Startup business structures 

Introduction

As a startup business owner, there are four common business structures available to choose from – sole trader, partnership, company or trust. It is important that careful consideration be taken to ensure the structure is the right one for your drilling business and best aligns with your future goals.

 Sole Trader

Sole trader is the simplest business structure, consisting of only one individual who controls and manages the business. 

This structure is commonly chosen by contractors, as the start up and ongoing cost are relatively low with no registration fees required. Additionally, if circumstances do change in the future, it is flexible to change the legal structure to another.

However, there is unlimited liability for debts and losses, which means there is no distinction between your personal and business assets. Profits made by the sole trader will be considered personal income and taxed accordingly.  

Partnership

A partnership involves two or more people carrying on a business together. There are two forms of partnerships – general and limited. A general partnership is where all partners are involved to a certain extent in the daily operation of the business. A limited partnership is formed by up to 20 people. It has at least one general partner who controls the company’s daily operations and is personally liable for the business debts, and passive partners called limited partners.

Partnerships are generally governed by the law of your state or territory. In Victoria, it is governed by the Partnership Act 1958 (Vic).

This type of structure is easy to set up with relatively low costs and minimal reporting requirements. However, like a sole trader, there is unlimited liability, in that, each partner is ‘jointly and severally’ liable for their share of the partnership debts as well as for all debts of the business.[1] This means each partner will be fully responsible for debts and liabilities incurred by other partners even if they had no knowledge.

Companies

A company has members who own the company and directors who run it. If you are in your start up phase, you can establish a ‘one-person company’ with a sole director and member.

Companies are regulated by the Corporations Act 2001 (the Act) and governed by a constitution or Replaceable Rules contained within the Act.[2] The requirements which govern companies under the Act are generally described as complex and strict.  

One of the advantages of operating a company is the limited liability. If shareholders have no amounts owing but the company goes into debt, the creditors will be unable to retrieve the debts from shareholders. Additionally, due to the limited liability, a company structure will be more favourable to high risk businesses looking to scale up as they have the ability to raise capital through the issue of shares.

However, establishing and maintaining companies can be costly. Companies are required to pay 30% tax on their income,[3] and keep up to date financial records and report to ASIC.[4]

Trust

A trust is an entity that holds property for certain beneficiaries. A trust will either have an individual or corporate trustee. The trustee controls the trust and distributes the profits to the beneficiaries in accordance with the trust deed.

If a trust has an individual trustee, they will be personally liable for the trust’s debts. On the other hand, with a corporate trustee, there is limited liability with personal assets being held separately. Corporate trustees are usually created for self-managed super funds, and not very favourable to contractors for drilling businesses.

The structure of a trust is often complex and can be expensive to establish and maintain. If your business is looking to grow in the future, trust would not be the most favourable. This is because if the profits are retained and not distributed, it will be taxed at the highest individual tax rate.[5]

Conclusion

Before committing to any business structure for your drilling and exploration business you should always receive specific legal advice tailored for your own requirements.

You can contact contact us now and find out more about business structure, most suitable for your new business or you can book an online appointment here to speak with one of our lawyers. 

Important disclaimer: The material contained in this publication is of a general nature only and it is not, nor is intended to be, legal advice. This publication is based on the law as it was prior to the date of your reading of it. If you wish to take any action based on the content of this publication, we recommend that you seek professional legal advice.

 

 

[1] Partnership Act 1958 (VIC), s 16.

[2] Corporations Act 2001 (Cth), Part 2B.4 , s 131- 141.

[3] Changes to Company Tax Rate (30 October 2018) Australian Taxation Office 

[4] Corporations Act 2001 (Cth), Div 5, s 319-322.

[5] See Trust (10 November 2016) Australian Taxation Office 

 

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