Australia: Doing Business in Australia - Business Structures

Last Updated: 30 April 2012
Article by Tony Holland

With Australian law based on the British system, forms of business entities are similar to those in the UK, US, New Zealand and other English-speaking countries.

Businesses usually take the following forms:

  • Company: private (proprietary limited, Pty Ltd) or public (Ltd)
  • Branch or subsidiary of a foreign corporation
  • Partnership
  • Joint venture
  • Trust
  • Sole proprietorship.

COMPANIES

Companies in Australia are subject to the Corporations Act 2001 (Cth) (Corporations Act), administered by the Australian Securities and Investments Commission (ASIC). ASIC regulates the incorporation, operations, management and control of companies and imposes obligations on directors and other corporate officers.

A company may be incorporated either as a private (proprietary) company or public company (listed or not listed on the Australian Stock Exchange). The liability of a company's shareholders may be limited by shares or by guarantee, or may be unlimited. In some cases, mining companies may be incorporated as no liability companies.

Proprietary and public companies are distinguishable in several ways.

Proprietary companies:

  • Must have at least one shareholder but no more than 50, not including employee members whose number is not limited
  • Cannot engage in fundraising activities (by offering to issue or sell securities) that would require disclosure to investors under the Corporations Act (eg requiring a prospectus to be issued). However, proprietary companies may offer securities to existing shareholders of the company, employees of the company or its subsidiaries, or via small-scale offerings (eg up to AU$2 million raised from up to 20 investors in any 12 month period) or offerings to sophisticated or professional investors
  • Usually restrict the right of shareholders to transfer shares pursuant to an agreement between the shareholders
  • Must have at least one director who must ordinarily reside in Australia
  • Are not required to have a company secretary, but if it does have one or more, at least one of them must ordinarily reside in Australia.

Public companies:

  • Must have at least one shareholder, but can have any number
  • Can offer shares to the public, but must comply with requirements of the Corporations Act, including issuing a disclosure document such as a prospectus
  • Normally have no restriction on transfer of shares made on shareholders
  • Must have at least three directors, at least two of whom must ordinarily reside in Australia
  • Must have at least one company secretary, one of whom must ordinarily reside in Australia.

Liability to creditors

A company's liability to its creditors is limited to the value of its assets. Should a company be unable to pay its debts in full as and when they fall due (ie become insolvent), its creditors may not be repaid all of the debt they are owed. Similarly, a company's shareholders' liability is generally limited to the extent of their initial investment (ie a limited liability company), and liability is limited to the amount, if any, unpaid on a shareholder's shares.

In certain circumstances, directors of an insolvent company may be held personally liable for a company's debts. Directors' responsibilities for a company's debts are set out in the Corporations Act and certain defences are available. Generally, directors will be liable for their company's debts if the debts were incurred when no reasonable expectations existed that the company could pay its debts from its own resources as and when they fell due.

Other requirements

A company must have a registered office in Australia where all communications and notices may be sent. The Corporations Act has specific requirements about a company's registered office. For example, a public company must keep its office open on each business day for a specified period. There is no such requirement of proprietary companies.

A company is treated as a separate legal person for tax purposes. Different tax treatments apply to proprietary and public companies in some circumstances.

FOREIGN CORPORATIONS

A company or entity incorporated or formed outside Australia may carry on business in Australia, provided it has registered or applied to be registered with ASIC under the Corporations Act. The Foreign Investment Review Board may also need to be notified of larger proposals, subject to the Foreign Acquisitions and Takeovers Act 1975 (Cth). See also the Investment in Australia chapter.

Generally, registering a foreign company requires the appointment of at least one local agent – an Australian company or resident in Australia – which is authorised to accept notices on the company's behalf. The local agent will be responsible for acts, matters and things that the company is required to do under the Corporations Act and may be held personally liable for any penalties imposed should a company contravene the Corporations Act.

The foreign company must also maintain a registered office in Australia, perhaps the agent's office, and lodge documents with ASIC, as specified by the Corporations Act.

PARTNERSHIPS

Partnerships are generally covered by contract law and do not require registration. However, trading must generally be registered. Partnerships are not considered separate legal persons and partners are jointly and severally liable for a partnership's debts and obligations to its creditors.

In some states, limited liability partnerships can be registered with state regulatory authorities. This type of partnership includes a general partner who conducts the business and other special partners who contribute capital only. In such partnerships, special partners are liable only to the extent of their capital contributions. A limited liability partnership is treated as a company for tax purposes, whilst in an ordinary partnership partners are taxed on their respective share of the partnership's profit or loss.

