Choosing a business structure is one of the important legal decisions involved in starting or growing a business.
Your structure can affect who owns the business, who makes decisions, who enters into contracts, how liability is managed and what happens if ownership changes later.
Common Australian business structures include sole trader, partnership, company and trust arrangements. There is no single structure that suits every business, so the right choice depends on how you intend to operate and what you may want to do in the future.
Key Takeaways
- Common Australian business structures include sole trader, partnership, company and trust arrangements.
- Your structure can affect ownership, control, liability, contracts and future changes to the business.
- Where there are multiple owners, the governing documents should clearly address decision-making, funding, transfers and exits.
- Review your structure when ownership, activities or future plans change.
- Legal structuring advice and tax or accounting advice deal with different issues and should be considered separately.
Table of Contents
- Why Business Structure Matters
- Sole Trader
- Partnership
- Company
- Trust
- Business Structures With Multiple Owners
- How to Assess Your Business Structure
- When to Review or Change Your Structure
- Legal Advice vs Tax and Accounting Advice
Why Business Structure Matters
A business structure is the legal arrangement through which a business operates.
It can affect matters such as:
- who owns the business;
- who controls day-to-day and major decisions;
- who enters into contracts;
- who owns business assets;
- personal liability;
- how new owners may be introduced;
- how ownership may be transferred;
- ongoing legal and administrative obligations; and
- what may happen if the business is later sold.
Business-name registration is separate from business structure.
A business name identifies the name under which a person or entity carries on business. Registering a business name does not create a company and does not itself give proprietary trade mark rights in the name.
You can read more about our business structuring services.
Sole Trader
A sole trader is an individual who owns and operates the business personally.
The business is not a separate legal entity from the individual.
This means the sole trader is generally personally responsible for the business’s debts and legal obligations.
A sole trader structure can be relatively straightforward to establish and administer, but the individual should understand that business and personal liability are not legally separated in the same way as they are with a company.
Issues to consider include:
- the level of commercial risk;
- contracts the business will enter into;
- whether significant assets will be acquired;
- whether employees will be engaged;
- whether another owner may join later; and
- future growth or sale plans.
Partnership
A partnership generally involves two or more people carrying on a business together.
The precise legal position can depend on the applicable partnership legislation and the arrangement between the partners.
Partners should consider documenting their relationship in a written Partnership Agreement.
A Partnership Agreement can address matters such as:
- ownership interests;
- initial contributions;
- roles and responsibilities;
- decision-making;
- profit distributions;
- additional funding;
- admission of new partners;
- transfer of interests;
- deadlock;
- retirement or exit;
- death or incapacity of a partner; and
- what happens when the partnership ends.
A Partnership Agreement regulates the relationship between the partners. It does not necessarily prevent third parties from having rights against a partner under applicable law.
See our partnership and shareholder agreement services.
Company
A company is a separate legal entity from its shareholders and directors.
The company can:
- own assets;
- enter contracts;
- employ people;
- borrow money;
- own intellectual property; and
- sue or be sued in its own name.
Shareholders own shares in the company, while directors are responsible for managing or overseeing its affairs.
A company structure can provide legal separation between the company and its owners, but it does not remove every source of personal liability.
Personal liability may still arise through matters such as:
- personal guarantees;
- breaches of directors’ duties;
- insolvent trading;
- certain tax liabilities; and
- other obligations imposed by law.
Where a company has more than one shareholder, a Shareholders Agreement can document how the owners intend to manage their relationship.
Company Constitution and Shareholders Agreement
A company may be governed through the Corporations Act replaceable rules, a constitution or a combination of both.
A Shareholders Agreement can sit alongside those arrangements and deal with commercial matters between the shareholders.
The documents should be prepared so they work together rather than creating inconsistent obligations.
Trust
A trust is an arrangement under which a trustee holds or manages trust property for beneficiaries in accordance with the trust deed.
The trustee may be an individual or a company.
The trustee is the person or entity responsible for operating the business on behalf of the trust and entering into contracts in that capacity.
Issues to consider can include:
- who acts as trustee;
- who has power to appoint or remove the trustee;
- who the beneficiaries are;
- how decisions are made;
- how the trust deed deals with changes in control;
- ownership of business assets;
- who enters into business contracts; and
- how the structure may affect a future sale or succession plan.
Trusts can involve additional legal, accounting and tax complexity, so professional advice can be useful before establishing or changing a trust structure.
Business Structures With Multiple Owners
If more than one person will own the business, it is useful to discuss the ownership arrangements early.
Questions to consider include:
- Who owns what percentage of the business?
- What will each owner contribute?
- Who will work in the business?
- How will major decisions be made?
- Which decisions require unanimous approval?
- What happens if additional funding is required?
- Can an owner sell their interest?
- What happens if the owners disagree?
- What happens if an owner dies or becomes incapacitated?
- How will an owner exit?
Depending on the structure, these matters may be documented in a Shareholders Agreement or Partnership Agreement.
