Choosing a business structure

2. Choosing a business structure • All businesses must conform a structure • There is no single structure that is better than another • Choose the one that is best for you. • It is a long-term business or short-term project? • - Are you earning?

3. Business Structures Do you want the structure to protect your assets as well as make a profit? Ask yourself the following questions: How committed are the various members to the business? Is it better to work on your own and use contractors for the tasks you can’t complete yourself? Are you earning money from other sources, will the business be your main income? If you are working as a part of a group, what are the expectations of the other group members How much money are you willing to invest in the set-up?

4. Sole trader: one-person business Single-person business Can still employ staff and contractors Owner has responsibility for the operation of the business Is the easiest structure to create. Is the most common business structure in Australia. Most flexible/unrestricted form of entering into a business. Is also the most vulnerable of the business structures

5. Sole trader: one-person business Sole trader = unlimited liability • The person who owns the business is not considered a separate legal entity from the business itself. • Any debts and liabilities of the business are the responsibility of the sole trader • Personal money and assets can be used to pay of the debts of the business. • If you are a single-person business, you only really have a choice to be a sole trader or a company

6. Partnerships: two or more people • ‘The relationship which subsists between persons carrying on a business in common with a view to profit’. • ‘Business’ is defined as including ‘every trade, occupation or profession’. • 2 or more people start working together, with a common goal of making a profit, a partnership is likely to have been formed, even if the people involved didn’t think about the fact that they were a partnership, or if they haven’t actually made a profit.

7. Partnerships: two or more people Partnership = unlimited liability • Not seen as a separate legal entity from the partners themselves • Each partner is equally responsible and liable for the debts and liabilities incurred in the partnership’s name. • Individual/personal debts and liabilities of the partners not incurred in the business name do not have any effect on the partners. • Every time a partner leaves, they are required to get a new ABN. • A hobby could prove to be the exception to the rule

8. Partnerships: two or more people Partnership agreements • Sets out the mutual rights and expectations of each partner • A court will usually decide that unless there is an agreement to the contrary all partners are presumed equal. • Consider all of the ‘what if’s’ • Simpson’s Partnership Checklist exercise:

9. Partnerships: two or more people Partnership names 1. If the group breaks up, nobody can use the name, regardless of how many members are still performing together. 2. A majority of band members performing together can use the name regardless of who constitutes the majority. 3. Only a key member — say, the singer, the group’s founder or the key songwriter — can use the name regardless of who they are performing with. 4. Only two key members — say, the singer and songwriter — can use the name, but they must be performing together. Otherwise nobody can use the name.

10. Companies • Forming companies require more admin procedures than forming partnerships or sole-trader • Company owners are called shareholders • Shareholders receive shares in return for money that they invest in the company • Companies = limited liability • The company is a separate legal entity from its owners

11. Companies • The company is a legal entity of its own, so if the company is unable to pay its debts, the personal assets of the company’s shareholders remain largely intact. • This does not mean that the company directors can act irresponsibly • They must act in the best interests of the company

12. Companies: Private vs public companies Private companies • Owned by shareholders but not listed on stock exchange • ‘Company limited by shares’, shortened to ‘Ltd’ • ‘Private company’ can also be called ‘proprietary’, which is shortened to ‘Pty’. • So Pty Ltd is a private company

13. Companies - Private • The profits of a private company are distributed to its shareholders according to the proportion of shares that they own. • Usually the percentage of shares held determines the degree of control over the company and the proportion of income that will be received from company dividends. • Individuals can set up single-shareholder private companies

14. Companies - Public • Are listed on the stock exchange, anyone can buy shares • Profits are paid to shareholders in proportion to the number of shares that they hold • They won’t have the ‘Pty’ in their name • Listing a company on the stock exchange is something that is usually done only when the company is well known and needs a huge injection of funds to make the company grow.

15. Forming a company • Establishing a company is far more complicated that the other structures • Consult a lawyer or an accountant • Probably not worthwhile for tax purposes unless you are earning in excess of $40k a year. • Limits personal exposure in high risk businesses • Create a shareholders agreement or company constitution

16. Trusts • Trusts are not a separate legal entity. • They are simply an arrangement by which someone holds and manages Property, Shares or Cash on behalf of others. • Tax minimisation – one person dispersing income to many in a tax effective way. • You should not enter the world of trusts without very detailed expert advice.

17. Sole trader

18. Partnerships

19. Companies

20. Trusts

21. Not-for-profit organisations (NFPs) • Unincorporated association • This is basically a private club. There is no formal structure and costs are minimal. • It has no legal identity separate from its members. • It has unlimited liability. • Incorporated association • This usually must have five or members, and have specific objectives and rules. • Liability is limited to the members or the board (in some cases).

22. Not-for-profit organisations (NFPs) • Co-operatives or ‘friendly societies’ • Liability is unlimited. • These are not usually successful over long periods of time.