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Business Structures and Setting up Your Business

So, if you are a small business, you need to be across the basics in business law.


  1. First, you need to decide what legal structure best suits your business.

Be aware - the legal structure you choose affects your taxation obligations, the structure of your leadership/Board, your finances, and even dictates the amount of staff and revenue you are able to acquire.


The nature of your business will affect the structure of your business. The structure of your business will often affect your tax and other legal requirements.


For example, if you are a SOLE TRADER, you are legally responsible for all of the aspects of your business. The legal entity of a COMPANY is separate from you. A PARTNERSHIP shares the income and losses between them. A TRUST has a TRUSTEE who carries out the business on behalf of, and for the benefit of the MEMBERS.


Here is a breakdown ....


1.A SOLE TRADER:

A sole trader business structure:

  • is simple to set up and operate

  • gives you full control of your assets and business decisions

  • requires fewer reporting requirements and is generally a low-cost structure

  • allows you to use your individual tax file number (TFN) to lodge tax returns

  • doesn't require a separate business bank account, although this is recommended to make it easier to keep track of your business income and expenses

  • requires you to keep financial records for at least 5 years

  • has unlimited liability and all your personal assets are at risk if things go wrong

  • doesn’t allow you to split business profits or losses made with family members

  • makes you personally liable to pay tax on all the income derived

If you do decide to take on any employees there are obligations you must comply with such as workers' compensation insurance and superannuation contributions.


A company business structure is a separate legal entity, unlike a sole trader or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue and be sued.

As a member you’re not liable (in your capacity as a member) for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you are called on to do so. However, directors of the company may be held personally liable if found to be in breach of their legal obligations.

Companies are expensive and complicated to set up, and generally suit people who expect their business income to be highly variable, and want the option to use losses to offset future profits.

There are key elements you should know if you’re looking at starting your business as a company. A company:

  • is a separate legal entity

  • is a more complex business structure to start and run

  • involves higher set up and running costs than other structures

  • requires you to understand and comply with all obligations under the Corporations Act 2001- external site

  • means that business operations are controlled by directors and owned by the shareholders

  • means company members have limited liability

  • means the money the business earns belongs to the company

  • requires an annual company tax return to be lodged with the Australian Taxation Office (ATO)

  • requires you to complete an annual review and pay an annual review fee

  • directors are required to complete a declaration of solvency each year

  • means wider access to capital

  • directors are required to have a director ID- with the Australian Business Registry Services .

Your company must register for goods and services tax (GST) if your turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000. The ATO has more detailed information on your tax obligations as a company- external site.

Companies and directors have key legal and reporting obligations they must comply with. Some of the more common obligations include:

  • update Australian Securities and Investments Commission (ASIC) within 28 days of key changes to company details

  • keep financial records

  • understand and comply with all your obligations as a director


1.C PARTNERSHIP:

There are 3 main types of partnerships:

  1. General partnership (GP) – is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.

  2. Limited partnership (LP) – is made up of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.

  3. Incorporated Limited Partnership (ILP) - is where partners in an ILP can have limited liability for the debts of the business. However under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.

If you’re looking at setting up a partnership structure consider the following key elements. A partnership business structure:

  • are relatively easy and inexpensive to set up

  • have minimal reporting requirements

  • require separate tax file numbers (TFN)

  • must apply for an Australian business number (ABN) and use it for all business dealings

  • share control and management of the business

  • don’t pay income tax on the income earned - each partner pays tax on the share of the net partnership income each receives

  • require a partnership tax return to be lodged with the Australian Taxation Office (ATO) each year

  • require each partner to be responsible for their own superannuation arrangements

  • must register for GST if turnover is $75,000 or more


1.D COOPERATIVES:

A co-operative structure is a legally incorporated entity designed to serve the interests of its members. Co-operatives carry on businesses in all sectors and they may be profit sharing enterprises or non-profit organisations. They serve their members by providing goods and services that may be unavailable or too costly to access as individuals. They share costs and carry on their enterprise under principles of:

  • non-discrimination

  • democracy

  • independence

  • education and care for communities.

Generally, all members are expected to use or contribute to their co-operative and have an equal say in the running of the organisation. Co-operatives are subject to state and territory legislation the Co-operatives National Law.


There are two types of co-operatives:

  1. Distributing co-operatives: can distribute any annual profits to members. A distributing co-operative must have share capital and members must own the minimum number of shares specified in the co-op rules

  2. Non-distributing co-operatives: can’t share profits with members. All profits must further the co-operative’s purpose. It may or may not issue any shares to members. If the co-operative does not have share capital it usually charges members a regular subscription fee. For taxation purposes, non-distributing co-operatives meet the ‘not for profit’ definition.

