Types of Incorporated Structures in Australia - Essay Example

Name Tutor Course Date Types of Incorporated Structures in Australia Introduction A business structure refers to an organizational system of administration, and of running a business that has been adopted for conducting the commercial affairs of the specific entity. Businesses require a stable operating environment. Each business is categorized on the basis of how it is governed and also the activities involved in. This paper focuses on the various types of incorporated business structures in Australia, distinguishing each of them, based on their characteristics and also the organization regulating them (Dagwell 11). In Australia, there are four different structures namely: sole trader, partnership, trust, and company. According to Jim, each of these structures attracts different legal and taxation consequences (2). There are different types of licenses required, level of personal liability, and specified paper work. The control that one has over the business and whether one is considered as the owner or a subordinate is also essential. Sole proprietorship An individual conducting business on his own, he or she is referred to as a sole trader and this type of structure is best regarded as sole proprietorship. On legal perspective, there are no barriers between the business and individuals. According to Nolan, this means that a sole trader is personally liable for any obligations that often come up in the process of business transactions. Such obligations include debts and court judgments (22). For a sole trader, who may wish to use a different name in running the business, he or she is to register the name with the registrar of companies and posses an Australian Business number. Legally, all business profits are regarded as personal income and thus taxable under a tax file number (Jim 34). Advantages of sole proprietorship It is simple and less complicated to set up and run the business. The owner has all profits for him or herself and has full control over the business thus hastening the decision-making process regarding the entity. There is reduced need for lots of paper work since it is the owner who runs the business. In a sole proprietorship business, there is no need to have a new business name to register with because the owner is able to use his or her name in identification of the business (Tomasic 50). Demerits of sole proprietorship The sole trader is fully liable for all the liabilities of the business and should be able to bear with the claims of his or her employees if any. The owner bears all the losses. A sole proprietorship for of business is demanding to the extent that it is hard for him or her to take time offs since he has to be present in the running of the business entity. It is more challenging to get financing for instance for financial institutions in a case where one is in need of a loan. The business is also characterized with a lot of complications when an individual wants to sell the business or transfer ownership. Most businesses tend to become extinct when the owner dies or becomes ill to a point in which it is impossible for them to attend to the daily routine and tasks. Partnerships A partnership is formed when two or more individuals of up to 20 come together in a joint effort of creating and running a business with a view of getting profits. In a partnership, all the individuals must be bearing the same goals. In running and managing of the business, each partner is responsible and liable for the consequences of the decisions made by other partners. On a legal point of view, all the partners are to be treated equally. In the case of distribution of profits and losses, if there is no legal agreement, they are to be shared equally. However in other cases, an agreement can be arrived at, that profits be shared based on the ratio in which each of the members contributed to raising the finances. Therefore, it is required that at the start of the business the agreement is recorded and all relevant aspects pertaining the business be arrived at by all. Since a partnership has no separate existence from the ones who make up the partnership, all partners are equally and jointly liable for all the business debts and obligations. Accordingly, each partner is prone to being sued on basis of the law and be required to take part in the payment of any debts of the partnership. However, if this happens, a partner has the right to sue or cross claim against the other partner or partners for their share of the debt (Dagwell 45). Bratton et al. point out that there are three categories of partnerships. These are: limited partnership, general partnership and family partnerships. A limited partnership is one in which the general partner runs the business and has a personal liability whereas the limited partners are basically passive investors and liable for no more than their stake in the partnership. A general partnership is one in which all the individuals are equally responsible for all the business obligations and each has an unlimited liability in the case of payment of debts. On the other hand, a family partnership is one in which two or more of the partners are related (Gregoriou 10). To set up a partnership the following is required. Firstly is to register the name articulated to the business under the partners’ names. Secondly is to register with a fee to obtain the Australian Business Number (ABN) to the Australian Business Registrar. Lastly, the partners have to find a lawyer who is to come up with the partnership agreement that is to run the business (Gregoriou 7-8). Advantages of partnerships It is fairly easy to and less expensive to form and run a business It is easier to distribute obligations and tasks since the business and all its assets are jointly owned by all the individuals in the partnership It is somewhat easier to come up with the required capital by summing up the resources from each of the partners: There is reduced need for paperwork. Demerits of partnerships Regardless of shares that one holds in the business entity, each partner is equally responsible for all the liabilities of the business: Cases of frequent quarrels amongst partners are inevitable: In the instance where there is need to transfer the ownership, it can be less or more difficult in regard to the agreement set up and the financial resources in the forming of the business (Bratton 19). Company A company is a legal entity that exists separate from its owners often referred to as the “shareholders” and those who manage the affairs of the company who are the “Directors”. Therefore, in any company, the shareholder and directors are not liable for the debts of the company. In Australia there exist two categories of companies and where each of them falls, is determined by the liability that can be imposed on the shareholders. These are: Company limited by shares and company limited by guarantee. A company limited by shares is one in which the liability of the shareholders