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The Right Business Structure to Protect Your Assets

The Right Business Structure to Protect Your Assets

The Right Business Structure to Protect Your Assets

Once you have made the decision to operate your own business, choosing the correct structure is the next step. Keep in mind that your business structure can change if your business grows in a direction that would suit a different structure. It makes sense to seek legal and financial advice before getting started, so you can tailor your business structure to your unique circumstances.

In Australia, your main options for establishing a business are:

  1. Sole trader
  2. Partnership
  3. Joint venture
  4. Company
  5. Trust

Getting a business name is not setting up a business, it is just registering a business name. We’ll discuss that a little more at the end, for clarity.

In deciding which option would best suit you and your business ideas, think about the following:

  • Your existing assets, income, tax and other ownership structures
  • The simplicity of the new structure and your initial set up costs
  • The type of business you would like to operate and the size of the business
  • The likelihood and speed of business growth and the requirements for investment
  • The tax impact upon the business and on you
  • The type of management and control levels required to operate successfully
  • The number of people involved in the management or ownership of the business
  • The degree of flexibility required to adapt as the business evolves and expands or moves in a new direction to first planned
  • The potential risk of the new structure failing and what impact that could have on you
  • The costs and ease of ending the business if it doesn’t turn out

Let’s have a look at potential business structures in light of the above factors.

1. Sole Trader

A sole trader is a very simple business structure and there are minimal set up costs involved for you as the business owner. You will need to register for an Australian Business Number (ABN) in your own name.

If trading under your own name eg. “Harper Lee Consulting” then you don’t need to register a business name. But if you want to trade under another name “Awesome Consulting” then you will need to register a business name. You are still the business, it just has a name that is not your name.

You will bear the responsibility over all of the business functions and will be completely personally liable for all of the debts that the business incurs.

If protection of your personal assets is important to you then this type of business structure might not be the most suitable for your needs. If you own a home or an investment property in your own name and someone sues the business, they are suing you and your property is on the line.

A sole trader business can have quite limited growth potential as it is heavily reliant on the owner and often can consume vast amounts of an owner’s time and resources. Even as a sole trader, you can employ other people, but the business is still intimately associated with you.

A sole trader business will pay tax at the personal tax rate applicable to the business owner.

It is relatively easy to end a sole trader business and cease trading, provided any debts of the business are paid in full.

A good example of a sole trader business could be a business consultant, a freelance writer, an at home hairdresser or a tradesman such as a painter.

2. Partnership

A partnership is similar to a sole trader, except it involves more than one owner. It trades under a registered business name and a partnership can comprise of owners with similar skills (eg. business brokers) or owners with complimentary skill-sets (eg. a graphic designer and a website developer).

Like sole trader businesses, partnerships are easy to establish. You simply register an ABN naming each of the partners in the application. It is also wise to have a partnership agreement prepared to protect the interests of everyone involved, while everyone is still friends and the business is working well. Partnership break ups without a written agreement are a bit like a divorce and can be messy and expensive.

Traditionally, law firms and accounting firms were structured as partnerships.

We’ve seen law firms dissolve without ever having had a partnership agreement and all the profits left in the business were spent on attempting to resolve disputes between the partners when it came to an end.

Partnerships are better for whole of business long term ventures between people. They are not really suited to short-term, part-time enterprises.  The number of partners can vary and can be comprised of individuals, or companies, or trusts.

Each owner pays tax at their own individual rates, depending on their share of the partnership profits. Partners don’t have to hold equal shares and can be split depending on the contributions of the partners. A partnership will require the agreement of all parties if the ownership structure or members are to change, and it is possible that a new ABN will be required if partners change.

When a partnership is working smoothly, it can be a great vehicle to operate a successful business. When a partnership is affected by personal differences between the owners, it can impact quite considerably on the successful business operation. Each partner is 100% liable for all the business debts and their own personal assets can be at risk if the partnership cannot repay its debts or taxes. This is the case even if the partner had nothing to do with incurring the debt in the first place.

We’ve seen partners in business lose their home because one of the other partners committed fraud through the partnership and went to jail, without being able to pay back the missing money. The people owed money were entitled to chase the other partners in the business to get paid, even though they knew nothing about the fraud.

