No matter what stage your business is in or the type of business
you operate, it is critical to have the right business structure in
place for many reasons, including to safeguard your personal and
business assets, minimise risk and tax implications and optimise
returns. Each business structure has its own benefits and risks as
well as criteria and regulatory requirements, which should be
considered before adopting a business structure that is ideal for
your business and personal needs.

Sole traders and partnerships

The more simple and less complex business structures are sole
trader and partnership structures. They are generally quite easy
and inexpensive to set up and maintain. While a sole trader
structure involves an individual operating the business in their
own name with unlimited liability, a partnership structure is
between two or more parties and can be structured as a general,
limited or incorporated limited partnership. Other than an
incorporated limited partnership, each partner under a general or
limited partnership is jointly liable with the other partners.

Unlike sole traders and partnerships, companies and trusts are
often the preferred business structures for small to medium-sized
enterprises. This is predominantly due to the numerous benefits,
including limited liability capabilities associated with these
structures that outweigh the often more expensive and complex set
up and maintenance of these structures.

Companies

In Australia, companies are governed by the Corporations
Act 2001 (Cth) and can be structured in a manner that is
consistent with the nature of the business and its industry,
intended number of shareholders and officeholders, the business
plan, and the business’ annual turnover and profit. Generally,
a company is either registered as a:

1. private company (limited by shares or unlimited); or




2. public company (limited by shares, limited by guarantee,
   unlimited or no liability).

A profound benefit of adopting a company structure is that a
company is a separate legal entity, and in that capacity, is
capable of owning assets and incurring liabilities independent from
its shareholders and directors. A company in its own capacity is
also able to sue and be sued.

Shareholders of a company generally have limited liability,
which means that they are not in their personal capacity liable for
the debts of the company. However, company directors have an
obligation under the Corporations Act to prevent insolvent
trading of the company. Therefore, under certain circumstances,
company directors may be held personally liable for the debts of
the company, potentially exposing their personal assets. These
risks are further exacerbated where directors and shareholders have
provided personal guarantees. This personal liability of directors
prescribed under the Corporations Act and any personal
guarantees provided by directors or shareholders can survive the
cessation and deregistration of the company.

In order to minimise potential risks and optimise the benefits
of a particular company structure, it is imperative to have proper
documentation in place, which includes a company constitution and,
in the particular case of a private company, a shareholders’
agreement.

Trusts

Similar to companies, setting up trusts can have the benefit of
asset protection and tax minimisation. Establishing a trust
involves the trustee or trustees (whether individuals or corporate
trustees) to legally hold assets in trust and ultimately for the
benefit of the beneficiaries of the trust.

There are many types of trusts used in Australia, such as
discretionary or family trusts, unit trusts, hybrid trusts, bare
trusts and others. Each type of trust has its distinct features and
choosing the right trust is effectively contingent on the
individual or business needs. Where a trust is required for
business or investment purposes, often trusts that offer the most
effective tax benefits, wealth accumulation and asset protection
are preferred. With that said, there is some evidence of
correlation between those benefits and discretionary (or family)
trusts and unit trusts.

1. Discretionary or family trusts are commonly established by
   families and small or family businesses, where the trustee has the
   power to allocate such of the trust capital and/or income to such
   of the beneficiaries or class of beneficiaries as the trustee in
   its discretion considers appropriate. Under a family trust, the
   trustee may hold the trust asset for generations before ultimately
   distributing the asset to the relevant beneficiary.




2. Unit trusts involves the beneficiaries of the trust to hold
   certain number of units in the trust (unitholders) that are
   transferrable subject to the terms of the unit trust, similar to
   shares held in a company by its shareholders.

Unlike companies, a trust is not a legal entity. Instead, it is
a legal relationship between the beneficiaries and the trustee,
where the trustee owes legal and fiduciary duties to the
beneficiaries.

Trusts are generally established through trust deeds, which must
be consistent with the nature and type of the trust as well as the
objective of the trust being created. In addition to trust deeds,
in NSW, the Trustee Act 1925 (NSW) governs trusts to a
certain extent.

Key Takeaways

It is important for businesses to ensure that they have adopted
the right structure for their business to, amongst other things,
maximise asset protection and minimise tax implications and limit
liability. You may currently have a business structure that may not
be right for you, limiting your ability to maximise on the benefits
available under other business structures. In that case, you may
want to consider restructuring your business to reap the benefits
through a structure that is more appropriate for you and your
business. Irrespective of the business structure, it is essential
for businesses initially assess both the benefits and risks
associated with any business structure.