Business Structures

Sole trader/sole proprietorship

It is fairly easy to be established as a sole trader; the only legal entity is the individual. A sole trader is therefore personally liable for all obligations incurred in the course of the business and income earned is taxed at their personal rate.

Unlike other business structures, no specific legislation regulates sole traders. However, they may be liable to comply with legislation specific to their business.

Joint venture

Two or more individuals or companies may carry on a business as a joint venture. In a joint venture, at least two parties enter into an agreement to work towards the same strategic goals while remaining separate entities.

The difference between a partnership and a joint venture is that the latter is often formed for a particular project or business goal, or the contributions of the members differ in type, amount or timing. Joint ventures usually have a defined end.

They may be incorporated (as a separate legal entity) or unincorporated (a purely contractual arrangement). The rights and liabilities of the members will depend upon the terms of the joint venture.

The key difference between a partnership and an unincorporated joint venture is that in the case of the unincorporated joint venture, participants do not jointly receive income or jointly participate in the output of the venture.

In the case of a mining joint venture each participant is entitled to its specified share of the output of the venture which it can then market as it determines.

Joint ventures are governed by common law, contract law and, in the case of incorporated joint ventures, the Corporations Act 2001 (Cth).

Trust

Trusts are widely used for conducting small businesses, particularly family businesses.

The trustee owns the trust’s property and carries on business on behalf of the beneficiaries of the trust. The trustee is liable for meeting the trust’s obligations, but will typically have rights of recourse against the trust’s property in relation to those obligations.

The rights of beneficiaries will depend upon the terms of the trust. The beneficiaries’ entitlements may be fixed or variable, at the discretion of the trustee.

Trusts are governed by common law and contract law.

Managed investment scheme

A business may be carried on through a managed investment scheme. The Corporations Act defines this type of scheme, which is usually an investment vehicle in which members gain an interest by contributing money that is pooled for a common purpose. That common purpose is usually to produce financial benefits or other interests for the members. They do not have day-to-day control over the operation of the scheme; rather, a ‘responsible entity’ operates the scheme.

Australian company

A company is a separate legal entity that can hold assets in its own name and is liable for its obligations. The two main types of company in Australia are proprietary and public companies.

A public company may be listed on the Australian Securities Exchange. A proprietary company is limited to 50 non-employee shareholders and cannot engage in fundraising activities in Australia. However, in terms of regulations, it can be simpler and cheaper to administer a proprietary company.

A company is managed by its directors but owned by its shareholders (commonly called ‘members’). Australian law and practice contains a principle of separation of responsibilities between those of the directors and the shareholders.

Directors oversee the management of the company’s day-to-day business and affairs. They also have common law and statutory obligations, such as a duty to act with care and diligence. Directors who fail to perform these duties can be found guilty of an offence. These duties may continue even after a company is deregistered.

Generally speaking the rights of the shareholders at a general meeting are to remove and appoint the directors and to deal with specific matters such as changes to the company's constitution, its capital structure and winding up.

The main duty of directors is to act in the best interests of the company. However, if the company is insolvent, or risks insolvency, they also have a duty to the company’s creditors. In such circumstances, directors must prevent the company from trading and incurring further debt. Directors who contravene the insolvent trading provisions of the Corporations Act can face civil and criminal charges.

There is currently no requirement under Australian law pursuant to which workforce representatives must be appointed as directors.

Australian companies are governed by the Corporations Act, their constituent documents and common law.

Foreign company

A foreign company may carry on business in Australia either as a branch or through an Australian subsidiary company. To carry on business as a branch, the company must register as a foreign company with ASIC.

Whether a foreign company carries on business in Australia is defined by certain legal principles. Usually, it is not enough to merely engage in certain activities in Australia, such as being party to legal proceedings, holding director or shareholder meetings, maintaining a bank account or owning property.

A registered foreign company must notify ASIC when company details change, such as its officeholders or registered address. It must also notify ASIC if it ceases to carry on business in Australia, or is wound up, dissolved or deregistered in its place of origin.

A foreign company can establish an Australian subsidiary by registering the new company with ASIC.