3. Joint Venture

A joint venture is usually set up by a written joint venture agreement between the parties for a particular purpose or project. It is a good structure for operating a specific project instead of continuing indefinitely. It can vary how many entities are involved and can be comprised of individuals, or companies, or trusts.

It is best to seek legal advice before signing a joint venture agreement to ensure you understand your contribution to the venture, what happens when things change during the project and to ensure you are adequately protected if the joint venture is not successful.

A joint venture helps to grow your business through collaboration with other entities that have complementary skills or financial resources. The structure can vary depending on what you want to achieve, the governance type and obligations as well as the division of profits and losses to the parties. The agreement should also contain the process for disagreement or dispute resolution, if the parties’ relationships break down.

Each of the joint venture members are responsible for the profits, losses and costs involved in undertaking the joint venture project. The joint venture is a distinctly separate entity from the members other businesses and assets.

An example of a joint venture might be the combination of ride-share giant, Uber, with vehicle manufacturer, Volvo, for the purpose of producing driverless motor vehicles.

4. Company

A company is a separate legal entity to the business owners. It is a legal vehicle that can incur debts in its own name, can sue and be sued by other parties. It does not cease if an owner passes away but exists until it is wound up. The business owners are the shareholders and can often hold the position of director and secretary as well, particularly in a small business arrangement.

A director is responsible for the management and governance of the company and need not be a shareholder. A company secretary is responsible for ensuring that the reporting obligations of the company are met.

If you are considering setting up a company, you will need a company name, you will have to set up a governing structure with a constitution suitable to your business. The company must be registered with the Australian Securities and Investments Commission (ASIC) and will incur a yearly fee.

There are many complex parts to a company and essential for you to speak to your accountant or lawyer, or both, prior to setting up a company structure. It can have considerable set up costs compared to other entities and there are many legal obligations of the office-bearers. However, there are considerable benefits too.

It is an excellent vehicle to conduct business and ensure your personal assets, such as your home, are protected against legal action.

We had a client who, after audit, was required to repay some tax rebates received as R&D credits, together with penalties. The shareholders thought they had to sell their home to pay the company’s debt. They did not. The company remained responsible for its own debts and the shareholders got to keep their house.

Unless you give a personal guarantee for a business loan, then your private assets are protected. Since the company is a separate legal entity, it has a separate liability from the business owners. It can incur debts that are limited to the value of the company. If an aggrieved party sues the company for the outstanding debts, it is limited to the company itself and cannot sue the owners, unless they have given a personal guarantee, or fall within a category of liability where directors can be found personally liable – such as failing to pay superannuation.

There are other benefits with respect to taxation as well. The company pays tax at a company rate and can pay “fully franked” dividends to its shareholders, which can be very attractive to the business owners, depending on their individual circumstances.

Since November 2021 directors of companies (along with some other entities) now must be issued a Director Identification Number (DIN) which is issued by ASIC.

There are two types of companies – a privately owned company and a publicly owned company. So what is the difference between a private company and a public company in Australia?

4.1. Private Company

A private company is distinct from a public company because it is privately owned. It will often have “Pty Ltd” after its business name, and this means ‘proprietary limited’. This indicates it is privately owned, with limited liability.

A Pty Ltd or proprietary limited It is the most common structure for small businesses. It is incorporated, issues shares, will have a maximum of fifty shareholders, and each of the shareholders are not personally liable for the debts of the business. They will only be liable for any unpaid financial value of their shares. What this means if that if you purchase 10 x $1 shares but only pay the company $5 at that time of purchase, there will still be 50c owed against each of your 10 shares, and that must be paid if called by the company.

A private company is for protection of your personal assets. There are a large variety of share structuring options available, so it is definitely an option to discuss in greater depth with your accountant or lawyer.

4.2. Public Company

A public company is a company that can be listed on the stock exchange and is funded by investors, or a company to be limited by guarantee and operated as a charity or not-for-profit.

