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Choosing a Business Structure

Choosing the right business structure can make or break your business (or investment). Stanley & Co Lawyers have over 20 years experience working with sole traders, small to medium businesses and large companies. If you are considering starting a business, or wish to restructure an existing venture, our experienced commercial lawyers in Adelaide will help you navigate the best business structure at an affordable fixed fee.

In determining the appropriate business structure, your short and long term needs should be considered. Other important matters such as taxation, impact of other legislation, logistics and risk minimisation are also important. Stanley & Co Lawyers will help you select the best business structure to satisfy your business objectives. With over 20 years of experience, our experienced commercial lawyers in Adelaide are experts at picking the best business structure.

Our commercial lawyers can help you setup the following business structures:

Sole trader

This entity is for an individual who trades in their personal name.

Formation: The formation of a sole trader occurs when the individual decides to start operating in a business like manner. There is no deed of creation or documentation outlining the rights and obligations of the sole trader. This means the cost of setup is low. The sole trader may operate in their personal name, or obtain and register a business name under which it operates. The entity ceases upon the death of the individual.

Liability: All liabilities of the sole trader business are the responsibility of the individual.

Asset Protection: This structure provides no specific asset protection, although this may be mitigated with insurance.

Control: The business owner has unrestricted control.

Taxation: The sole trader has the same tax file number as the individual, and would obtain an Australian Business Number (ABN) which would be linked to the business operations. The sole trader would be required to register for GST if business turnover is greater than $75,000 per year and is required to lodge Business Activity Statements (BAS) on a regular basis. All profits are considered to be earned by the individual and all profits are taxable to the individual at their individual marginal tax rate. There is no ability to stream or split income to another entity or individual. Losses made by the sole trade are attributable to the individual and for tax purposes may be offset against other income such as salary or investment income of the individual. This is subject to non-commercial loss provisions and capital loss rules. The individual may be entitled to tax deductions for superannuation contributions made on a self-employed basis up to annual limits. For capital gains tax, the individual is entitled to a 50% general discount and will likely be entitled to the small business CGT concessions.

Other features: Sole traders may employ other persons, including their relatives, on a genuine arm’s length basis (i.e. cannot be used as income splitting mechanism).

Partnerships

A partnership is an association of two or more people engaged in business in which the profits and losses are shared equally.

Formation: the formation of a partnership requires a voluntary association of persons who co-own the business and intend to conduct the business for profit. Persons can form a partnership by written or oral agreement (we always recommend to have things in writing) and a partnership agreement often governs the partner’s relations to each other and to the partnership. The term person may include: individuals, corporations or other partnerships and business associations. Some partnerships may also contain individuals as well as corporations.

Relationship of partners to each other: Each partner has an equal right to share in the profits of the partnership. Unless the partnership agreement states otherwise, partners share profits equally. Also, partners must contribute equally to the partnership losses unless a partnership agreement provides for another arrangement.

Relationship of the partners to 3rd parties: A partner is an agent of the partnership. When a partner has the apparent or actual authority and acts on behalf of the business, the partner binds the partnership and each of the partners for the result obligations. This is why it is important to think carefully about who you are going to partner up with.

Liability: Each partner is jointly liable with the partnership for the obligations of the partnership.

Asset protection: This structure does not provide specific asset protection, although this may be mitigated with insurance.

Control: Partners have control subject to rights in partnership agreement.

Taxation: As partnerships are considered an association of co-owners, each of the partners is taxed on her or his proportional share of partnership profits. This is considered “pass-through” taxation in which only the individual partners are taxed. Although a partnership is required to file annual tax returns, it is not taxed as a separate entity. Instead, the profits of the partnership “pass through” to the individual partners, who must then pay individual taxes on such income.

Discretionary trusts

Trusts Generally

A trust is a fiduciary relationship in which one person (the trustee) holds the title to property (the trust estate or trust property) for the benefit of another (the beneficiary). Property is set aside with discretion that it be used for the benefit of another, the beneficiary, and which provides that the trustee has the right to accumulate, rather than pay out to the beneficiary, the annual income generated by the property or a portion of the property itself.

Formation: Trusts may exist without explicit intention by the parties to create a trust – it is the existence of the necessary relationship that forms a trust, not formalities. However, to eliminate all doubt as to existence, and powers of trustees and appointors, all trust arrangements should be formalized and documented in a deed. Stanley & Co Lawyers can do this for you.

