Each potential business structure has its attractions. Having made your decision, ensure that you will derive maximum benefit from your choice of structure with clear and concise business documentation.
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Most business people who choose a proprietary limited company as their trading vehicle do so because it is a separate legal entity that represents the interests of just one person or many people whose shareholding rights are clearly defined within the company structure.
The company also shields the personal assets of the shareholders from the consequences of its trading activities. The exceptions to this is where the company is required to give personal guarantees to creditors and in the case of director liability for insolvent trading.
The financial benefits of a company structure include a fixed (sometimes lower) income tax rate than that which might be applicable to its shareholders. Equally there are some potential taxation downsides which should be discussed with your accountant or financial advisor before deciding to adopt this type of business vehicle.
Companies can be established was as few as one shareholder and director who in such cases called a “sole governing director”.
If there is more than one shareholder, the company will generally have two directors.
A company requires a constitution which documents how shareholders relate with one another; the powers of directors and how the company is governed and deals with third parties.
Upon incorporation (registration), the original members (shareholders) subscribe to the constitution by signing it to signify their agreement with its terms. If a constitution is adopted after registration, the company must pass a special resolution (ie one supported by at least 75% of the company’s shareholding) to adopt it.
The Corporations Act records a generic constitution called the “Replaceable Rules” that a company can expressly resolve to utilise instead of a customised constitution.
The Replaceable Rules are not as one might think, a pro forma constitution. Rather they are a listing of relevant topics cross-referenced to sections from the Corporations Act that are declared to apply to each topic.
They cannot be utilised for a sole director / sole shareholder company.
The Rules apply unless removed or modified. Thus if a company wants to change or remove a replaceable rule, it must have a constitution to record the changes.
A company’s constitution is publicly available.
In addition of a constitution, shareholders also often enter into a “shareholders agreement” that records in greater detail in the Constitution, the obligations and rights of shareholders; and the way in which the parties intend the company to operate. This document is not publicly available. For information about Shareholder Agreements, see “Agreements among Owners”.
A company can change or repeal its constitution by special resolution (not less than 75% of the shareholding in the company voting in favour). A special resolution needs at least 21 days’ notice for private companies. The special resolution must be notified to ASIC.
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If two or more people carry on business together other than through a company, the business is a partnership.
Frequently people do this without any written partnership agreement in which event in Queensland at least, the provisions of the Partnership Act apply. It is prudent however for the parties to carefully consider how they will want the partnership to operate and to enter into a Partnership Deed early on.
Things that need to be considered include contributions to capital, contributions to expenses, division of profits, pre-emption rights to buy out the interestof a retiring partner, arrangements in the event of death or TPD of a partner and insolvency.
These agreements deserve careful consideration as they can be the foundation of a long and prosperous enterprise. Equally, a sound agreement that has thought through potential difficulties, is an excellent starting point for the resolution of disagreements.
An important feature of partnerships is that each partner is jointly liable for all the debts and liabilities of the partnership. A creditor may therefore recover a debt in full from any partner – even if the partner as a very minor share in the business – although that person may seek contribution for payment of the debt from other partners (assuming they are not insolvent).
Transfer of partnership shares is not as easy as the transfer of shares in the company. That is because the admission or exit of a partner as a practical effect of creating a new partnership, even though it may be covered by an existing partnership agreement.
Unit Trusts & Discretionary Trusts
The main advantage of a Discretionary Trust is that it allows an individual to distribute income from business activity to other individuals (“beneficiaries”), usually family members.
A Unit Trust is in many ways like a partnership because it is comprised of different “units” controlled by unrelated persons or entities who agree to carry on business together. It also has similarities in terms of governance and entitlements, to a company. Whereas shareholders own a specific number of shares out of the total shareholding, unit holders in a unit trust, own a specific number of units out of the total unit holding.
Tax advantages may be gained by utilising a discretionary trust or a unit trust structure. A trust structure allows for the distribution of income to beneficiaries or unit holders in a different to that by which dividends are distributed to company shareholders.
