Legal Speak
LAYING FIRM FOUNDATIONS
COMPANY A company is an independent legal entity able to do business in its own right. You will run the business as a director and/or shareholder. The advantages of a company are that your liability for the debts of the business is limited to the money you have invested in the business, unless you agree to personally guarantee the debts. A company can also own property in its own name There is, however, a large initial establishment fee. The establishment rules are complex, and the regulations are strict.
How do you choose the best structure for your business? HVAC&R Nation legal expert Frank Gambera shares some tips. Your choice of business structure depends on a number of factors. These include how profits are to be shared with other people; who is legally liable for the actions and debts of the business; and the tax implementations on earnings from the business. We look at the most relevant structures below.
SOLE TRADER The sole trader structure involves an individual trading on their own. This is the easiest method of starting a business and the simplest form of business structure. The advantages of being a sole trader include low commencement/registration fees and independent control over business decisions. All profits and capital also belong to you.
TRUST
But there are disadvantages too. Your capital is limited by your personal assets, and you will be personally responsible for all debts and liabilities.
PARTNERSHIP A partnership exists when two or more people go into business together and plan to make a profit. A partnership is not a separate legal entity like a company, so all assets of the partnership are owned by the partners jointly. On the positive side, a partnership is inexpensive to start and establish. And shared control reduces your individual burdens. On the other hand, partnerships bring the potential for disputes over profit sharing, administration and development. You will also be personally responsible for business debts and liabilities incurred by your partners.
Frank Gambera is a director for McMahon Fearnley Lawyers Pty Ltd. Contact him on 03 9670 0966 or through www.mcmahonfearnley.com.au
Corporate trusts have become extremely popular in the industry. According to ATO data, in the 2014 financial year there were 802,000 tax returns lodged for trusts with a total income of $345 billion compared with 763,000 tax returns lodged for companies and 344,000 tax returns for partnerships. A trust is a business structure where a trustee holds property or income for the benefit of others called “beneficiaries”. With a corporate trustee, the company is a trustee who owns the assets of the business and manages the trust. The members of the trust are directors of the company. A trust deed is usually prepared by a lawyer who formalises the powers of the trust. There is a limited liability for trusts, because the business is a separate legal entity. They also make it easier to separate trust assets and personal assets. And business income can be split among beneficiaries to assist in minimising tax. The disadvantages are that it is expensive to establish a business under a trust structure. And it does not offer protection from personal liability When deciding which structure will be best for your business circumstances, you should seek professional advice to avoid selecting the wrong structure and incurring unnecessary costs. ■
February 2020
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