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In Australia, the business environment is both large and competitive. However, when it comes to starting your business journey, you don’t have to go down the same path as everyone else. In fact, there are several paths to choose from when starting your business.
There are different types of businesses and business structures in Australia, and the one you choose will often depend on your specific goals and your current resources.
In this article, we’ll go through what types of businesses exist in Australia and how business owners choose the type that is most suitable for them.
What Types Of Business Structures Are There In Australia?
Like we mentioned, there are different types of businesses. This means the nature of the business activities and the platform on which they are offered will differ.
However, a common question we get from small businesses and startups is, “Which business structure should I choose?”.
This is perhaps the most important question you should ask yourself in the early stages of your business venture as your structure will set the foundations for the rest of your business moving forward. While you can change your business structure, this can cause a speed hump in your business plan and it’s always best to be certain from the start.
So, what are the different types of business structures in Australia, and how do I know which one is right for me?
Let’s discuss these in more detail below.
Sole Trader
A sole trader structure is arguably the easiest structure. When we say ‘easy’, we mean it’s simple and relatively cheaper to set up than the other structures.
This is because you don’t need to do as much as part of the registration process. Once you register your business, you obtain an Australian Business Number (ABN) which is essentially your business’ unique identifier for tax purposes.
You can choose a business name, but whether you register your business name is entirely optional. It’s always safer to register your business name as a trade mark as business name registration alone does not grant you exclusive ownership of it.
However, there is a downside to the simple process of a sole trader set up. While it is cheap and easy to start, it also exposes you to more liability should your business ever run into trouble. This is because it has unlimited liability.
For instance, if the business went into debt and owed money to a third party, that liability would extend to you personally as the business owner. So, your personal assets (like your car or home) could be affected in order to repay that business debt.
A sole trader structure is best for those who wish to keep things small or local, and don’t expect to enter into high-risk transactions. That way, there is a smaller risk of being personally liable for business dealings that go wrong.
Partnership
Another option is a partnership structure, which involves a minimum of 2 people who both control the business. This also means they share income and losses of the business.
Like a sole trader structure, a partnership has unlimited liability. But rather than one person bearing that responsibility, it extends to 2 people under a partnership. This is why it’s important to have a Partnership Agreement in place, so that both business owners understand how income will be shared, how liability will work between them and what happens if one partner wants to leave the business.
As a partnership, you also need to apply for an ABN during the registration process. If you expect to have an annual turnover that exceeds $75,000, you also need to register for Goods and Services Tax (GST).
While it’s not always admirable to consider the end of something at the beginning of a business relationship, it’s always safer to have a Partnership Dissolution Agreement prepared in case things don’t go as planned and the partnership comes to an end.
This also makes the termination of the partnership simple and easy, and parties can be clear on who owns what.
Company Structure
If your business intends to engage in higher-risk activities or you plan to expand overseas, a company structure is more suitable for you. In other words, if your plans for your business look big, a company structure is your safest option. Why?
A company benefits from limited liability. Unlike a sole trader and partnership, a company’s debts and other liabilities are limited to the business, and does not extend to the owners (also known as the company directors).
However, having this extra security comes at a cost. Setting up a company is more complex than the structures we’ve discussed thus far. Not only is it more expensive, but there are more responsibilities for directors.
Some key responsibilities for companies are as follows:
- Obtain an Australian Company Number (ACN) – you need to attain an ACN in addition to your ABN
- Registration process – you need to register your company with ASIC
- Directors’ duties – company directors have a number of duties to uphold, and a breach of these duties carry heavy penalties such as termination
- Reporting obligations – companies are obligated to report certain financial information to ASIC
- Documents – all companies need to have a Company Constitution which is the governing document
All companies in Australia are subject to the Corporations Act 2001, which regulates corporations. For example, it sets matters from a breach of directors’ duties to how a company is liquidated.
If you’re a company director, it’s important that you understand your rights and responsibilities under this Act, and ensure that your company documents reflect these requirements. If you need help, our lawyers are experts in setting up a company and are happy to assist you with compliance.
Trust
As the name suggests, a trust business structure works similarly to a standard trust. This often involves three parties:
- Trustee – the person or entity managing the trust subject to the terms set out in a deed
- Beneficiary – the person receiving the benefit of the trust
- Settlor – unrelated third party who signs the trust deed
So, a trust structure allows the trustee to manage a business which will then go to the beneficiary, depending on the terms set out in the deed. It’s important to note that under this structure, the trustee has legal ownership of the business’ assets.
As a trustee, they are under a fiduciary duty to act in the best interests of the beneficiary. More specifically, a trustee is expected to manage the business in a way that maximises profit and reduces losses so that the beneficiary can receive the benefit of a healthy business.
People opt for a trust structure as it offers safety for the business’ assets. However, it can also be quite complex and requires a legal professional’s assistance to ensure it is suited to the business’ specific needs and goals.
You may also require legal help for drafting a trust deed, as this document importantly sets out:
- Beneficiaries
- Trustee/s
- Beneficiary’s entitlements
- How the benefit will be given or distributed
- Relevant signatures
- Exit clause
Our lawyers at Sprintlaw are experienced in setting up a trust – contact us for more information about our trust packages.