Not for profit means the members or shareholders are not entitled to a distribution of the profits of the business and the profits must be reinvested back into the business. In a for profit company, members or shareholders are entitled to receive a distribution of the profits if dividends are paid. Business is not sustainable if it does not generate a profit.

A public company often has “Ltd” or “limited” after its name to indicate that it has limited liability.

For profit public companies have a complex structure and are required to issue public documents when paying dividends or raising capital. Qantas is a public company. Any company you can purchase shares for on the Australian Stock Exchange is a public company.

A public company remains an option if you grow your business to the point where you would like to take it public and raise considerable share capital through a public offering.

A not-for-profit public company is an appropriate structure for a large charity.

5. Trusts

A trust can be an excellent asset protection structure, but you will need tailored legal and financial advice to correctly suit your personal circumstances. A trust is a vehicle that enables a trustee to act in the best interests and hold property or income for a particular purpose, for the benefit of the beneficiaries or trust members. The trustee can be an individual or a company.

Whilst there are many types of trusts available, there are two main types of trust used in small business. They are:

  1. Unit Trust
  2. Discretionary or Family Trust

The trust is set up with a formal trust deed that provides guidance on the way that the trust operates and the powers of the trustee.

There are other parties named in the trust deed – such as the settlor who won’t have any future involvement in the trust, but who is essential in its establishment.

Superannuation trusts are often established with limited investment categories, for example, an inability to invest in cryptocurrency.

The trustee is responsible for administering the trust. Provided that the trustee behaves appropriately, the trustee is usually entitled to be indemnified out of the trust fund for any liabilities incurred in association with the administration of the trust. If the trust is an individual trustee, their own personal assets can be at risk if the trustee is sued and a good reason to appoint a company as a trustee.

A trust may also be entitled to a 50% capital gains tax exemption, but a company is not. You should seek accounting advice when reviewing your tax obligations.

A discretionary trust is the most common structure in small business.

A unit trust is one of the most common structures for small property development. 

Unit trusts have certainty in proportionate interests, whereas a discretionary trust is variable depending upon the decisions of the trustee. Where a greater degree of certainty in financial dealings of trust property is required, the unit trust is more effective. Each unitholder of the trust holds a specified number of units and the trustee has no discretion to give unitholders distributions that are inconsistent with the rights of other unitholders. You can transfer a unit to another unitholder, just like shares in a company.

We normally recommend that people involved in a unit trust structure enter into a unitholder agreement, similar to a shareholder agreement, to better protect their interests.

How can Onyx Legal help you?

Book an appointment to talk with one of our team about your business structure and whether it is still the most appropriate structure for what you are doing and what you’d like to achieve.

Your Guide to Terms & Conditions

Your Guide to Terms & Conditions

Your Guide to Terms & Conditions

The last few years have seen lots of businesses pivot to make greater use of online tools and increase the opportunity for online sales.

As a business owner you should be considering the exposure of your online business and in particular, when you last updated your terms and conditions, your privacy policy and your disclaimer – or even if you have them to protect your business.

The post COVID-19 era has resulted in more important updates, changes and governmental compliance responsibilities than prior to the pandemic, and increased the complexity of navigating the online business world.

Your terms and conditions set out essential protections for your business including identifying which laws govern your website and business, reducing your chance of a dispute arising, giving you the freedom to remove unwanted people, and placing responsibilities on the user that are important to the way you do business.

Having terms and conditions can significantly reduce any future problems from arising, if you have taken the time to obtain appropriate legal coverage.

Services Online

If you sell a service and have any type of intellectual property, such as an education course or unique planning tool, you will want to ensure one of your terms and conditions include protection. As other businesses move online, they may copy some of your own website and design, so a copyright clause can at least alert visitors to your website that you intend to protect your intellectual property and caution them against copying it.

As a practical tipdo not copy someone else’s website content. It is copyright infringement. If you are checking out what your competitors are doing and want to create something similar, at least choose a competitor on the other side of the world who might have a totally different client base. Don’t copy your local competitor just down the road and expect them not to get upset!

Be innovative. Even if you sell hard products, you can use your online environment to create membership communities, offer education, host competitions etc.

