There are a number of ways that you can legally structure your business each with differing taxation and asset protection consequences. It is therefore vital that you seek professional advice as to what structure suits your needs prior to entering into a contract to purchase a business or property. We are happy to discuss the options with you and to establish your preferred legal entity to ensure the business or property purchase is not delayed.
We set out below the four most common forms of legal ownership:
A sole trader is an individual who operates a business in their personal name. A sole trader does not have business partners nor a company structure behind them. This structure is simple to operate but has some negatives in regards to taxation and asset protection.
A partnership is a relatively simple and common structure whereby two or more co-owners work together in a business with a view of making profit. This structure provides for joint and several liability meaning that creditors can attack one or more of the partners and accordingly having a strong written partnership agreement is vital. This structure may have some negatives in regards to taxation and asset protection depending on your particular situation.
A company is regulated by the Corporations Act. It requires appointment of directors and shareholders and is advantageous in that it can be difficult (but not impossible) for a creditor to pierce the corporate veil to recover debt from a shareholder over and above the amount of their share capital. For example, if a shareholder owns one share at $1 per share their liability to creditors is $1.
There are 2 main types of companies being:
“Limited” companies (public listed) and “Proprietary Limited” (not public listed). Most small to medium businesses are established as proprietary limited companies. This structure can be advantageous in relation to asset protection and taxation depending on your circumstances.
There are many types of trusts with the most common being a discretionary trust with a company as Trustee. The trustee will run the company for the benefit of the beneficiaries named within the Trust Deed. Technically, the trust is not a separate legal entity and the company has control as the legal entity operating the business. This structure has advantages in both asset protection and taxation depending on your particular circumstances.