Incorporated Association
If you’re running a company, but you wish to operate as a not-for-profit (NFP), you may consider an Incorporated Association structure.
This is more suited for businesses that are smaller and NFP, like community organisations and sporting clubs. They’re less complex to set up than a company structure, so it’s a popular option among NFPs.
Incorporated associations are regulated at the state/territory level, so it’s worth checking out which regulator is specific to your state or territory. For example, in NSW, the key regulator is the Office of Fair Trading.
In addition to this registration process, you’ll need to register as an Australian body. As such, you’ll need to apply for an Australian Registered Body Number (ARBN).
At Sprintlaw, we offer an ARBN package for incorporated associations, which includes:
- An initial consultation with a Sprintlaw lawyer
- Preparing a Form 401 to apply for an ARBN with ASIC
- Preparing a Form 911 to provide a certified copy of your organisation’s Constitution
Reach out to our friendly team if you need help with your business set up.
Types Of Businesses In Australia
Now that we’ve covered the different types of business structures, let’s move on to the types of business with respect to the nature of business activities and where they are operated.
Brick And Mortar Stores
A common type of business is a brick and mortar store, which is essentially a physical, in-person store.
These have been around the longest and are still known to be a popular business type. Even if customers are just there to browse, there are plenty of opportunities for you to make sales.
If you’re running a brick and mortar store, you’ll likely need a Commercial Lease Agreement. This agreement sets out the terms under which you are using the premises to conduct business activities.
For example, the agreement might set out the following:
- How much rent is to be paid
- The rights of the landlord and tenant
- What happens if the tenant wants to break the lease early
- What activities are prohibited from being conducted on the premises
- Repairs and maintenance
We recommend getting your Commercial Lease reviewed by a legal professional to ensure you are not being deprived of important rights and entitlements in your business relationship.
eCommerce Stores
While physical, in-store businesses are common, so too are online stores. These are often referred to as eCommerce stores.
eCommerce stores saw a rise in popularity due to its increased visibility not just nationally, but across the globe. This provided more opportunities for businesses to expand to overseas markets and increase customer engagement.
In addition, an online presence provides a much more convenient customer experience. With just the click of a button, an item can be on its way!
However, the online world comes with its risks. There are cyber security threats everywhere and possibilities of items being damaged or lost through the supply chain. This is why it’s important that as an online business, you have the right legal documents to mitigate these risks.
For example, it’s essential that an online business has Website Terms and Conditions so that they can regulate activity on their platform, and remove content or users where necessary. With privacy being such a highly regulated area across the globe, a Privacy Policy is also necessary where you are collecting the personal data of users.
If you’re unsure about your obligations or what you need to protect your online business, reach out to our expert eCommerce lawyers who can walk you through the relevant processes.
Marketplaces
A marketplace is another type of business that is often found in the form of an online platform. An online marketplace connects sellers to customers, and acts as a medium to do so.
Marketplaces can get a bit tricky with the legal side of things because the marketplace is not responsible for the actual transaction between the specific seller and buyer. Their sole purpose is to connect them so that sellers and buyers can easily find each other in one place.
So, it’s important that your Marketplace Terms and Conditions cover key matters, such as limiting your liability for what goes on between the buyer and seller. You might also want to cover things like how payment will work or whether users need to create an account before they can further engage with your service.
Marketplaces sound an awful lot like dropshipping models, but it’s important not to confuse the two! They are quite different in the way they are structured and how they operate, and they have different legal requirements, too.
Charities And Not-For-Profit Businesses
We mentioned charities before quite briefly. Charities are a type of not-for-profit business, which (as the name suggests) refers to a business that does not operate to make a profit.
Often, these types of businesses conduct activities for a social cause they believe in.
However, charities and NFPs need to follow a certain set up and registration process that is different to that of a regular business. For instance, charities need to be registered with the ACNC. They also have certain reporting obligations.
Charities also need to have a Charity Charter drafted by a legal professional so that it governs their internal processes and activities. This way, you can ensure compliance with the relevant laws around running a charity in Australia.
Running a charity can also be tricky because one small mistake can mean the disqualification of your business – we’ve written more about false charity claims here.
Key Takeaways
Running a business can be a fun and exciting venture, and with so many types of business structures and business types to choose from, it can be overwhelming when trying to familiarise yourself with all the legal requirements.
To make things a little easier to digest, we’ve listed the key takeaways below:
- Choosing the right business structure is important because it sets out the path your business will take and how safe it will be moving forward
- A sole trader or partnership structure is more suitable for smaller businesses with low-risk activities
- A company or trust structure is better for bigger businesses who may wish to expand overseas or engage in higher-risk activities due to the extra security it provides
- Online stores are a common business type, but there are additional legal requirements such as Privacy Policies, investing in a good cyber security system and website management
- Marketplaces can be a tricky area to navigate as your role of the middle man can be a bit blurred. It’s important to have Marketplace T&Cs that clarify each party’s role and responsibility
- Charities do not operate for a profit, however, there is still a process to follow with respect to registration and reporting obligations.
Choosing the right business structure or type isn’t always easy. Our lawyers have a wealth of knowledge about the business environment and which business type will make your journey both profitable and enjoyable. If you need help, chat to our friendly team!
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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