Commercial Structures

Is your idea or product protected?

Intellectual Property (IP) refers to the intangible ownership rights that include patents, trademarks, copyrights and trade secrets. You must take advantage of these rights to protect your business name, and to legally protect your original ideas or inventions.

Sole Proprietorship

Sole Proprietorship is a business or enterprise owned by one person. It is a simple, cheap and common form of legal structure for uncomplicated businesses.

The advantages of sole proprietorship include:

• cost effectiveness
• high level of autonomy for the owner operator(you are your own boss)
• simple business structure
• simple to run tax-wise as profits are taxed at the owner’s personal income tax rate
• there are no retained earnings that create complicated taxation issues.

On the other hand, the disadvantages include:

• a considerable reliance on the owner’s skills and finances to make the business a success
• often a lack of attention to succession planning or a lack of support if the owner is unwell or
• wants to do other things
• unlimited liability for any claims against the business. Any debts will need to be paid by the
• owner selling his or her other assets like the family home and car
• taxation disadvantages relative to companies. The company tax rate is currently 30 per cent, while the top marginal tax rate for individuals is 47 per cent
• limited ability to secure additional investment. Investors prefer to invest in a company structure.

Many accountants in giving advice to people talk about the “hobby rule”. When a business idea gets to the stage where it’s consistently profitable, time-consuming in its dealing with customers, and increasingly demands the application of business principles (e.g. marketing, record keeping, formal accounting), a hobby has become a business.

Partnerships

A partnership involves two or more people going into businesses together in order to make a profit.  A partnership is a relationship where each partner jointly owns all the business assets and liabilities. It’s vital that each partner knows their rights, responsibilities and obligations which should be set out in an appropriate agreement.

The advantages of a partnership include;

• Simple and inexpensive to set up.
• Minimal reporting requirements.
• Combined skills, experience and knowledge.
• Relatively easy to dissolve or exit.
• Access to capital.

On the other hand, the disadvantages include:

• Potential for disputes over profit sharing and business direction.
• Joint and several liabilities of partners.
• Changes of ownership can be difficult.

Proprietary Limited Company

A Proprietary Limited Company is a company that is privately owned and the liability of the owners is limited to any unpaid portion of the face value of their shares.

A company is an entity created under the Corporations Law, and is similar to a person in that it can own assets, and can sue or be sued in its own name. The Australian Securities and Investments Commission (ASIC) administers the incorporation of companies.

The abbreviation “Pty Ltd” at the end of a company name denotes that the company is a proprietary company limited by shares.

In setting up new ventures to commercialise an idea, one, two or more people set up a Pty Ltd company. They buy a share or shares.  In many cases, the initial shareholders are a husband and wife, or two close friends. They may each own half the shares in the company, often through an initial share offering of $1 each.

The vast majority of incorporated organisations in Australia are such private companies. These companies have shareholders, company directors and managers who are typically the same two or three people.

The advantages of a Pty Ltd arrangement are:

• it makes you apply all of the legal, financial and reporting arrangements required of any business
• it takes a hobby or good idea into the marketplace
• taxation is at the lower company rate
• the personal liability of its members is limited
• investors prefer a company structure because they can acquire shares or “equity” in the company.

But the disadvantages are:

• the legal and accounting costs in setting up, maintaining and reporting upon the company’s operations
• the possibility of giving up control to others who buy into the company or who sit on the company board.