Friendly Reminder

Australia is experiencing serious inflation right now, and many people feel that wage growth is falling far behind the rise in prices — and once you look at property prices, the sighs only get heavier. You may have wondered: instead of slogging away as an employee for a lifetime, perhaps it’s time to give being your own boss a try.

Skilled migration is still the mainstream of Australian immigration, but governments at every level are increasingly encouraging skilled migrants to try their hand at small business. Canberra and Queensland both have well-established skilled migration — small business pathways, and in Tasmania more and more people are meeting the requirements for state sponsorship invitations, or for the 489-to-887 PR conversion, through running a small business.

For this reason, for new migrants or prospective migrants in Australia, choosing the right business structure when starting out has gradually become a common question. Today NS Legal will walk you through the differences, pros, and cons of the three basic structures.

Sole Trader

Partnership

Company

One

Sole Trader

This is the simplest form of business organisation — you independently manage and run the business yourself, and all obligations arising from the business are borne by the sole trader personally. For tax purposes, there are obligations to keep records, retain them, and lodge returns, and the individual and the business are treated as one.

Advantages:

– The sole trader has full control over the management of assets and profits.

– Because the structure is direct and simple, set-up costs are low and the legal requirements are minimal. If you need to transfer ownership or wind up the business, the process and communication involved are straightforward.

Disadvantages:

– The operation and expansion of the business may be limited by the sole trader’s own capabilities and capital resources.

– For tax purposes, the sole trader pays tax at their individual marginal tax rate.

– The sole trader has unlimited personal liability for the debts of the business. If the business becomes insolvent, the sole trader must use their personal assets to repay the business’s debts.

Two

Partnership

Formed by an agreement between 2 to 20 people, who jointly share the profits generated through contributions of capital, time, technical skills and the like, and who also jointly bear the responsibilities and losses that arise.

Advantages:

– Although the partnership structure is also relatively simple and low-cost, additional funding can be accessed through partners’ personal resources or financial services.

– Partners can each take on their own responsibilities and bring their respective strengths, jointly decide on the operation and management of the business, share profits according to a formal agreement, and together face difficulties and losses.

Disadvantages:

– Partners need to jointly enter into a partnership agreement. The partnership agreement will determine the nature of the partnership, each partner’s contribution ratio, each partner’s rights and obligations, dispute resolution within the partnership, profit and loss sharing, duration of joint operation, and many other matters. For this reason, a poorly drafted partnership agreement can have a detrimental impact on the future operation of the partnership.

– If one of the partners passes away or becomes bankrupt, the partnership may face dissolution. If the remaining partners decide to continue the business, it may be necessary to form a new partnership.

– Every partner is responsible for the debts and conduct of the business.

– The operation of a partnership can be affected by personal issues of a partner as well as by disagreements between partners. Among these, the transfer of a partner’s ownership interest is a complex process, and admitting a new partner requires the consent and authorisation of all existing partners.

Three

Company

Australian companies are divided into proprietary (private) companies and public (listed) companies — we’ll focus on the former. A proprietary company may have up to 50 non-employee shareholders. In terms of regulatory requirements, proprietary companies are relatively simple. To establish a company in Australia, a registered office location must be set up within the country, and a proprietary company must have at least one director who ordinarily resides in Australia and is at least 18 years of age. However, shareholders of a company are not restricted by residence, and there is generally no minimum capital requirement.

Advantages:

– Ownership rests with the shareholders and the company is managed by its directors. The company is an independent legal entity and can bear liability in its own right.

– Shareholders have limited liability to the company, generally limited to the amount they have agreed to contribute. Under ordinary circumstances, a shareholder’s personal assets will not be affected by the company’s losses or debts (unless the shareholder has given a guarantee for the company’s business).

– The business will not come to an end because of the illness, death, or retirement of any single shareholder, and the transfer of ownership is relatively direct and clear.

Disadvantages:

– Compared with sole trader and partnership structures, setting up a company is more complex, involves more expense, and also requires more professional legal and accounting advice.

– There are more record-keeping and reporting requirements, and the corresponding legal requirements are more extensive, more complex, and more stringent.

– Directors of a company may bear greater risk. In certain circumstances, if a director has reasonable grounds to suspect that the company is insolvent or will become insolvent and fails to prevent insolvent trading or fails to prevent the company from incurring new debts, the director may be held personally liable.

Final Thoughts

As to which business structure best suits your personal, financial, and business circumstances, we recommend contacting a professional lawyer for in-depth advice. After all, every entrepreneur hopes to s\ucceed — and no one wants to take a wrong step right at the start.