COMPANY LAW

FERMS OF BUISNESS ORGANISATION

A business can be conducted either through a company or an unincorporated business structure.

COMPANY

The most common vehicle for the operation of a business is a company. Its principal advantage is that the liability of its shareholders is limited to the unpaid capital on shares held by them. The directors of the company may nevertheless be liable because of legislative provisions such as Section 592 of the Corporations Law and other legislation which imposes personal liability on directors. Furthermore, limited liability will not be available if financiers require guarantees or other securities from the shareholders or directors.

Another advantage to the company is that the corporate tax rate (33%) is much less than the highest personal income tax rate (48.4%), although the profits of the venture have to be sufficient to ensure that use of a company is tax efficient.

Companies pay a flat rate of tax on each dollar of taxable income. The current rate is 33%. However, companies may be entitled to a tax rebate or tax credit for tax payable in respect of dividends included in their accessible income.

In the case of an import business the importer may have to choose between operating through a branch of the overseas company or a subsidiary company incorporated in Australia. To operate a branch in Queensland, the foreign company must be registered in Queensland by lodging its constituent documents and reserving its name in this jurisdiction.  In addition, an Australian resident agent must be appointed to represent the company.

An Australian subsidiary company must have at least two directors, one of whom is an Australian resident and a secretary, who is an Australian resident.

SALE TRADER

A sole trader is an individual who carries on business on his or her own behalf. The individual may carry on business under his or her own name which must be registered under the Business Names Act of Queensland.

The principal advantages of being a sole trader are that it is comparatively easy to windup or sell such a business; the costs of establishing and operating the business are generally less than those of other structures; and apart from an individual tax return, there are generally no other reporting or disclosure requirements.

The major disadvantage is that a sole trader has unlimited personal liability for his or her business obligations and debts. There may also be income tax disadvantages in operating in this way depending upon the profit levels of the business.

PARTNERSHIP

A partnership arises where two or more individuals or companies agree to carry on business together or in common with a view to jointly driving profit. A partnership is not a separate legal entity and the liability of the partners for the obligations of the partnership is joint and unlimited.

The principal advantages of partnerships are the arrangements do not need to be committed to writing, though, for taxation reasons and to avoid future disputes it is prudent to have the full terms of the partnership clearly set out; the degree of control among the partners can be agreed upon and management may be vested in a particular partner or a committee of partners; partnership accounts need not be published; the partnership agreement is a flexible document which may be tailored to meet specific needs.

For taxation purposes, partnership accounts must be prepared on the basis that the partnership is a taxpayer. The income or losses are then credited to the partners in their appropriate share. If profits are made they are taxed in the hands of the individual partners. If losses are made the partners can offset these tax losses against their other Australian income.

TRUSTS

Where a trust is established to carry on a business, the trustee holds both the assets of the business and runs the business for the benefit of the trust beneficiary. The trustee may be a company, thus attracting limited liability and having perpetual successions for the trustee.

The operation of the trust is regulated by a deed, and the flexibility of available trust structures means that any particular deed can be drawn to suit most applications and requirements. The beneficiary's entitlements may be in a fixed proportion or variable at the discretion of the trustee.

A unit trust structure is one where the beneficiary's entitlements to income and capital depend upon the number of units he or she holds on it. A unit trust is more appropriate for an investment between two or more unrelated parties.

Where family businesses are concerned the discretionary trust is a more popular vehicle for investment.  A typical family trust gives the person establishing the trust and the trustee wide discretionary powers in relation to the distribution of income and capital among the beneficiaries.