It is advisable that a written partnership agreement indicating the intentions of the partners be prepared. Partnerships without written agreements or contracts are governed by the Partnership Act of the state in which the partnership is formed. In an ordinary partnership, partners are taxed on their respective share of the partnership's profit or loss.

JOINT VENTURES

Joint ventures are normally entered into for a limited time or to carry out a specific activity. These ventures are not recognised as a separate legal entity and, for the same reasons that a written partnership agreement is advisable, the relationship between joint venture parties should be set out in writing. Participants in a joint venture are usually taxed individually. Where a seperate legal entity is required, the jont venture may be carried out using a company or trust.

SOLE PROPRIETORSHIP

Sole proprietorship is a reference to a natural person who runs their own business. This is not suitable for foreign investors considering investment in Australia. Sole proprietorship does not provide limited liability for the sole proprietor.

TRUSTS

A trust is a relationship or association between two or more persons or companies in which one party (trustee) holds property on trust for the other party (beneficiary). The trustee holds legal title to the property (land, shares, money, real property, etc) and must deal with the property for the benefit of the beneficiary. Trustees have similar fiduciary duties to those of a company director.

Establishing a trust in the context of a business may provide tax incentives for the beneficiaries, asset protection and limit liability in the context of a business. Trusts should be made expressly in the form of a written trust deed and must have a registered Australian Business Number, Tax File Number and business name.

In the context of a business run through a trust structure, the business will generally be carried on a by a trustee company for the benefit of the beneficiaries. The most commonly used types of trust structures used to carry on businesses are discretionary trusts and unit trusts.

Discretionary trusts allow the trustee to determine which of the beneficiaries are to receive income and capital of the trust estate (ie the business) and in what proportions, on a year-by-year basis, thereby allowing the earnings of the business to be distributed, taking into account the tax attributes of the beneficiaries on a year-by-year basis. Use of discretionary trusts is most typically in the context of closely held private businesses.

In a unit trust, the beneficiaries hold units in the trust and their entitlement to distribution from the trust is determined by the number and class of units held. The issuing of units allows the trust to raise capital for the business of the trust and provides unit holders with a liquid asset. Unit holders may increase their investment in the trust by purchasing more units, derive income from their investment via distributions from the trust, or make a capital profit from the units by selling them to other unit holders. Unit trusts are generally used for the carrying on of businesses that derive income primarily from the management and investment of capital assets. They may be widely held (eg a Managed Investment Scheme (MIS) - see below). Some unit trusts that meet certain regulatory requirements under the Corporations Act may be listed on the Australian Stock Exchange.

MANAGED INVESTMENT SCHEMES

MISs are collective investment vehicles commonly used in the carrying on of businesses that derive income primarily from the management and investment of capital assets, where the investors are unrelated and do not have day-to-day control over the management of the scheme's investments.

The custodial nature of this business arrangement lends MISs to typically being structured as widely held unit trusts (which can be listed or unlisted). However, company structures are also sometimes used.

In consideration for their contribution, investors receive an interest in the scheme, which entitles them to distributions of income and capital from the MIS and which can typically (subject to any contractual restrictions) be sold to third parties. Interests in an MIS are a type of "financial product" and are regulated by the Corporations Act.

A "responsible entity" operates the MIS and is generally required to hold an Australian Financial Services Licence. The granting of such licenses is tightly regulated by ASIC and the applicant responsible entity is required to show a good degree of experience and knowledge in managing the types of investments that the MIS proposes to acquire and manage. The license is generally limited to the entity operating the particular MIS, although more experienced entities are able to obtain licenses, allowing the entity to operate a wider range of schemes.

MISs are especially common in the commercial real estate sector, where investors contribute funds to a real estate investment trust, which invests in and manages a portfolio of commercial properties. Apart from being prevalent in the commercial property section, MISs may cover a wide variety of investments. Some of the popular MISs that may be offered include:

  • Cash management trusts
  • Australian equity (share) trusts
  • Many agricultural schemes (eg horticulture, aquaculture, commercial horse breeding)
  • International equity trusts
  • Some film schemes
  • Timeshare schemes
  • Some mortgage schemes
  • Actively managed strata title schemes.

Note:

To encourage foreign investment into Australia, certain MISs operating as unit trusts (managed investment trusts) are afforded a much reduced withholding tax rate on certain payments made to qualifying overseas investors. See also the Taxation chapter.

FRANCHISE/DISTRIBUTORSHIP

Franchising has emerged as a popular and effective business structure in Australia. A franchise is a structure under which a franchisor grants a franchisee the right to carry on the business under a system or marketing plan of the franchisor and under which the franchisee will be associated with a particular brand.

Franchises in Australia are subject to a mandatory Franchising Code of Conduct, which is established under the Competition and Consumer Act 2010 (Cth).

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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