Putting the arrangements in writing can help make each owner’s rights and obligations clearer.
How to Assess Your Business Structure
A practical review starts with how the business operates now and then considers what may change next.
- Describe the business. Record what the business does, its main activities and how you expect those activities to develop.
- Map ownership and control. Identify current owners, future owners and who has authority to make important decisions.
- Review the governing documents. This might include company records, a constitution, Shareholders Agreement, Partnership Agreement or trust deed.
- Identify important assets. Consider equipment, intellectual property, contracts, leases, licences and other business assets and who legally owns them.
- Consider future changes. Think about investment, new owners, succession, franchising, expansion or a possible sale.
The aim is not to assume the existing structure is wrong. It is to consider whether it still reflects how the business operates and where you expect it to go.
Business Assets and Intellectual Property
The business structure can also affect who owns important assets.
Examples include:
- trade marks;
- domain names;
- equipment;
- software;
- customer contracts;
- leases;
- licences; and
- other intellectual property.
If assets are owned by one entity but used by another, the legal arrangements should be considered carefully.
This can become particularly important when bringing in an owner, restructuring or preparing the business for sale.
See our trade mark and intellectual property services.
When to Review or Change Your Structure
A structure that suited a business when it started may not always suit it later.
A review may be appropriate when:
- a new owner is joining;
- an existing owner is leaving;
- the business is growing significantly;
- new commercial risks are being taken on;
- the business is acquiring substantial assets;
- outside investment is being considered;
- the business is preparing to franchise;
- succession planning is underway;
- the business is preparing for sale; or
- the current documents no longer reflect how the business operates.
Changing structure can involve more than registering a new entity.
Depending on the circumstances, it may also require attention to:
- contracts;
- business names;
- leases;
- licences;
- employees;
- banking arrangements;
- intellectual property;
- PPSR registrations; and
- ownership of business assets.
Legal Advice vs Tax and Accounting Advice
Business structuring can involve legal, accounting, tax and financial considerations.
A commercial lawyer can advise on legal matters such as:
- ownership;
- control;
- liability;
- governing documents;
- Shareholders Agreements;
- Partnership Agreements;
- business contracts;
- asset ownership; and
- legal steps involved in restructuring.
Tax, accounting and financial consequences should be discussed separately with appropriately qualified advisers.
The legal and tax sides of a structure often need to be considered together, but they are different areas of professional advice.
How Rise Legal Can Help
Rise Legal assists Australian business owners with the legal aspects of business structuring.
Our work can include:
- business structuring advice;
- Shareholders Agreements;
- Partnership Agreements;
- business contracts;
- Terms and Conditions;
- contractor agreements;
- trade marks;
- commercial leases;
- PPSR matters;
- franchising; and
- business sales and purchases.
Rise Legal provides fixed-fee proposals for defined legal work so the scope and professional fee are agreed before work begins.
Rise Legal focuses on commercial and business law and does not undertake disputes or litigation.
Contact Rise Legal to request a fixed-fee proposal for business structuring advice.
Frequently Asked Questions
What are the main business structures in Australia?
Common Australian business structures include sole trader, partnership, company and trust arrangements.
Other structures also exist, so the appropriate arrangement depends on the business and circumstances.
Which business structure is best?
There is no single structure that is best for every business.
The choice can depend on ownership, control, liability, future investment, succession, administration, tax and other considerations.
Can I change my business structure later?
Yes, business structures can often be changed as circumstances change.
The legal, tax and administrative consequences should be considered before restructuring because contracts, assets, licences and registrations may also need attention.
What is the difference between a sole trader and a company?
A sole trader operates the business personally and is generally personally responsible for its obligations.
A company is a separate legal entity with its own rights and liabilities, although directors and shareholders can still have personal exposure in some circumstances.
Do I need a Shareholders Agreement if I have a company?
A Shareholders Agreement is not mandatory for every company.
Where there are multiple shareholders, it can be useful for documenting matters such as decision-making, funding, transfers, deadlock and exit arrangements.
Does registering a business name mean I own the name?
No.
Business-name registration does not itself provide proprietary rights in the name.
Trade mark registration is a separate process that may provide legal rights in relation to a registered brand and specified goods or services.
When should I review my business structure?
A review may be useful when ownership changes, the business grows, significant assets or contracts are being taken on, investment is being considered, or the business is preparing for franchising, succession or sale.
Article by
Helen Kay, Principal Lawyer, Rise Legal
Helen Kay is the Managing Director and Principal Lawyer at Rise Legal, an Australian commercial and business law firm advising business owners, franchisors and franchisees across Australia. Helen practises in commercial law, franchising, business contracts, business sales and purchases, trade marks and related business law matters.
Disclaimer
This article provides general information only and does not constitute legal advice. It does not take into account your specific circumstances. Laws and regulatory requirements may change, so you should obtain legal advice relevant to your situation before acting on the information contained in this article. Liability limited by a scheme approved under professional standards legislation.
