Business Models (Part 2)

In our previous article on business models, we introduced the sole trader and partnership models. This article will discuss the rights and responsibilities you have when operating a Company or Trust.

Company
A company is a separate legal entity from those who run it, unlike a sole trader or a partnership business model. This means once a company has been registered, it has legal personhood and can incur its own debt, sue, or be sued by others.

Those who start a company do not have the same degree of control or ownership as someone who owns their business as a sole trader. A company is controlled by its director(s) but must act in the interest of the shareholders who have joint ownership of the company. Earnings of the business belongs to the company and is not the directors’ personal income. While there is less capacity for ownership and control, a company can raise funds through selling shares to investors while other structures cannot.

The company structure can limit risk for its members, the personal liability of members for a company’s debts is limited to the amount owing in the shares that they hold. However, the directors of a company may still be personally liable for debt incurred by the company if they are found to have breached their legal duties.
Companies are subject to regulation by the Corporations Act 2001, and have strict requirements for record keeping, auditing, reporting, and more. These obligations may differ depending on the size of the company.

Although starting a company involves significant costs and complexities, it is suitable for businesses with a large expected turnover. Its largest advantage is the ability to raise capital through shares and to limit liability of its members.

Trust
A trust is where a nominated person (trustee) holds assets or property for others (the beneficiaries), in this context it refers to when a trustee carries on a business on behalf of beneficiaries. A trust is not treated as a separate legal entity; the trustee is liable for the debts of the trust and must personally pay any shortfall if the assets of the trust is insufficient. The trustee can be a natural person or company, in the latter case, liabilities of the trustee can be reduced.

A trust must be set up by a formal trust deed that outlines the operation of the trust. There are two main types of trusts – discretionary trust and unit trust. In a discretionary trust, the trustee has discretion over the distribution of the funds to each beneficiary. In a unit trust, the interest of the trust is divided into units and distribution of the units is dependent on how many units each beneficiary holds. Only profits can be distributed and not loss.

A trust has no tax obligations. However, the trustee must have a tax file number and lodge an annual trust return. Tax is payable by the trustee or the beneficiaries for the trust net income they receive.

A trust allows flexibility in the distribution of business profits to nominated beneficiaries, this contrasts with the Company structure where profits of a company is passed onto shareholders or the sole trader structure where all business earnings can only be personally attributed to the sole owner.

Both of these business structures have their advantages and drawbacks. They can be more difficult to set up initially than the sole trader and partnership model. This is especially true for a company, which is subject to onerous obligations and regulation.

If you have any questions as to which business model would be the best fit for you, or how to set up your company or trust in accordance with current laws and regulations, Straits Lawyers are glad to assist. Simply contact us at info@straitslawyers.com or give us a call on 8410 9069.

Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.