Discretionary trusts are also an excellent vehicle for protecting assets from future life events such as business failures, bankruptcy and relationship breakdowns.
The trustees of a discretionary trust will usually have absolute discretion concerning decisions on the distribution of trust income, subject to some opportunities for the beneficiary to enlist the assistance of the court.
In the unit trust situation, the trustee is of less importance because it will ordinarily act according to the direction of the majority of unit holders.
Discretionary trusts and Unit trust are established by a trustee settling a Trust Deed. Particular care is required in drafting such needs to ensure that all potential circumstances are thought through and accommodated.
A sole trader business structure is where – because the business and the owner are one and the same. – he or she has all of the control and is entitled to all of the profits. Even if trading under a business name, the business is not a separate legal entity to the individual owner.
If a business name is used, it must be registered with the ASIC. Trading under an unregistered business name is an offence.
Many successful enterprises begin their way in business as a sole trader and transition later – when likely profitability seems assured – into the type of more sophisticated entity they decide is more suitable.
REGISTERING A BUSINESS NAME
A company, partnership, sole trader or trust can trade under a business name. Note that the registered name does attain the legal status of a separate legal entity. Rather the underlying entity that owns the business name – company, partnership, sole trader or trust – retains that legal status.
Business names must be registered – it is an offence to carry on business under an unregistered name. This of course does not prevent a company, trust or sole trader trade trading under their actual names without having a registered business name. A partnership can trade under the names of the partners eg W.G. & A.R. McBride with no registered business name.
Ownership of a web domain eg McBrideAssociates.com.au implies that a business is being carried on under the registered domain name and thus such name should be registered as a business name, in this case: McBride Associates.
ng o but in most cases and that the name is not already taken by an existing business or company before you begin your trading and services.
Registering a business name does not grant the same exclusive rights or privileges to the use of the name as a trademark would.
For advice on registering your business name, consult one of our experienced commercial lawyers today.
REGISTERING YOUR COMPANY
When starting your company, it is important to note that compared to other business structures,it has different responsibilities regarding finance, governance and record keeping.
Before you register a company, consider its proposed structure, who will be its members (shareholders), who will have decision making powers (directors), whether different classes of shareholders will have different rights and responsibilities and how and to whom dividends should be distributed.
For advice on registering your company, consult one of our experienced commercial lawyers today.
WEBSITE TERMS AND CONDITIONS
Ownership of a unique web domain name does not establish a separate legal entity in that name. It does however imply that the owner is carrying on business in that name, thus necessitating registration of that name as a business name.
If another person registers a domain that is identical to your registered business name, they may be compelled to cease using the name if in doing so they would be considered to be “passing off” as similar business. The only benefit of registering a website name that is identical to the business name of a competitor is that the party registering the name may be able to sell it to the competitor.
If your website is principally for eCommerce – ie the online sale of goods – you need a comprehensive set of terms and conditions that deal with payment, delivery, risk and liabilities.
For advice on website terms and conditions, consult one of our experienced solicitors today.
REGISTERING A TRADE MARK
Even if you have registered a business, company or domain name, it does not automatically prevent third parties from using your business name as their brand and/or trademark.
A trademark allows you to obtain exclusive rights for your brand in relation to the goods and services that you provide.
It also removes the opportunity for third party organisations to use your business name and/or symbols.
For advice on registering a trade mark, consult one of our experienced solicitors today.
ESTABLISHING YOUR TRUST
A Discretionary Trust can be established relatively simply by a written Deed. Be sure to do this before you acquire any assets that are intended to be in the name of the trust.
You will need to consider whether you want a corporate trustee whether you are satisfied to have individuals, perhaps yourself, as trustee of the trust.
The person is intended to have control of the trust is usually constituted as the Appointor or the Principal. Such person usually has power to change the trustee etc. The trust deed should provide a power to the Appointor or Principal to appoint another person in the place event of their death or TPD.
For Unit Trust Agreements, a “Agreements among Owners”