Common Structure for Business in Australia
Guantao Australian Law Series is prepared by its Sydney Office for the benefit of our existing clients in Australia and clients who are coming to Australia to start their businesses.
Every year, thousands of Chinese arrive in Australia looking for business opportunities. The relatively stable political environment, a developed legal system and beautiful environment are the main factors that attract Chinese investors migrating to Australia and develops their business locally.
Over the year, by assisting Chinese investors doing business in Australia, we, Guantao Law Firm (Sydney), observe the common issues and mistakes which the Chinese investors may encounter when they involve in business activities in Australia.
In this article and the subsequent articles, we will outline the basic concepts in commercial and corporation laws in Australia as well as other issues we observed from the cases we have dealt with previously.
There are four major types of business entities in Australia:
Sole Trader: Operate and responsible for all the legal aspects of a business in your own capacity.
Features:
• Require at least an individual tax file number and depending on turnover, an Australian Business Number;
• As a sole trader you can employ people to help you run your business;
• Full control of your business, low costs and limited reporting requirements;
• Easy to change your business structure;
• Losses incurred may be offset against other income earned for tax purposes;
• Unlimited liability; and
• Unable to split business profit or losses.
Partnership: individuals and/ or entities operate together as an association to run a business.
Feature:
• Similar to sole traders, the partnership is not a separate business entity – personally liable;
• Must apply for an Australian Business Number and quote it for all business dealings;
• Each of the partners pays tax on its share of the net income of the partnership;
• An annual tax return is required to be lodged with the Australian Taxation Office; and
• Must be registered to GST if the annual GST turnover is $75,000 or more.
Company: a separate entity that is operated in its own capacity.
Feature:
• Separate legal entity – separate business bank account and taxed as a separate entity;
• limited liability;
• Business operations are controlled by directors and owned by the shareholders;
• More complex business structure and higher setup costs and running costs;
• Reporting responsibility according to the Corporations Act and annual company tax return to be lodged with the ATO;
• Subject to GST if the annual GST turnover is $75,000 or more;
• Money earned by the Company belongs to the Company; and
• A company could not enjoy the capital gains concession as compare to sole traders, partnerships of individuals or a family trust could enjoy a 50% discount when assets held more than 12 months are sold and a capital gains event occurs.
Trust: appears when an entity (individual(s) or incorporated entity) holds a proprietary interest for the benefit of a different entity as beneficiary. In modern China, after the Trust Law of P.R.C come into effects in 2001, trust can be commonly observed in funds and financial products provided by major financial institutions.
Feature:
• Secrecy and Asset protection - In express trusts, the relationship between the trustee and beneficiaries is regulated by a trust deed, the detail of which is often not required to be disclosed to the general public;
• For a discretionary trust, the trustee has the discretion to distribute trust income and capital gains. Trust structure is often be adopted in the context of managing family assets, i.e. setting up a family trust to manage, protect and pass on family income and assets for an optimised tax planning;
• For another common type of express trust, unit trust, the trust units are held by the trustee absolutely for the unitholders. Therefore, it only gives the trustee fairly limited and specific discretion to distribute income or capital. A unit trust structure is often be adopted when your
• business requires pooling a certain amount of capital from multiple investors; and
• Usually complicated and expensive to setup and operate.
There are quite a few types of trusts which will be explained in later series.
Another common type of business structure is Franchising:
Franchise: the franchise is not a business entity. We would like to mention it because franchise is also a common business structure in Australia. For a quick start of business in Australia, people often choose to join or to purchase a business subject to a franchise. On the other hand, a great number of our clients also successfully converted their business into a franchise in Australia, where they will become the franchisor.
If you are considering becoming Franchisee:
Pros:
• Purchasing a franchise allows you to operate your business under another well-established brand and business model with a proven track record for a quick start;
• The Franchisor would usually provide channels for supplies and quality assurance;
• The Franchisor and the Franchisee are regulated by the Franchising Code of Conduct under the ACL.
Cons:
• The prospect profit margin may be smaller than a usual business if deducting the fees, i.e. franchise fee, licence fee and royalty for intellectual property; and
• If you don’t do your research right, you may end up stuck in a franchise.
If you are considering becoming Franchisor:
Pros:
• You have an established business model that is capable of being standardised and duplicated. Franchising is a good way to quickly expand your business;
• Franchising is also a good way to share risks and liability in business development with your associates; and
• It is a good way to attract further investments.
Cons:
• Setting up a franchise is usually expensive. It involved a large amount of business structural adjustments and preparation of legal documents;
• You should have a good understanding of your current business and require good and reliable supports from accounting, tax planning and legal advisers.
The Parliamentary Joint Committee on Corporations and Financial Services has completed its inquiry into the operation and effectiveness of the Franchising Code of Conduct and released its report on 14 March 2019. It is expected that amendments will be made to the current Franchise Code of Conduct and other related legislations in the near future. We will explore relevant issues in later series.
If you are considering setting up your business in Australia, and need advice on business structure, please do not hesitate to contact us.
Shun Cheng
Managing Partner, Guantao & CS Lawyers (Sydney)
T: +61 2 9002 0999
E: Shun.cheng@cslawyers.com.au; chengshun@guantao.com
Calvin Mai
Solicitor, Guantao & CS Lawyers (Sydney)
T: +61 2 9002 0999
E: Calvin.mai@cslawyers.com.au; Calvin.mai@guantao.com
Disclaimer
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