Key Roles: 

  • Trustee – holds the title to property with instructions to use it for the benefit of another;
  • Beneficiary – a person who is entitled to receive a benefit, either income or capital, of the trust;
  • Settlor – who contributes the initial trust asset to bring the trust into existence;
  • Appointor – who generally has rights to appoint, replace and remove trustees.

Asset protection: Property and assets can be moved into a trust for protection from creditors, to maintain an estate until a beneficiary becomes old enough to have legal possession, or isolate valuable assets from a trading company that may become exposed to litigation. To achieve this the funds must be a gift to the trust, not loaned, as the loan would remain an asset of the individual available to creditors.

Discretionary Trust

Features: Income may be accumulated for future distributions to the income beneficiaries or added to the principal of a trust (also known as the “corpus“), for the benefit of the “remainderman” (legalese for: a person who inherits or is entitled to inherit property upon the termination of the estate of the former owner.)

Discretionary Nature: This is a discretionary trust since the trustee has discretion to give or deny the beneficiary some benefits under the trust. A beneficiary cannot force the trustee to use any of the trust property for the beneficiary’s advantage.

Beneficiary Interest: In this type of trust the beneficiary has no interest that can be transferred or reached by creditors unless the trustee decides to pay or apply some of the trust property for the benefit of the beneficiary. Due to adverse tax consequences, most Australian trust deeds require the annual income of the trust to be distributed or applied each year, and therefore beneficiaries usually have an interest in the trust assets.

Taxation: Annual income that is not distributed to beneficiaries is taxable to the trust at the top marginal taxation rates. Annual income distributed to beneficiaries is taxable to the beneficiary.

Companies

A company is a separate legal entity that is created in accordance with the Corporations Act. Individual ownership is documented by their shareholding and their liability is limited to the value of their shareholding.

Formation: A company is created in accordance with the Corporations Act. The objects of the company are documented in the company Constitution. Companies are regulated by the Australian Securities and Investment Commission (ASIC). Every company has a unique individual name and is identified by an Australian Company Number (A.C.N.).

Features: A company is a separate legal entity and can therefore own and trade property. It is run by directors and owned by shareholders. Ownership may be changed by purchase, issue, or sale of shares. Allocation of income to owners is optional, and is in the form of dividends.

Liability: Liabilities incurred are the responsibility of the company and not a liability of owners (shareholders). Directors may be personally liable if a company is found to be trading while insolvent.

Asset Protection: This structure protects owners (shareholders). The company’s assets are available to meet the liabilities of the company.

Control: Directors control day-to-day activity, but shareholders may appoint and remove directors.

Taxation: Companies are taxed as separate legal entities. The company tax rate is lower than the highest personal taxation rates, and some taxation concessions available to individuals are not available to companies, such as capital gains tax concessions.

Winding Up: Small companies with minimal assets can be deregistered completing simple documentation and lodging forms with ASIC. Companies that do not meet the deregistration criteria are wound up by liquidation. This process requires realizing all company assets, paying liabilities including tax, with the surplus being returned to shareholders.

Self Managed Superfunds

SMSF’s are a tax structure with sole purpose of providing for retirement.

Formation: SMSF’s are created by a deed. The deed contains provisions and restrictions including the inability of the beneficiary to access the capital or income of the SMSF until certain conditions are met, the most common one being retirement.

Key Roles: 

  • Trustee – holds the title to property with instructions to use it for the benefit of another;
  • Beneficiary – also known as the Member, is the person for who the trust funds are being accumulated;

Asset Protection: Property and assets are generally protected from creditors.

Features: SMSF’s cannot operate a business, but can own assets including business assets. Transactions with related parties must be conducted at arm’s length, and are prohibited if it results in members and their relatives obtaining an advantage prior to retirement. SMSF’s are prohibited from borrowing money, except within strictly structured arrangements. The types of investments that a SMSF can accumulate include cash, domestic and international securities, debt securities and real estate. The SMSF member may not access their beneficial interest in the SMSF until a condition of release is achieved, commonly retiring on or after attaining preservation age.

Taxation: Annual income of the SMSF is taxed at a concessional tax rate (15%).

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