We have expertise in advising on the appropriate business structure for clients and in the transfer of assets from one structure to another. If you need assistance with establishing a business structure or you require advice about reviewing your existing business structure, we can help. Every business is unique and has its own particular needs when it comes to structuring the business. We can work with you to formulate the best structure for you and your business – whether it be a company, a partnership, a trust or a joint venture.
What is a company?
A company is the most common form of business structure in Australia. A company is a body corporate and has a separate legal identity to that of its members. For this reason, the liability of the company is separate to that of its members. Shareholders own the company while directors run the company. In many cases company directors are also shareholders, sometimes along with company employees.
To become a company, an entity must:
- be incorporated under the Corporations Act 2001 (Cth); and
- be registered with the Australian Securities and Investment Commission.
Types of companies
There are two types of companies:
- Proprietary (ie private); or
A proprietary company has no more than 50 non-employee shareholders and is generally not allowed to offer shares or securities to the public. It must have at least one shareholder and one director, and at least one director must ordinarily reside in Australia. A public company may have more than 50 non-employee shareholders, can offer shares and securities to the public, and may seek listing on the Australian Stock Exchange or another exchange.
What is a partnership?
A partnership is a relationship which arises between persons or entities going into business together in order to make a profit. Unless varied by agreement, all assets of the partnership are owned by the partners jointly and all partners are jointly liable to fulfill the obligations of the partnership.
In the absence of a written partnership agreement, the relationship between partners will be governed by common law and the statutes applicable in each state and territory.
What is a trust?
A trust is a more complex form of business structure where a trustee is appointed to hold the trust assets for the benefit of the beneficiaries under the trust. The trustee may be an individual or a corporation. When a trust is used as a business structure, a trust will be declared over certain assets and the trustee will be appointed to hold legal title to the assets and to deal with the assets in accordance with the terms of the trust deed and otherwise in accordance with trust law. The beneficiaries under the trust hold the beneficial interest in the trust estate. The flexibility afforded to the trustee in distributing profits and capital to the beneficiaries under the trust is the key advantage.
Types of Trusts
Trusts are generally divided into:
- fixed trusts;
- unit trusts; and
- discretionary trusts.
The most common forms of trusts are unit trusts and discretionary trusts (or a combination of both).
A fixed trust is a trust in which the beneficiaries have fixed entitlements to the income of the trust (as well as the capital assets). This means that the trustee is bound to make a distribution of income to the beneficiaries in a fixed or prearranged manner, as set out in the trust deed.
Unit trusts divide the beneficial interests in the trust between unit holders. A trust deed will set out how a trustee may issue units and what rights may attach to those units. The rights of a unit holder in a unit trust are frequently considered to be similar to the rights of a shareholder in a company.
Discretionary trusts, as their name suggests, permit the trustee to determine how to distribute capital and income to the defined class of beneficiaries under the trust.
A trustee is personally liable for the liabilities incurred when acting as trustee for the trust. Ordinarily the trust deed will provide that the trustee is entitled to be indemnified out of the assets of the trust for any liabilities incurred as trustee (except in the case of fraud, breach of trust or gross negligence).
The Trust Deed
Powers and administration of the trust are formalised in the trust deed. In many ways the trust deed operates in a similar fashion to a constitution for a company setting out how the trustee must operate the trust.
What is a joint venture?
A joint venture creates a common enterprise for the joint venture participants to assist each other to achieve a mutual goal. Selection of appropriate joint venture partners is key to a successful joint venture. Each party to the joint venture will generally bring a specific skill set to the venture. The parties to a joint venture agree between them the limitations of their participation, including for funding and exposure to liability.
Types of joint ventures
There are two types of joint venture business structures:
- incorporated; and
An incorporated joint venture is formed by the joint venturers establishing a company and holding their interests in the special purpose company as shareholders. In those situations the special purpose company is a separate legal entity from its shareholders and the shareholders benefit from limited liability. Incorporated joint ventures are generally governed by a written shareholders agreement between the joint venture parties. Those agreements are critical and will usually include provisions dealing with:
- the responsibilities and contributions of the parties;
- the day-to-day procedures and delegation of responsibility;
- veto powers and other restrictions;
- the resolution of disputes between the parties; and
- the dissolution of the joint venture.
An unincorporated joint venture is not a separate legal entity. Typically the parties to an unincorporated joint venture will elect an agent or manager to hold the assets of the joint venture for the benefit of the parties as tenants in common. Unincorporated joint ventures are governed by the terms of the formal written joint venture agreement between the joint venture parties and by common law.
From our experience, it is money well spent to get tailor made documents put in place from the outset. Each party working out what they feel the documents should include is valuable because potential issues get thought of and resolved before a problem emerges. There is an understandable aversion to signing documents but not doing so can be a serious mistake.