Rory Moriarty
Partner •
Sydney
Business structures
Last updated: October 2018
Introduction
A person may carry on business in Australia as a sole trader, a partnership, a joint venture, a trust or a company or in the case of a foreign company as a branch. Different legal frameworks apply in each case including the Corporations Act 2001 (Cth), contract law and a range of industry-specific legislation, as well as common law.
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.
Partnership
Two or more individuals or companies may carry on a business as a partnership. Partnerships (other than certain professional partnerships) are limited in size to 20 partners.
Most partnerships are established by a partnership agreement, which defines the partners’ rights and obligations between themselves, subject to applicable legislation. A partnership is not a separate legal entity and, as such, the partners own the assets jointly or in the proportions set out in the partnership agreement.
Partners share profits and are jointly and severally liable for the partnership’s obligations.
In some Australian states, a limited partnership may be established under which the liability of some (but not all) partners is limited to the extent of their capital contribution. However, limited liability partners cannot take part in managing the partnership.
Partnerships are largely governed by Australian state laws, common law and contract law.
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.
Managed investment schemes cover a wide variety of investments. A common scheme is an Australian real estate investment trust (REIT). Under a REIT, investors pool their money to buy property that individuals would be unable to invest in, such as commercial property. A REIT will be managed by a company, which selects the investment properties. Some REITs specialise in particular sectors, such as industrial property, office buildings, hotels or theme parks.
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 must have a registered office in Australia and Australian resident directors (two for public companies and one for proprietary companies). A public company must also have an Australian resident company secretary; however, this is optional for proprietary companies.
There are no residency restrictions on shareholders and no general minimum capital requirements.
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.
With limited exceptions, a company may be required under the Corporations Act to prepare and file annual financial statements with the Australian Securities and Investments Commission (ASIC). These statements must be prepared in accordance with the Corporations Act and Australian Accounting Standards.
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.
How to register a foreign company
A foreign company wishing to register in Australia should reserve the company’s name to ensure that it is available in Australia. It must also lodge an application form with ASIC, together with a certified copy of the company’s certificate of registration and constituent documents. It must provide translations of any documents not in English.
It must also have a registered office in Australia and appoint a local agent to represent it. Once registered, the foreign company must lodge copies of its financial statements and comply with notification obligations under the Corporations Act.
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.
Business names
ASIC is responsible for registering, renewing and administering business names for all Australian businesses. If a person carries on business anywhere in Australia (other than under their own name or a company name), they must register the business name on ASIC's business name register.
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