Goods Online

If you manage a type of retail or goods-based business, necessary terms and conditions would include your refund and return policy. Ideally this would set out in very clear terms what the customer should expect in the event that they sought a refund or wanted to return their items.

Your customer must be aware of your terms and conditions before purchase for them to be binding. It saves a lot of hassles and time down the track if your terms of trade are clear and easy to access. It is worthwhile noting here that some terms and conditions cannot override Australian consumer guarantees. Any attempt to limit the Australian Consumer Laws (ACL), is invalid. Consumer guarantees now apply to products and services with a value up to $100,000, regardless of who the purchaser is. 

We can help you navigate your obligations under Australian Consumer Law.

Interesting Recent Cases

Consider the 2019 case of Australian Competition Consumer Commission (ACCC) v Jetstar.

Jetstar tried to present their air fares in a way that excluded any right to a refund for the cheaper air fares. The ACCC commenced proceedings against Jetstar for false and misleading representations, as well as breaching the automatic consumer guarantees that cannot be excluded, restricted or modified, no matter how cheap the air fare was for the consumer.

The Federal Court ordered Jetstar to pay a financial penalty of $1.95 million for the breaches as well as an undertaking to commit to amend its policies and practices to ensure they are consistent with the ACL. This undertaking was court-enforceable if they did not comply.

Another recent case that illustrates the importance of having express terms and conditions is the case of Hardingham v RP Data. Hardingham was a real estate photographer who had an exclusive licence with his business ‘Real Estate Marketing Australia Pty Ltd’ (REMA) for the copyright of his works. He had an ongoing informal oral agreement between him and the various real estate agencies for the use of his photographs and floor plan images for the agencies marketing campaigns. He did not have any express terms and conditions in place between him and the various agencies.

These agencies would then upload his work to Realestate.com.au for the marketing campaigns. In order to proceed with the upload of the photographs, the agency (often a subscriber) would need to agree to the terms and conditions on the website as set out by Realesate.com.au. The terms and conditions on the Realestate.com.au website contained a sub-license to “other persons” in a detailed form.

Realestate.com.au then sub-licensed to RP Data who then published the photographs on its websites and superimposed a logo on the images. RP Data is a subscriber-only database of real estate sales and rental history. After an appeal to the Full Court of the Federal Court of Australia, the court held by 2:1 majority, that the sub-licence to RP Data who then used and manipulated the photographs and images was an infringement of copyright.

The court held that the original owner of the copyright did not agree to the sub-licence when it verbally agreed to the various real estate agencies uploading the images to Realestate.com.au.

We have assisted professional real estate photographers to prepare appropriate terms and conditions for the use of their images to ensure they are paid for use.

This case is a good example where the copyright owner might have avoided going through the expensive and lengthy court process, and the subsequent need to appeal, to receive a judgement in his favour, if he had express terms and conditions that explicitly set out the use of the photographs and images.

Since he had only oral agreements between him and the real estate agencies, the court had to determine if the implied terms were so obvious and were necessary to give business efficacy to the contract. Thankfully the Full Court found that there was such an implied term in this instance.

COVID-19 Impact on Terms and Conditions

Consider another recent case that relied on terms and conditions under a contract that was affected by COVID-19 shutdowns is the case of Dyco Hotels Pty Ltd v Laundry Hotels (Quarry) Pty Ltd. This case concerned the sale of the Quarryman Hotel in Pyrmont, New South Wales (NSW). The contract was signed on 31 January 2020, with the date of settlement set for 27 March 2020.

The contract price was for $11,250,000 and included the associated hotel licence, the gaming machine entitlements and the hotel business itself. The deposit paid by the buyers was $562,500.

In the sale contract, there was an Additional Clause 50.1 which imposed various obligations upon the vendor, including the obligation to continue to operate the business “in the usual and ordinary course as regards to its nature, scope and manner”.

On the 23 March 2020, 4 days before settlement, public health orders issued shutting down the majority of hospitality services. This made it unlawful for the hotel to continue to operate, except for takeaway food and drinks, in accordance with the public health directions.

