Commercial Law · Additional Resources

There are many considerations when choosing a business structure for your business organisation. Proper advice should be obtained in relation to any business structure, particularly in relation to taxation laws, stamp duty, how assets of the business are to be held and how the business is to be managed.
The most common business organisations are:-

1. Sole Trader

As the name suggests, the business is carried on by one individual. A sole trader is the simplest form of structure and the establishment, carrying on and control of the business is simple. Establishment and administration is inexpensive compared to other business structures.

Legal advice should be obtained in relation to the liability of the business because a sole trader is personally liable for business debts. Estate planning is important because the business is tied to the trader and will die with the trader.

2. Partnership

A Partnership is also a simple form of business organisation where the partners own and operate the business and make all the decisions. When establishing a partnership, it is important that a partnership agreement be prepared. This agreement can affect the control of the organisation, including the making of business decisions, administration and the admission and retirement of the partners.

Again, partnership administration is quite simple and costs are relatively low. The major disadvantage is that each partner is personally liable, without limit, for the whole of the debts of the business.

3. Companies

A company is a more complex business structure, bound by rules and regulations. The main advantage is a company is a separate legal entity from its members and therefore, the liability of members of the company is limited. Shareholders are not liable for the company's debts and their only obligation is to pay the company any amount unpaid on their shares if they are called on to do so.

A director of a company may be liable for the company's debts if it is unable to pay those debts as they fall due and yet, the director continues to allow the company to trade. A director has a duty to act in good faith and the best interests of the company and must exercise care and diligence. Therefore, directors must have a hands on role and cannot use the excuse that they have been a "silent partner" when queries are raised in relation to the company's dealings.

As a company is a separate legal entity from its shareholders and board, it pays tax at a flat rate. The formation of a company however will not necessarily mean tax advantages. While a company can be used for tax planning, it is important that legal and accounting advice is first obtained.

4. Unit Trust

In a unit trust, the capital of the business organisation is represented by units, usually of equal size and the number of units held determines the entitlements of the unit holder to annual distributions of income and also, to an interest of the assets of the trust.

A trust can be useful for tax planning because it allows the business person to split income but at the same time, retain broad control over the business organisation and its assets, liabilities, income and expenditure.

The unit holders could be jointly and personally liable under trust law to indemnify the trust for any shortfall of assets on liquidation, but it may be possible to alleviate this. It is therefore important that legal advice be obtained in respect of all business structures.

Business Insurance

By law, a business is required to have workers' compensation insurance. Whether any other insurance is obtained is up to the discretion of the owner. Apart from workers' compensation, other types of general insurance which may be required include fire, theft, public liability, product liability and personal accident and illness. Another important consideration is life insurance which can be used to have immediate funds available for dependents to support themselves, payment of personal and business debts and acquisition of a deceased business partners' shares.

Life insurance is often an integral part of business and financial plans and legal and insurance advice should be obtained to ensure needs are met. Even life insurance can be affected by taxation laws.

Superannuation is another way to accumulate wealth for retirement and again forms an integral part of business planning. It is important to obtain legal, accounting and financial advice in relation to retirement issues concerning superannuation, including investment restrictions, taxation laws, superannuation rules and standards and estate planning.