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Defining and Differentiating the Most Common Legal Firm Business Structure Types

When planning to put up a business, it is important to know first the various legal business structure types and their salient features. Researching about it will serve as a useful guide in choosing the right structure that is best suitable for your business needs and possible demands in the future.

It is worthy to note that different legal entities may vary in terms of registration, management, composition, incurment of liability and acquisition of legal personality. Choosing carefully the right business structure will help you avoid costly mistakes in investing your personal funds to a wrong entity due to lack of enough knowledge and information.

Seeking an expert advice from an accountant, a lawyer, or a professional business adviser can be helpful too.

Below are the most common types of business structure in Australia:

Company

A company is a legal business entity that has separate and distinct personality with that of its shareholders, which means that by legal fiction a company is bestowed with rights similar to that of a natural persons.

Hence, it can acquire properties, incur debts, it can sue and be sued. In Australia, there are several types of companies like Public Limited Company, Private Company Limited by Shares and Ready Made Private Limited Company, etc.

However, a company has its pros and cons, to wit:

Advantages:

  • Liability for shareholders is limited, which spare their personal properties from being held liable for corporate debts
  • It is easy for a company to transfer ownership by selling shares to another party
  • No prohibition against shareholders (often family members) getting employed by the company
  • The company can trade anywhere in Australia
  • Taxation rates can be more favourable
  • It has access to a wider capital and skills base

Disadvantages:

  • It is costly to put up, maintain, wind up and dissolve
  • The reporting requirements can be complex
  • Financial affairs are public
  • Directors may be held personally liable for the company’s debts should they perform acts beyond their legal obligations
  • Profits received by shareholders are taxable

Next are the types of risk affecting a company in its daily operation. They are:

  • Strategic, like a new competitor coming on to the market
  • Compliance, like responding to new health and safety legislation
  • Financial, like failure on the part of the customer to pay or increased interest charges on a business loan
  • Operational, like the breakdown or theft of key equipment

These risks are inevitable but it can be managed or regulated by properly identifying it to lessen its impact on the company.

Compliance

With respect to the compliance aspect, the Company has to observe certain requirements as stated in the Corporation Act 2001 as well as other specific industry regulations before it can carry out its business. Otherwise, the company may face serious penalties imposed by the government. Here are some of the legal requirements:

  • Register its business name
  • Maintain a principal office
  • Disclose the directors’ personal details, including company secretary (if one is appointed)
  • Keep financial records, which may include financial statements, ledgers, cash records, etc.
  • Pay the required fees to Australian Securities Investments Corporation
  • ASIC must be notified relative to the up-to-date company details, appointment of alternate director or change of company name
  • Check annual statements
  • Guarantees the company’s solvency, which means that the company would be able to pay its debts when it becomes due and demandable.
  • Act to the best interest of the company, meaning that stockholders and directors when representing the company on a particular transaction or dealing should disregard personal interest
  • Using obtained information properly. It cannot be used for personal interest or gain, directly or indirectly, which may possibly harm the company.

Directorship

After the company complied with the necessary permits or licenses, a company may now appoint directors to manage its affairs. The minimum qualification requirements for a company director are:

  • At least eighteen years of age
  • Has consented to the taking on the role of a director

And his key duty is to exercise his power and discharge his duties with care and diligence in accordance with the Corporation Act 2001 and other laws.

Shareholdings

Shareholdings refers to the specific number of stocks and shares owned by the company. As such, all shares issued must include on his register to ASIC the following information:

  • The date of every allotment (or issue) of shares
  • The number of shares in each allotment
  • The class (or classes) of shares
  • The share numbers (if any), or share certificate numbers (if any), of the shares
  • And if whether the shares are fully paid which includes the amount paid on the shares and the amount unpaid on the shares (if relevant)

Partnership

Partnership is the association of two or more persons who agreed to do business with one another and with the intent to divide among themselves the profits earned by them on the basis of their respective contributions or shares.

Partnership may be general or limited partnership:

In General Partnership, all general partners participate in the management of their business like attending meetings or having the right to access the firm’s books and other confidential financial reports. They are personally liable for all debts and liabilities incurred in the course of their business operation.

On the other hand, Limited Partnership is formed by up to 20 individuals. The highlights of this kind of entity is that the limited partners have limited liabilities when it comes to business debts and losses of the partnership. Nevertheless, it has one general partner who would answer for all its debts and obligations, even up to the extent of his own properties.

Theoretically, a Partnership has several advantages and disadvantages.

Advantages of a Partnership:

  • It is a popular choice because there is sharing of labor, skill, expertise, equipment and financial resources. Not to mention the combined effort among partners as regards to losses and debts incurred.
  • Compared to other business structures like company, the expenses incurred in establishing partnership are relatively cheap. A partnership usually exists through a written contract entered into by the partners.
  • It’s easily put up by registering its business name, procuring an Australian Tax File Number and an Australian Business Number. Subject on the partnerships turnover, it may be necessary to register for the Goods and Services Tax.
  • Although partnership has no separate legal entity. It is required to present income tax return at the end of the income year, but it does not pay income tax. However, Partners are the ones subject to income tax on their share of the partnership’s profits and are also entitled to deductions with respect to losses incurred by the partnership.
  • Partnerships is the best choice if the objective is about sharing of profits and losses. This kind of arrangement is perpetual as long as the partners stay in the partnership, which makes this type of business structure particularly appealing.

