Understanding Business Structures

Understanding Business Structures

In the ever-evolving landscape of business, selecting the appropriate structure is a critical decision that can profoundly impact the success and longevity of any enterprise. At Elamine Lawyers, we understand that navigating the complexities of business structuring requires careful consideration and tailored legal advice. In this comprehensive guide, we aim to shed light on various business structures, their implications, and the factors to consider when making this crucial decision.

Sole Proprietorship:

This indicates that the business is owned by a single individual, leading to the unity that the business entity and the owner are classified as one single entity. As a sole proprietor, you’re legally responsible for all aspects of your business including any debts and losses and day-to-day business decisions.

These are the characteristics of this business structure:

• Easy to operate and set up;
• Comprehensive control over assets and business decisions;
• Cost-effectiveness;
• Utilise your individual Tax File Number (TFN) for tax return submissions;
• Unlimited liability, putting personal assets at risk if complications arise; and
• You’re personally responsible for paying taxes on all earned income.

Company:

A company stands distinct as a separate legal entity, akin to a natural person and can incur debt, sue and be sued. A notable departure from the liability associated with sole traders or partnerships, the members of a company are shielded from personal responsibility for the company’s debts. Their financial commitment extends only to the payment of any unpaid amount on their shares if called upon.

While the establishment of a company involves a higher cost and complexity in comparison to other structures it proves advantageous for those anticipating variable business income.

Moreover, the flexibility to offset future profits with losses adds an appealing dimension to the company structure, making it a preferred choice for individuals seeking a robust and versatile business framework.

These represent the traits inherent in the business structure of a company:

• Distinct legal entity;
• Wider access to capital;
• More complex business structure to start and run;
• Company members have limited liability;
• Means that business operations are controlled by directors and owned by the shareholders; and
• Requires an annual company tax return to be lodged with the Australian Taxation Office (ATO).

Partnership:

A partnership is formed when two or more individuals embark on a business venture together. Partnership laws are regulated by individual states and territories. In Victoria, the governing legislation is the Partnership Act of 1958. The three main partnerships are as follows:  

1. General Partnerships: In a general partnership, each partner is equally responsible for the management of the business’s debts and obligations, and there is no limited liability protection.
2. Limited Partnerships: a limited partnership combines general partners with unlimited liability and limited partners with liability capped at their investment. The number of limited partners is unrestricted. Registration with Consumer Affairs Victoria (CAV) is required, involving submission of documentation and a partnership agreement outlining roles. This structure offers flexibility for an investment in the business.
3. Incorporated Limited Partnerships: An incorporated limited partnership is a partnership designed for venture capital investments, made possible by the federal Venture Capital Act 2002 (Cth) and related state and territory laws. Venture capital involves financial support from investors to start-ups and small businesses with anticipated long-term growth. It poses a high risk for investors since funding is often provided during challenging stages in a business’s development, where failure is more likely. Despite the risk, the potential for above-average returns makes it an appealing investment.

Trust:

In a trust structure, a trustee manages your business for the benefit of the beneficiaries, who can be individuals or companies. The trustee oversees all aspects, including income and losses, and decides how profits are distributed. While establishing trusts is complex and expensive, they serve to protect business assets.

Establishing trust requires expertise and time. For a thorough and proper setup, it is advisable to consult with one of our qualified, licensed professionals who can guide you through the process and clarify the necessary registrations.

The key elements of a trust are as follows:

• Can be a costly process to set up and operate;
• Due to the complexity of trusts, they usually require licensed professionals help to clarify and set up;
• Assets are protected;
• Dissolving or making changes to the structure can be challenging once established; and
• Requires yearly administrative tasks to be completed by the trustee.

Cooperative:

A cooperative structure is an entity designed to benefit its members. These entities operate in various sectors, either as profit-sharing businesses or non-profit organisations. This aims to offer goods and services that might be inaccessible or too expensive for individuals. Guided by principles such as non-discrimination, democracy, community care and independence in an attempt to create a more equitable society. Members are expected to actively engage and contribute, with an equal voice in organisational decisions.  

Co-operatives fall into two categories: distributing and non-distributing. Distributing co-operatives can share annual profits with members, requiring share capital and minimum share ownership. Non-distributing co-operatives cannot distribute profits, and their earnings must align with the co-operative’s purpose. These co-operatives may or may not issue shares but often charge a subscription fee. Non-distributing co-operatives are classified as ‘not for profit’ for taxation purposes.

The following are the key elements of a co-operative business:

• Often have a community-oriented approach, considering the impact of their actions on the broader community;
• All active members have an equal vote at general meetings regardless of their shareholdings;
• Provide services to their members rather than maximise a financial return on investment;
• Limited liability entities, meaning the member has no direct responsibility for debts of the co-operative; and
• Anyone who can comply with a co-operative’s rules can apply to be a member, with the directors making decisions about the sustainability of the applicants.

Indigenous Corporations:

Indigenous business owners can register as an Indigenous corporation through the Office of the Registrar of Indigenous Corporations (ORIC) to access additional benefits. These corporations are formed to address diverse needs such as education, housing, legal acquisition and cultural promotion, playing a crucial role in supporting Aboriginal and Torres Strait Islander communities.

The following steps need to be taken to register your business as an indigenous corporation:

1. Visit the ORIC Website: this is where you can find information and resources related to the registration process to better understand whether your business fits the necessary qualifications for registration.
2. Complete Application Forms: fill out the relevant application forms provided by ORIC. These forms will typically require information about the corporation’s structure, objectives, and key personnel. You will need to identify your members, create a rule book, meet the pre-incorporation requirements, consider any exemptions and then lodge the application.
3. Submit the Application: submit the completed application forms and accompanying documents to the ORIC. Ensure that you provide accurate and complete information.
4. Wait for Approval.
5. Receive Certificate of Incorporation: Upon approval of the application, you will be issued a Certificate of Incorporation, solidifying the official registration of your Indigenous corporation.
6. Comply with Ongoing Requirements: Following registration, ensure strict adherence to any continuous reporting or compliance obligations stipulated by ORIC. This may involve submitting annual reports and keeping corporate details up-to-date as necessary.  

For more information about the steps to register as an Indigenous corporation please visit the ORIC website.

Joint Venture:

A joint venture involves two or more individuals, companies or organisations collaborating for a specific purpose or project, which is distinct from continuous business operations. Joint ventures can be established for a short- or long-term initiatives, such as research and development, launching a new product or service, and expanding into different markets. Each participant in the joint venture bears responsibility for its profits, losses, and associated costs. However, the venture itself operates as a separate entity, independent of the participants’ other business interests.

A joint venture agreement is legally binding and governs the relationship between the involved parties, outlining aspects such as the structure, governance, financial contributions, profit and loss distribution, dispute resolution processes, and conditions for leaving or terminating the agreement.

The advantages of a joint venture are as follows:

• Encompasses accessibility for businesses of all sizes;
• Potential for business growth;
• Collaborative opportunities; and
• Cost savings.

Seeking legal counsel is strongly recommended before entering into a joint venture agreement.