How to Choose the Best Legal Forms for Your Company Structure

bulram | March 21, 2013

Choose the Best Legal Forms for Your Company

When starting out in a new business, you need to set a solid foundation right from the start in order to build your business with confidence heading into the future. In order to do this, you need to decide on a foundational structure for the business. In Australia, there are three main business structures: sole traders, partnerships, and Limited Liability Companies (LLC).

When it comes to small businesses and legal issues, having the right legal forms from day one can make all the difference; these forms need to reflect the structure of your business. Legal forms that relate to the structure of a business can include business registration forms, loan agreement forms, company name reservation forms and even confidentiality forms.

Sole Traders

A sole trader business structure is the simplest structure for any business. The entity is owned by one person and can be in their name, as in John Smith, or in a company name. For those who want to register a company name, it must be completed through the Australian Securities and Investment Commission (ASIC). This is the least expensive way to structure a business.

As a sole trader, you retain complete control of the business and you pay income tax at the same rate you would for personal tax. This type of structure is ideal for small entities, although it is relatively easy to change this structure should the business grow. One of the greatest disadvantages of a sole trader company is that liability is unlimited, meaning your personal assets are at risk. For this reason alone, those setting up a sole trader business should ensure they have legal documents in place.

Partnerships

A partnership involves between two and 20 people and each partner jointly own the business assets and liabilities. In Australia, partnerships are registered with ASIC and have their own tax file number (TFN) and Australian business number (ABN). Each partner has unlimited liability, so it is important to have legal documents in place that clearly identify the role and authority of each partner, their expected financial contributions and their responsibilities and obligations. Partnerships should also have documentation identifying dispute resolution procedures and dissolving of the partnership. Other important legal forms for partnerships include the dividing of share and how new partners can join. Partnership agreements, minutes of meetings and deed of accession forms are also important.

Limited Liability Companies (LLC)

These companies are owned by shareholders and run by directors. Often directors and employees of the company are also shareholders. Not all shareholders work in the day-to-day running of the company. Each company requires an Australian company number (ACN) and must be registered with ASIC. Once registered, they can trade throughout Australia. This type of business structure is required to pay company tax as well as income tax for all employees and directors. The company holds liability, not the directors or shareholders. For this reason, an LLC can be an ideal option for more high-risk business ventures. LLCs take significant effort, time and cash to set up compared to other types of business structures. Maintaining an LLC can be quite costly, and complex reporting and auditing procedures are required to be in place.

An LLC requires a significant number of legal forms and documents in order to run smoothly. Company registration forms, director and secretary forms, minutes of meetings, and member applications are all commonly used legal forms for this type of business structure.

Although these are the three of the more common types of business structures in Australia, there are other types of structures available. Trusts, cooperatives and associations are other options available to those setting up a business.

When considering business structure it is important to understand the advantages and disadvantages of each, including the differences in tax obligations, legal liability, management and auditing requirements, and costs.

About the Author:

With almost 10 years of experience in the legal industry, Kim Waters has focused the majority of her career on business law. She enjoys specialising in assisting small-business owners with a wide range of legal issues, from legal forms and company setup right through to employee dismissals and company closures.