Starting New Business

One of the most important decisions you will need to make when starting a business is the business structure that best suits your needs. Generally, the desirous characteristics of a good business structure are:

• flexibility so that the structure can accommodate changing circumstances
• provides adequate asset protection
• minimise costs, particularly tax
• allows for efficient distribution of profits

The possible structures available to operate a business include:

Sole proprietorship (not seperate legal entity)

A sole proprietor is an individual. All assets and liabilities of the business belong to the individual personally. The assets and liabilities are not differentiated between personal and business. Therefore, creditors have rights to the personal assets of the individual should there be insufficient business assets. Hence, the sole proprietor has unlimited liability.

Partnership (not seperate legal entity)

A partnership is defined as the legal relation that subsists between persons carrying on a business in common with a view of profit. Each partner is entitled to take part in the management of the partnership. Acts or instrument done or executed in the partnership's name, by any partner authorised, is binding on the firm and all the partners. A partner can bind the partnership to the extent of their actual or apparent authority. A partnership is not a separate legal entity, and all the assets of the partnership are owned by partners jointly. In relation to liabilities of the partnership, as similar to sole proprietorship, creditors have rights to the personal assets of the individual partners should there be insufficient business assets. Each partner is jointly and severally liable for the liabilities of the partnership. Each partner is fully liable to creditors despite any agreement amongst the partners to limit liability. Partnerships are regulated by the Partnership Act 1892 (NSW).

Company (seperate legal entity)

A company is separate legal entities that is able to enter into contract, sue and be sued, holds assets, and accrue liabilities, in its own name. A company consist of shareholders (owners of the business and ones who put capital into the company) and directors. The directors manage the day to day operations of the company, and whilst the shareholders have no right to management, except the election of the directors at general meetings. As directors are managing the company for the benefit of shareholders, numerous obligations and duties are imposed on directors. It is common in closely held proprietary companies to have shareholders also acting as directors. Companies only require at least one shareholder and one director, and that one shareholder can be the same person as the one director. The commercial advantage of companies is that the structure offer limited liability for shareholders (owners). Creditors have no right to the personal assets of the shareholders. Companies are regulated by Corporations Act 2001 (Cth).

Trust (discretionary or unit)

A trust exists when the holder of assets is holding the assets not for his or her own benefit, but for the benefit of another person or purpose. The trustee is the holder of the assets, and the beneficiary is the person benefiting. Because of its nature, it is not necessary to disclose the fact that a trust is in existence in respect of most commercial transactions. The trust is governed by the trust deed, and, where relevant, the state Trustee Act. Under a discretionary trust, the trustee has a discretion as to who distribute or apply the income and capital of the trust. In a unit trust, units held by the unitholder (beneficiary) confers upon him or her a proprietary interest in the property of the trust. It is possible to issue units which have rights only to the income or different classes of income of the trust, or to capital of the trust, or to capital gains of the trust or any other combination. Unit trusts are in many ways similar to companies in that the trust is separate from unitholders; the unitholders subscribe equity on the units.

GK & Co. Certified Practising Accountants. Registered Tax Agents.

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