|Business issues to consider
- Complete control over business and autonomy
- Ultimate decision-maker
- Able to implement changes quickly when required
- Retains all the profits
- Relatively easy to set up
- Personally liable for all debts
- Individual carries all the risks
- Limited source of funds
- Difficulty of finding time to work on the business due to need to work in the business
- Difficult to take any significant period of leave
|Operating as a sole trader means you are exposed to many risks, including putting your assets on the line. It is important that you obtain advice on an appropriate structure to minimise your risk exposure.
To avoid exhaustion it is necessary to be able to put in place systems that allow tasks to be delegated to employed staff and to ensure staff are accountable for performance of delegated tasks.
- Opportunity to pool resources, such as, contributions of funds, talent
- Opportunity to spread risks among partners
- Shared management responsibilities
- Sharing of debts and liabilities of the partnership
- Potential conflicts and disputes between partners
- Jointly and severally responsible for debts and liabilities incurred by the partnership
- Shared profits
- Problematic decision making
|The Partnership Act 1891 covers various aspects of a partnership, including:
- Nature of partnership
- Relations of partners to one another (for example, equal contribution of capital and sharing of profits)
- Relations of partners and people dealing with them (for example, partners are jointly and severally responsible for partnership debts)
- Dissolution of partnership and its consequences.
Whilst the Partnership Act contains the safety-net provisions, you should consider a partnership agreement that clearly sets out the intentions, understandings and requirements of the partnership:
- Partnership capital contributions
- Partnership profits and distribution of profits
- Management structure, such as, managing partner or executive committee
- Remuneration/compensation structure
- Dispute resolution process
- Obligations of partners
- Retirement and admission of new partners
- Partnership Agreement amendment provisions
- Voting rights and voting procedures.
The end of the partnership should be considered before it is formed whether that is by retirement, dissolution, admission of a new partner, death of a partner or bankruptcy of a partner.
- Great way to raise capital and retain capital
- Greater flexibility in structuring management and decision-making arrangements
- Lower tax rate than highest marginal tax rates for high income earners.
- Allows profits to be shared as dividends paid to shareholders
|Greater regulatory compliance
- Greater administrative burden, e.g. lodgment of annual returns
- Risk of insolvent trading and director liability
|A company is a legal entity, separate from directors and shareholders.
Generally, directors of a company are not responsible for debts and liabilities incurred by the company. However, directors can be liable for company debts under certain circumstances. Some issues directors should consider include:
- avoid giving personal guarantees, guaranteeing liabilities of the company
- avoid trading in circumstances when the company cannot pay its debts as and when they become due and payable
- company meets its pay as you go (PAYG) withholding and superannuation guarantee charge (SGC) obligations
- avoid conflicts of interests between the director’s personal interests and the director’s fiduciary and legislative duties to the company
If you, as a director, advance funds to the company, it is important that you properly register, and in time, a security interest to preserve the status of your priority and protect your interests to secure the monies you have advanced to the company. To find out more, or to register a security interest, go to www.ppsr.gov.au.
|Income and profits sharing
|Greater compliance and administrative burden
|At law, a trust is comprised of a trustee (either an individual or corporate trustee), trust asset and beneficiaries.
There are various types of trusts, for example:
- Fixed trusts
- Discretionary trusts
- Unit trusts
The laws (taxation and legal) applying to trusts are complex and you should seek professional advice on an appropriate trust structure for your circumstances.
Risk of conflict between trustee’s personal interests and duties as trustee to beneficiaries of the trust.
Tax issues with respect to undistributed trust income.