and control
Easy to set up and run.
What is a partnership?
A partnership is where 2 or more persons operate a business as co-owners. All co-owners will be responsible for the assets and liabilities related to the business. A partnership is not a separate legal entity and all partners are personally responsible.
Some legal requirements of a partnership
In general, all partners will have control of the operations and management of the business, unlessotherwise stated in a Partnership Agreement. If you intend to enter into a partnership, it is advisable to have a Partnership Agreement in place.
Advantages and disadvantages of a partnership
Disagreements between owners can occur which can inhibit the operations of the business and cause conflict;
Profits/losses shared between owners;
More operational flexibility as owners can take holidays, etc;
Ability to change structure, flexible structure;
Less complex to set up and administer than a company.
What is a trust?
A trust is where a trustee carries on a business on behalf of its beneficiaries. A trust is a complex structure and is not considered a distinct legal entity. A trustee can decide how and where profits are distributed. Most commonly, a trustee is a company.
Some legal requirements for trusts
Trusts are complex structures and it is recommended that you obtain legal advice if you would like to operate a trust. There are complex and many legal, financial and other obligations related to running a trust. A Trust Deed is usually required to operate a trust.
Advantages and disadvantages of a trust
Operations of the business are limited by the Trust Deed;
Extensive and complicated regulations and restrictions apply;
An 'Appointer' has the power to replace the Trustee
A solicitor or accountant usually needs to set up a trust, therefore, It's the most expensive of all the business structures;
Its not a legal entity - it simply holds property for the benefit of its beneficiaries;
It can be more tax effective and flexible;
It provides asset protection as assets and may limit liability of the business;
Separates the control of an asset from its owner.
What is a company?
A Company is a distinct legal entity separate to its shareholders. A company can also be listed as a public company, by listing shares on the stock exchange. A Proprietary Limited Company, is a private company, that cannot be owned by the public. This is usually denoted by 'Pty Ltd.' This type of structure is suitable for larger businesses, or those with some risks attached to it.
Legal requirements of a company
A company must be registered with ASIC. You will also need to disclose certain details with ASIC, such as details of shareholders, directors, structure and capital. These are ongoing requirements that need to be updated when changes occur. Other documents such as a constitution and shareholder documents may also be required. A company must have an Australian Company Number (ACN). This is separate to an ABN.
Advantages and disadvantages of a company
Separate legal entity, i.e. owners are not personally responsible for debts/assets;
Complex to set up in terms of legal obligations/requirements;
Ongoing legal obligations;
More regulated than other business structures;
Complex tax requirements;
Directors can be held personally liable for dishonesty, etc.
There are a number of different legal structures available for a business. You should think about what structure will best suit your circumstances. To make an informed choice you need to understand what the differences are between the different structural arrangements. This includes things like the cost of establishment, complexity of setting up and maintaining the structure, owner’s control, tax and liability implications and options for growth or ceasing the business.
Legal structures such as not-for-profit, government organisations, franchise and cooperatives are not considered within the context of starting a small business. You may wish to get professional advice about which structure would best suit your business.
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This article contains information of a general nature only and is not specific to your circumstances. This is not legal advice and should not be relied upon without independent legal or financial advice.