There are key elements you should know if you’re looking at starting your business as a co-operative:

  • a minimum of 5 members is required

  • they are governed by a board of directors that is elected by the members

  • all members must maintain an active relationship with their co-operative by using or contributing to its main activities

  • all active members have an equal vote at general meetings regardless of their shareholding

  • co-operatives are limited liability entities, meaning that members have no direct responsibility for debts of the co-operative

  • directors of the co-operative owe legal duties to the co-operative and under the law that may lead to prosecution and compensation if they are negligent, reckless or fraudulent in carrying out their responsibilities

  • co-operatives are formed to provide services to their members rather than to maximise a financial return on investment

  • members are rewarded by having access to less costly or better goods and services, these rewards may be in the form of rebates, or for distributing co-operatives, there may be limited dividends on their shares

  • anyone who can comply with a co-operative’s rules can apply to be a member, with the directors making decisions about the suitability of applicants

  • members, other than directors, can be under 18, though these members cannot stand for office and do not have the right to vote

All co-operative members must be active, the types of members include:

  • Customer-owned co-operative: members jointly purchase goods and services, improving value for money and access to expert advice.

  • Worker-owned co-operative: members of a worker co-operative are the employees of the co-operative and the co-operative provides work for its members.

  • Producer-owned co-operative: smaller businesses can group together in producer-owned co-operatives to share supply chain costs and reach markets.

  • Multi-stakeholder co-operative: formally allow for governance by representatives of two or more stakeholder groups within the same organisation.


1.E JOINT VENTURES:

A joint venture is 2 or more people, companies or organisations who work together for specific purpose or project, rather than as an ongoing business. You may decide to enter into a joint venture agreement for short and long-term projects, such as to:

  • research and development

  • create a new product

  • provide a new service

  • expand markets.

Each of the participants in the joint venture is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants' other business interests.

The benefits of a joint venture include:

  • businesses of any size can enter into a joint venture agreement

  • it is a temporary arrangement

  • can help you grow your business

  • the opportunity to collaborate and combine resources or expertise

  • save money.

A joint venture agreement is a legally binding agreement that governs the relationship between the people or companies in the joint venture.Some of the inclusions of joint venture agreement are:

  • the structure, governance and obligations

  • financial contributions

  • division of profits and losses

  • ownership of intellectual property (IP)

  • disagreement or dispute resolution process

  • leave or termination of the agreement.

Before you enter into a joint venture agreement, it is important to seek legal advice.


1.F TRUSTS:

Trusts are widely used for investment and business purposes.

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.

The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities. Trust structures:

  • can be expensive to set-up and operate

  • require a formal trust deed that outlines how the trust operates

  • require the trustee to undertake formal yearly administrative tasks

  • assets are protected

  • can be difficult to dissolve or make changes once established

2. Second, you need to Register your Business Name

For a visual guide, go to the 'How to register a business name' user guides.

Register Business Name - Guide attached below:

rg235
.pdf
Download PDF • 279KB

To apply, you will need to create an ASIC Connect account and must provide certain information, including:

• the ABN of the proposed business name holder;

• your proposed business name;

• your preferred registration period (1 or 3 years);

• the ‘business name holder’ and their details;

• a street address for the principal place of business; and

• a street address for service of documents from ASIC.


If the name of your business is anything other than your name, for example John Smith Consulting, you need to register your Business Name with the Business Registration Service here.

3. Third, you will need to set up an Australian Business Number (ABN)


Have you registered for an Australian Business Number?


4. Fourth, Board and Constitution

Depending on the legal structure of your organisation, you may need to set up a Board, prepare a Constitution and take it as read by the Board at your first Board meeting.


5. Charities register through the ACNC

If your organiaittin is a charity, you will still need to go throguh this process, but your relevant regulatory body is the ACNC.



5. Charities Ongoing Reporting Requirements to ACNC 


The two most common reporting due dates are:

  • 31 December for charities that report to a standard financial year (1 July to 30 June)

  • 30 June for charities that report to a calendar year (1 January to 31 December).

If your charity was registered within three months of the end of its reporting period, there are two options for submitting an Annual Information Statement. Either:

  • submit an Annual Information Statement that reports on the time left in the charity’s current reporting period (which would be three months or less), or

  • wait until the next reporting period and submit an Annual Information Statement that reports on the 12-15 months that the charity has been registered.


6. Dealing with ASIC

Businesses will need to deal with ASIC from time to time.


The scope of complaints includes: supply of goods and services; employment, including wages and conditions; business names; scams; superannuation and insurance; borrowed money; invested money; insolvency practitioners; shares and market misconduct, and the running of companies.


7. Complants made to the ACCC

Contact the Australian Competition and Consumer Commission (ACCC) for complaints about:

  • prices

  • competition

  • pyramid selling

  • consumer guarantees

  • product safety

  • franchises

  • advertising

  • debt collection in relation to non-financial services (i.e. phone and utility bills or bills for professional or trades services).


The Corporations Act 2001 (Corporations Act) provides certain legal rights and protections for people who meet the definition of an 'eligible whistleblower'.


8. Claiming Expenses and Tax Exemptions

You may be able to claim home-based business expenses, motor vehicle expenses, travel expenses, and digital product expenses according to your business expenses as a whole.


The Australian Taxation Office have these helpful tips for small business owners on what you can claim here.


I hope this guide was helpful for you!

If you need further assistance, BOOK ANDREA CONSULTS TODAY!


Understand your legal obligations under Director ID's and Digital ID's:



Thanks, and have a great day!

Andrea.

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