The buyers argued that the business sale was frustrated by the public health orders since the hotel was no longer able to operate in the “usual and ordinary course as regards to its nature, scope and manner”. They asked for return of the $562,500 deposit and claimed the value of the assets decreased by $1 million due to the public health orders.

The vendor disagreed.

The vendor’s position was that the hotel continued to trade as a going concern within the confines of the health orders and in accordance with the legal restrictions that had been imposed upon it. If the vendor had operated contrary to the public health orders, it would have placed the future operation of the business in jeopardy, including the hotel licence to operate. This would have damaged the goodwill of the hotel. The vendor also argued that they were entitled to terminate the contract, retain the deposit and seek damages for the loss of the bargain.

The NSW Supreme Court found in the vendor’s favour and held that the contract was not frustrated by COVID-19 public health orders. The vendor was entitled to keep the $562,500 deposit and recover damages as well for the loss of bargain. The court assessed the damages to be $900,000 and deducted the deposit of $562,500 from that amount.

Although the terms and conditions in this case were not online but contained in sale documents, it does demonstrate that carefully considered terms and conditions can make a big difference to the outcome of a dispute. 

The purchasers might have been better protected if there were any contractual warranties given by the vendor about the future financial performance of the hotel. Since there were no warranties given, the purchasers accepted the risks.  The purchasers were experienced in the Sydney hotel operations business and understood the various potential risks of legislative changes, despite not being familiar with the impact of a pandemic.

This is a good illustration of the impact of the COVID-19 pandemic on terms and conditions and contemplation of the risks associated with business operations. Following the lessons in this case, a vendor would be wise to include business conduct obligations under the contract that can be altered or changed to comply with public health emergencies. A buyer would be wise to include options to terminate the contract in the event where the value of the business has dramatically dropped due to unexpected circumstances.

Another COVID-19 impact on the operation of businesses can be seen in the recent case of Flight Centre Travel Group Limited Trading as Aunt Betty v Goel. Terms and conditions were online and agreed to by click wrap agreement – where the buyer has to check a box stating they agree to terms and conditions before being able to complete the purchase.

In the first hearing, Goel had been awarded a refund on the basis that the purchased flights hadn’t been received.

On the 5 November 2019, the customer (Goel) had made a booking online, for the return flights from Sydney to Delhi scheduled for flights during April 2020. The $2,336.30 flights were with Malaysia Airlines which cancelled the flights during March 2020, when COVID-19 public health orders restricted international travel.

The terms and conditions stated that Flight Centre was only agent and not responsible for delivery. If that were the case, Malaysian Airlines would have been liable to provide the refund, not Flight Centre.

The case we are referring to was an appeal by Flight Centre where it argued that the business Aunt Betty operated as an agent, and not the supplier of the service and therefore was not liable for actions by the airline in cancelling the flight. It would have set a damaging precedent for Flight Centre to be liable to refund all booking costs where it had not received the bulk of those funds, which had been passed on to the suppliers (like Malaysian Airlines) pending delivery.

The tribunal, on appeal, held that Goel would have been aware at the time of booking that he had booked the flights with an agent and not the actual airline carrier itself. It is interesting to note that the court decided that the booking could not have been made without the positive acknowledgement of the terms and conditions on the website. The court also decided that there was no breach of the consumer laws by the agent, and it was not liable to provide the refund.

Conclusion

In order to operate your business successfully, you need to be mindful of the ever-changing landscape that both COVID-19 public health emergencies create, and the increasing demands shaped by conducting more business in the online space.

The pass of change suggests you have your terms and conditions of trade reviewed and updated more frequently, with consideration of all aspects of a transaction.

If you are contemplating signing any contracts for business sales or purchases, it would also be advisable to ensure you are covered in the event that COVID-19 emergency public health order impacts adversely on the contract price and business valuation or operational requirements.

The new year is also a good time to evaluate your privacy policies and disclaimers, as well.

How can Onyx Legal help you?

We love reading and writing terms and conditions. Someone has to do it. It’s fun for us. If your terms and conditions are like a different language for you and you’d rather not think about them, let us help. Book a time to chat with one of our team about how we can help update your online terms sooner rather than later.