is limited to the value of their shares. These types of companies can be either public or private. A company limited by guarantee refers to non-trading organizations such as sporting clubs, charitable organizations, and relief aid organizations just to name a few (Bratton 28). Companies limited by shares Public companies These are companies whose larger part of the shares is owned by the public. For a public company to exist there must be at least one shareholder but there is no limitation to the number of shareholders. In public companies there is no limitation on the amount of funds that can be borrowed from the public. The name of a public company has to bear the word “limited” or “Ltd” at the end. The liability of the shareholder is limited to the balance owing to the shares if any. Private companies Private companies do not sell their shares to the general public. A private company can have a minimum of one shareholder and a maximum of 50 members (shareholders). In a private company, the transfer or sell of shares is restricted in such a way that the directors of the company must first approve. The liability of the shareholders is limited to the number of uncalled shares if any. The accounting requirement of a private company is subject to whether the company is classified as either a small or large company. A private company’s name has to have the name “Pty Limited’ or “Pty Ltd” at the end. Company limited by Guarantee A company limited by guarantee is limited to the contribution of the members in acquiring the company’s assets in the case of the company being wound up. Company’s limited by guarantee are legally bond to not taking part in activities that are profit oriented. Companies limited by guarantee are thus related to religious and charitable organizations amongst others. Advantages of Companies A company is able to carry out its activities anywhere in Australia. It is easy and less complex in the case of either selling or transferring ownership and obligation of one’s mandate to business debts and other liabilities is reduced. In the event of death of one of the shareholders, the company’s structure ensures there is continuity in the operation s of the company. There is reduced tax rate for individuals since the company is taxed as a whole and not on an individual perspective. There is limited liability in that the members are only in a position of losing their shares but are not liable for the company’s debts: There is mobility in managing the business affairs of the company and distribution of profits amongst shareholders. Demerits of Companies It expensive to set up a company in terms of the capital requirement and more paperwork is needed: Companies are more regulated by the authorities compared to other structures. All profits are taxable and in the case where the directors fail to comply with their legal obligations, they are directly liable for the company’s debts. Financial institutions may not agree to lend the company unless the shareholders or directors provide personal guarantees. Trust A trust is where a trustee holds a number of assets in his name. However, the assets are aimed at benefitting other groups of people who are referred to as the beneficiaries. Makari argues that the work of the trustee is to make use of the property that belongs to the trustees to benefit themselves but not for his/her own benefit (6). The reason for creating trustees is to enable flexibility during the planning and maximization of tax. The protection of assets is also guaranteed. Trusts also provide certain income tax savings by distributing income among tax-advantaged beneficiaries (The TMS Continuum 4). As long as the profits are well distributed among the beneficiaries, a trust cannot be compelled to pay income on the generated profits. There exist two types of trusts in Australia. They include unit trust and discretionary trusts. In a unit trust, the ownership of the units is bestowed on them. The trustee is mandated with the task of distributing the income to the associated beneficiaries based on the class of unit holding in the trust. In a unit trust, the specified holder is permitted to have a specified share of income or property, the same way it is done in a shareholder company. Nevertheless, the various classes may have equal or different rights as well as entitlements (Makari 12). A discretionary trust is one in which the trustee is in a position to decide which of the beneficiaries will receive distributions of both income and capital and in what amounts. Advantages Since a trust is run by a trustee, he or she responsibly liable for any debts incurred. A trust exhibits mobility in distribution of profits to shareholders. It is also easier and less complex to sell or transfer ownership (Dagwell 23). Demerits A trust is characterized by more paperwork. It is expensive to set and manage a trust. A trust is limited to being in operation for not more than 99 years. Organizations Regulating Company Structures in Australia 1) Australian Business Registry. This organization is solely responsible for registration of all entities: sole proprietorship, partnership and trusts. It also has the mandate of giving the Tax File Number (TFN) to any registered company. 2) Australian Securities and Investment Commission (ASIC) This is the organization responsible for the registration and regulation of the operation of Company’s. Conclusion It is worth noting that the choice of business structure can determine the destiny of the business. The success or failure will be determined with the choices made. They will determine how the available assets are taken care of and how the sovereignty is conserved. The choices made should be able to overcome the impending risks. The decision making process determines the nature of tax status of the business and hoe immunity can be waived. The requirements of the business are determined by choices and they also guide in the determination of business partners within the legal framework chosen for economic development. Works Cited Jim, Psaros. Australian Corporate Governance: A Review and Analysis of Key Issues. Australia: Pearson Higher Education AU, 2008 Makari, Monica. How to open a company in Australia. Australia: Monica Makari, 2009. Dagwell, Ron. Graeme Wines, Cecilia Lambert. Corporate Accounting in Australia. China: Pearson Higher Education AU, 2011. Gregoriou, Greg. Initial Public Offerings (IPO): An International Perspective of IPOs. New York: Butterworth-Heinemann, 2011. The TMS Continuum. The Australian Immigration Book: 2014. Australia: Autonet Pty ltd, 2014. Nolan, James. Australia Business: The Portable Encyclopedia for Doing Business with Australia. New York: World Trade Press, 1996. Tomasic, Roman, Stephen Bottomley, Rob McQueen. Corporations Law in Australia. New York: NerdPress, 2007. Bratton, John, Carolyn Forshaw, Militza Callinan, Peter Sawchuk, Martin Corbett. Work and Organizational Behaviour 2nd Edition: Understanding the Workplace. New York: Palgrave Macmillan, 2012. Read More