A Legal Guide To Business Structuring
Written by: Gabrielle Andersen l Insight Team
In our last update, we focused on the steps in setting up a new business, including a brief overview of finding the appropriate structure for your business. Today we wanted to delve into this area further, and cover not only what to do if you’re starting a business from scratch, but also look at some important steps that you might need to take even if you’ve been in business for many years.
Business Structures
Finding the right business structure is not only an important first step when setting up a business, but one you will likely come back to as your business grows or its operational needs and the risks associated change. Last month we had an in-depth look into the types of business structures and how these interact and differ from one another.
Click here to read our guidance on: Setting Up A Business: A (Legal) Checklist.
We’ve put together a list of the most common business structures:
Sole Trader
This is the simplest and least expensive business structure, where people operate their business through their own personal name and ABN. Predominantly used by people working for themselves as freelancers, contractors, or tradespeople; however, the downside can be the lack of asset protection. A sole trader arrangement may also no longer be suitable once your business grows beyond just you.
Partnership
If you run a business with another person or group of people, a partnership may be the best structure for you. Partnerships have the benefit of being relatively easy and inexpensive to set up – often only needing an ABN and a Partnership Agreement. As each partner is jointly and severally liable for the debts of the partnership, or any claims made against the partnership business, personal liability and asset protection can be an issue.
Company
If asset protection is of importance, a company will be the most suitable structure. A company is a separate legal entity, meaning it can sue or be sued. Personal liability of the directors is therefore not automatic unless they have breached their legal obligations – known of as Directors’ Duties. Tax advantages may be another key reason why people choose to run their businesses under a company structure. It is important to note that in choosing a company structure you will have higher set-up costs, however, these may be often worth it from an asset protection standpoint.
Trust
Another common business structure is a trust, which is essentially an obligation on a person or entity (the trustee) to hold and operate the business assets for the benefit of others (the beneficiaries). A trust will have its own ABN and TFN, and it should also have its own formal trust deed outlining how the trust operates. While a company is a separate legal entity, a trust is more of a relationship between the trustee and the beneficiaries. The trustee itself is therefore legally liable for the debts of the trust, which is why from a structuring perspective it is often advisable to have a corporate trustee (being a company) rather than an individual as a trustee. Importantly, however, if an issue of liability arose, a trustee may be able to claim indemnity from the trust assets. One of the main reasons for using a trust is the tax benefit – a trust only distributes profits, and losses are retained within the trust and cannot be distributed to beneficiaries.
Joint Venture
A joint venture is often limited to a specific project, rather than an ongoing business structure. Joint ventures can be between individuals, companies or organisations, or a combination, and can provide a useful way to collaborate on a temporary basis without having to change your own business’s structure. A joint venture can also present a unique opportunity for combining resources or expertise and growing your business’s products or services in a relatively low-cost way. To set up a joint venture all that is usually required is a Joint Venture Agreement, which contains the formal agreement between the parties, including the specifics of the project, the roles each party will play and how the goals of the projects will be achieved. It should also address important matters such as confidentiality, IP and liability.
If you believe one of the above is the best structure for you but don’t know where to start, or you already have the structure in place but don’t have the necessary documentation (such as a Partnership Agreement, Shareholders Agreement or Joint Venture Agreement), contact Canny Legal so that we can assist in preparing one for you!
Setting Up A Company
Canny Insight and Canny Accounting can provide specialised business structuring advice that may focus on one of the above structures, or suggest that you use a combination of structures, depending on your particular business and organisational needs.
For today, we are going to focus on the process for setting up one of our most recommended business structures, which is a company.
The reason a company is usually the most suitable is that once created it allows for business growth in enabling the addition of new shareholders, investors and directors over time. A company has an unlimited lifespan and can be sold in its own right, which is a major benefit if you’ve grown a successful business and are looking to capitalise on that growth through selling the business. As a company can sue and be sued and has the benefit of reduced personal liability for the directors and shareholders.
There are set-up costs involved in creating and registering a company, and preparing a Shareholders Agreement. Most business owners find these expenses are worthwhile upfront costs in return for the benefits this structure provides.
In setting up a company, the following licenses, registrations and documentation may be needed:
- An ACN and/or ABN (sometimes an ABN includes the ACN);
- Tax File Number;
- Registering the business name;
- Trademarks for the business name or any logos, or unique products;
- Registering for GST if the annual turnover passes $75,000; and/or
- Shareholders Agreement.
Choosing the necessary officeholders for your company, such as the director(s) and secretary, is also an important step in setting up a company. These people will need to understand their legal obligations under the Corporations Act 2001 (Cth) and any relevant ASIC reporting requirements. They will be legally responsible for matters such as keeping accurate financial records, passing solvency resolutions, keeping company details up to date and adhering to any other ASIC reporting requirements.
The brilliance of our multi-service firm is that both Canny Insight and Canny Accounting can work together to set up a company for you and ensure that all bases are covered in finding and setting up the best structure for your business.
Shareholders Agreements
If you are setting up a company and you have more than two shareholders you will need a Shareholders Agreement, which is simply a contract between the shareholders and the company. It confirms the nature of the business being run by the company and sets out operational matters such as the appointment of new directors, the frequency of board and shareholders’ meetings and procedures for the issue or sale of shares.
The Shareholders Agreement will also address issues specifically relevant to the shareholders, such as the conduct and objectives expected of shareholders, the grounds for removing a shareholder, and how disputes between shareholders are to be dealt with.
Canny Insight can assist in preparing a Shareholders Agreement for your new or current company.
Protecting Your Personal Assets
When initially setting up a business your focus may be on getting enough work or selling enough products in order to sustain your financial needs. Business structuring costs are possibly not high on your list of priorities as you may first want to be sure your idea is viable. However, getting reliable business structuring advice could be the most significant decision you make as a business owner and potentially save you from great personal loss.
One of the ways you can best protect your personal assets when setting up your business structure is to consider where your personal assets are held, and in whose names, and how this may be impacted by the business structure. For example, if you have a family home you may wish to remove yourself from the title to that home if you are a director of the company. This is because directors have personal liability under the Corporations Act 2001 (Cth), such as for any breach of the Directors’ Duties.
Another means of asset protection is through having multiple companies managing separate areas of your business, such as a trading company, a company holding the assets of the business (for example any property or vehicles), and a company responsible for employees and wages. The reason being that a claim made against one company means the assets of the other (such as the asset holding company) are protected. This structure is not necessary or suitable for all businesses, however, it may be a structure worth considering if your business has grown or owns considerable assets.
Canny Insight + Your Business Structuring
There are a range of factors that need to be taken into account in business structuring, such as taxation considerations, and the nuances of your specific family and businesses circumstances, as well as any specific risk factors inherent in your business. There’s never going to be a one-size fits all structure. This is why obtaining business structuring advice that you can trust from Canny Insight and Canny Accounting is crucial. If you already have a business structure in place, now might also be a good time to meet with us to ensure this structure is still the most appropriate for your business and personal needs.
Get in touch with our team so we can walk you through business structuring, and find the best model for you.
