Finding the correct long-term business structure for your startup is a significant undertaking that should be done as early as possible. In terms of legality, how you start a business or the process required to start a business in Australia will differ depending on the type of business structure you choose.
If you’re looking for the best legal structure for a startup in Australia, an incorporated company will be the most advantageous in almost all circumstances. So, what is company incorporation? Let’s look at common business structures in Australia, what incorporation means in legal terms and what types of obligations come as part of the package.
Choosing the right type of business structure
Before you can move ahead, it’s essential to understand what business or legal structures in Australia are like.
Firstly, there are three main types of business structure (and one bonus option):
- Sole trader/sole proprietorship
This is the most straightforward option for small business owners planning to operate as a one-person team. Paperwork is minimal, tax filings can be added to your personal return, and all you really need is an ABN and an optional registered business name. However, your liability and asset protection is practically nil, and scaling to a company size is not feasible or wise.
A partnership looks a lot like a sole proprietorship with the addition of a partnership agreement and the benefits of splitting costs with a partner. Liability is low, and you automatically become responsible for the actions of your business partner, which is less than ideal. Again, this is not viable for a large-scale company – or a business with big aspirations.
- Incorporated company
Incorporating a company provides the highest asset and liability protection, brings significant tax benefits for accumulating income, and opens the door to further possibilities as you scale the startup, such as relatively easy investment, employee share schemes and others. Incorporation should be undertaken by a legal professional. Incorporating a company is not the same as registering a business.
While a trust is not usually a business structure, it is possible to manage a company through a trust. There are various legal reasons this may be an attractive option in certain specific circumstances, but it’s complex enough that it should only be considered on the advice of a legal professional. Consider this a conversation for your lawyer.
What incorporation means for your business
While it is possible to launch your startup without incorporating, it’s wiser to implement a robust company structure from the outset, so you’re able to dive into activities like raising capital as and when needed.
Why is the incorporation of a business so important? Because an incorporated company is considered its own entity and therefore comes with significant advantages. A corporation (and remember, the word ‘corporation’ is used only for a business that has undergone incorporation) is owned by shareholders and governed by a board of directors. In many cases, the shareholders may be one or two co-founders who also act as directors on the board and control the business in this manner.
Incorporation offers corporate tax benefits and protections in the form of limited personal liability. Their personal assets are not at risk if legal issues are brought against the company (for example, debt recovery) – unless very exceptional circumstances apply. Shareholders (in this case, the co-founders) are liable only for company debt equivalent to the amount unpaid on their shares – and usually, this amount is zero.
How to incorporate
It is possible to incorporate a company without a lawyer, but it’s strongly recommended against. There are a lot of complexities and questions that need to be answered before you can start your application with ASIC to register and incorporate your business. Your lawyer will walk you through core decisions such as:
- Choosing company officeholders
- Deciding on the share structure
- Using replaceable rules or constitution
- Choosing a company name
- Choosing registered and business addresses
Your obligations as an incorporated company
Before you proceed with incorporation, you should be aware of the obligations that come with a company. There are annual filings required and costs associated with these. You’ll also be required to file corporate taxes, keep financial records current, and lodge required reports to ASIC on a yearly basis (or every time you make a change to the Company, it’s officeholders or it’s shareholders). It’s recommended to speak with an accountant, tax specialist, and lawyer before proceeding with incorporation.
At UX Law, we specialise in supporting startups with their legal needs. We provide startups and entrepreneurs with practical legal solutions to protect and empower their business. Reach out for a free consultation to learn more.