Disadvantages:

  • Since the law does not bestow upon the partnership a separate legal personality unlike that of a corporation; each partner will be personally liable for the debts and negligence of the partnership. It is worthy to note that the nature of their liability is joint and several, which means that a claimant may pursue a claim against any of the partners in the partnership should one of the partners liable does not fulfill his obligation. However, the partners have the right to seek for reimbursement against the debtor-partner as a remedy.
  • It will cease to exist whenever there are changes in its membership. Ergo, the partnership is dissolved and there is a need to create a new one by executing another partnership agreement.
  • If a partner’s intention is to amass appreciating assets, this business structure is not the right one for them. This is because if the partnership receives a gain from a trust during the income year, all partners are required to include their shares of the capital gains or capital loss on their tax return.

Risks:

All other business structures have their own risks to share, but in a partnership the potential risks it may encounter is when there is a disagreement and friction among partners and management. This is because, at some point, there is a need to act on some issues that require the unanimous or majority consent of all the partners let’s say: Releasing any Partnership claim except for full consideration, Sale of a Partnership Asset with fair market value greater than a fixed amount and Incurring Single Transaction expenditures over a fixed amount.

If the said conflicts are left unresolved, this may lead eventually to the dissolution of a partnership. Hence, the business will cease to operate. However, the other partners have other options if they still want to continue with the business. They may resort to guilty partner’s removal or expulsion.

A partner’s share or personal property brought to the partnership is always at risk of being used to satisfy partnership’s debts and losses.

Compliance

If someone wishes to form a partnership business he should first have an idea of all the applicable legal, operational and business requirements prior to its actual operation.
Here are some of the legal essentials to comply with:

  • All partnership business should register its business name and taxes such as the Goods and Services Tax (GST), Tax file number (TFN) and Pay as you go (PAYG) withholding.

It is very important that the business meet the requirements provided under the following laws:

  • Fair Trading Law
  • Australian Consumer Law and your business
  • Complying with the Competition and Consumer Act
  • Australian standards
  • Codes of Practice

When the partnership is engaged in selling products and services it is governed by the following laws:

  • Australia’s trade measurement laws
  • Pricing regulations
  • Displaying prices
  • Product labelling
  • Warranties and refunds
  • Selling goods & services.

With respect to the handling of clients’ personal information collected and gathered by the partnership, it should always be guided by the Privacy Act. The business is required to protect its customers’ information and prevent it from possible misuse, unauthorized access, theft, interference, loss, modification and disclosure.

Make sure that partnership’s goods and products do not infringe the intellectual properties of other businesses. Registering as well the business’ unique creations and products with the federal government agency in charge with granting of patents, designs and trademark.

Since partnership business hires people to work for it. It is automatically covered by the Australian Labor laws. Hence, it is obligated to perform the following duties:

  • Paying its workers proper wages
  • Reimbursing its employees for work-related expenses
  • Ensuring its workers’ compensation insurance for each employee
  • Not acting in a manner that may taint an employee’s reputation or cause mental distress or humiliation.

As part of the partnership firm’s social responsibilities. It is bound to protect and take care of the environment by not contributing to its further damage and destruction. And so, it is required to apply for a permit and license in the Department of Environment as mandated by Environment Protection and Biodiversity Conservation (EPBC) Act.

Directorship

The management and control of partnership business is vested upon the partners as they run it by themselves. Unlike in corporation, its affairs are performed by the directors.

Shareholdings

The partnership’s shareholdings depends on the number of shares contributed by each partner and the same be recorded in the partnership agreement.

Sole trader

Sole trader business structure is when one person is legally in charge of all the aspect of the business. Usually, it is a one-man show operation; from making decisions on how to run the business to the satisfaction of his debts and losses. The owner shall assume all these obligations single-handedly. Furthermore, among the other business structures this is the simplest and inexpensive business structure when planning to put up a business in Australia.

Sole Trader has its own advantages and disadvantages just like the two preceding business structures.

Advantages

  • It’s easy to put up and inexpensive for it has lesser legal and tax requirements, low set up costs and low administration cost
  • Sole control and management of the business by the owner as he confer with nobody except himself regarding the future of his business
  • There is more freedom to run the business and avoid possible misunderstanding with anyone.

Disadvantages

  • The sole trader cannot offer shares to increase his capital
  • Since sole trader is legally and financially in control of the business, his personal properties are not exempt from liability if debts and losses arise
  • It is difficult to change ownership when selling the business

Compliance

The sole trader cannot start his business without first observing some of the compliance requirements mandated by law. Here are the requirements:

  • Apply for an Australian Business Number (ABN) and utilize it in all of his business dealings
  • Utilize individual tax file number when presenting income tax return
  • All income earned must be reported on individual tax return, using the section for business items to show business income and expenses
  • Register for Goods and Services Tax (GST) if your annual GST turnover is over $75,000
  • Sole trader has the same income tax rates with that of an individual taxpayer when paying income tax and thus may be qualified for the small business tax offset
  • Separate money to pay income tax at the end of the financial year – usually, this is done by paying quarterly Pay As You Go (PAYG) installments
  • Asks for a deduction for any personal super contributions made after notifying fund

Directorship

Directorship is not present in sole trader business structure because there is only one individual who takes full control over the business.

Shareholdings

A sole trader does not maintain a shareholdings, which is in a form of shares or stocks sold to the public in order to raise or increase capital for the company. Ergo, he will borrow some money from the bank if he wants to infuse some funds in his business.

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Bottrell Group
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