Key Points:

There are five different business structures in Australia, each with their advantages and disadvantages.

A person may carry on business in Australia as a sole trader, a partnership, a joint venture, a trust or a company.

Sole trader / sole proprietorship

An individual may carry on a business on his or her own behalf as a sole trader, also commonly called a sole proprietorship. A sole trader is relatively simple to establish; there is no separate legal entity other than the individual. A sole trader is therefore personally liable for all obligations incurred in the course of the business and income from the business is taxed at the personal rate of the sole trader.

Unlike other business structures, there is no specific legislation regulating sole traders, however they may be liable to comply with other 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 rights and obligations of the partners between themselves, subject to applicable legislation. A partnership is not a separate legal entity and, as such, the assets of the partnership are owned by the partners jointly or in such proportions as set out in the partnership agreement.

Partners share profits and are jointly and separately severally liable for the obligations of the partnership. However, in some Australian States, a limited partnership may be established under which some (but not all) partners have liability limited to the extent of their capital contribution. However, limited liability partners must take no part in the management of the partnership.

Partnerships are largely governed by Australian State laws, common law and contract law.

Joint venture

Two or more individuals or companies may also carry on a business as a joint venture. A joint venture describes the relationship between multiple parties entering into an agreement to work towards the same strategic goals while remaining separate entities. A joint venture differs from a partnership in that it is often formed for a particular project or business goal, or where the contributions of the venturers are different in type, amount or timing. Joint ventures usually have a defined end. Joint ventures may be incorporated (as a separate legal entity) or unincorporated (a purely contractual arrangement). The rights and liabilities of the respective venturers will depend upon the terms of the joint venture. Joint ventures are governed by the common law, contract law and, in the case of incorporated joint ventures, the Corporations Act.

Trust

A business may be carried on by a trust. The trustee owns the trust property and carries on the business on behalf of the beneficiaries of the trust. The trustee will be liable for the obligations of the trust, but will typically have rights of recourse against the trust property in respect of those obligations. The rights of beneficiaries will depend upon the terms of trust. The beneficiaries' entitlements may be in a fixed proportion or variable at the discretion of the trustee. Trusts are governed by common law and contract law.

Australian company

A business may be conducted through an Australian company. A company is a separate legal entity capable of holding assets in its own name and is liable for its own obligations. The two main types of company in Australia are proprietary and public companies. A public company may also 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. A proprietary company can, however, be simpler and cheaper to administer from an Australian regulatory point of view. An Australian company must have a registered office within Australia, have Australian resident directors (two for public companies, one for proprietary companies) and an Australian resident company secretary (optional for proprietary companies).

There are no residency restrictions on shareholders and no general minimum capital requirements for an Australian company. A company is managed by its directors, but owned by its shareholders (also commonly referred to as members.) Shareholders make a number of decisions on special issues that affect the company by passing ordinary resolutions or, if required by the company's constitution or the Corporations Act, special resolutions. The liability of shareholders will generally be limited to the unpaid amount on any shares held.

Directors are the individuals responsible to manage the company's day-to-day business and affairs. There are a number of common law and statutory duties and obligations imposed on their position, such as the duty to act with care and diligence. These duties may continue even after deregistration of the company. A director who fails to perform these may be guilty of an offence. The primary duty of directors is to act in the best interests of the company. However, if the company is insolvent, or there is a real risk of insolvency, their duty expands to the company's creditors. In such circumstances, directors have a positive duty to prevent the company trading and incurring further debt. Contravening the insolvent trading provisions of the Corporations Act can result in both civil and criminal charges against a director. Australian companies are governed by the Corporations Act, their constituent documents and common law.

Foreign company

A foreign company may carry on business in Australia either as an Australian branch or through an Australian subsidiary company. To carry on business as an Australian branch, the foreign company must register as a foreign company with ASIC. Whether a foreign company carries on business in Australia is defined by certain legal principles. It is generally not sufficient that it merely engages in certain activities in Australia such as becoming a party to legal proceedings, holding director or shareholder meetings, maintaining a bank account, or holding any property.

A foreign company wishing to apply for registration should reserve the company's name to ensure that it is available in Australia and must lodge an application form with ASIC, together with a certified copy of the company's certificate of registration and constituent documents. If any document is not in English, the foreign company should also provide a certified translation of that document. The foreign company must also have a registered office in Australia and appoint a local agent to represent the company in Australia. Once registered, the foreign company is required to lodge copies of its financial statements and comply with various notification obligations under the Corporations Act.

A registered foreign company must notify ASIC when company details change (such as a change in officeholders or registered address). ASIC must also be notified in circumstances where the foreign company ceases to carry on business in Australia, 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 in an Australian State (other than under their own individual or a company name), that person is required to register the business name on ASIC's Business Name Register which is accessible online.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.