Types of Business Ownership

Sole Trader

Definition

The simplest form of business ownership structure. Where one person owns the business and makes all the decisions related to the long-term life of the business.

Key Features

• Single owner: Owned and operated by one individual

• Full control: The owner makes all business decisions

• Easy to set up: Simple registration process with minimal cost

• Australian Business Number (ABN): Must register for an ABN for all business dealings

• Unlimited liability: The owner is personally liable for all debts and obligations.

• Business Name Registration: Required if operating under a name other than the owner’s personal name.

Advantages & Disadvantages

Partnership

Definition

A partnership involves two or more people (but no more than 20, with some exceptions) going into businesses together in order to make a profit. Partners need to carefully select who they are going into business with, usually it is to combine skills or knowledge, and/or raise more capital than they could individually.

Features

• Multiple Owners: Two or more people (up to 20, with exceptions) share ownership.

• Shared Control: Partners collectively manage and make decisions for the business.

• Australian Business Number (ABN): Required for all business dealings.

• Unlimited Liability: Partners are personally liable for business debts and obligations.

• Individual Taxation: Each partner includes their share of the partnership's net income or loss in their personal tax return. This is based on the partnership agreement or an equal share if no agreement specifies otherwise.

• Relatively Easy Setup: Simple to establish and cost-effective compared to other structures.

• Governed by the Partnership Act 1985: Outlines the legal framework for partnerships.

• Partnership Agreement: Recommended to outline roles, responsibilities, and profit-sharing arrangements.

• Profit Sharing: Profits are divided among partners as per the partnership agreement.

Partners Share All Business Assets and Liabilities

A partnership is a relationship, not a separate legal entity. Each partner jointly owns all the business assets and liabilities. It's vital that each partner knows their rights, responsibilities and obligations.

Unlimited Liability

This is important because personal liability is unlimited for each and every partner in the business. If the business fails and your partner can't afford to pay their share of any debts incurred, you will be held liable for the shortfall. You are also jointly responsible for any debts your partner incurs, with or without your knowledge.

Partnership Act vs Partnership Agreement

Where there is no other written agreement is in place, the Partnership Act 1895 (WA) is used to set rules and regulations of the partnership. Under the Act each partner is deemed to own equal shares of each asset, profit and losses, regardless of each individual’s contribution and capital.  For partners drawing a salary for work done in the business it is considered part of their share of the profit.

The partnership agreement should set out all the terms of the relationship including the following:

• Partnership shares

• Partnership assets

• Distribution of profits

• Partnership liability. How liability is to be apportioned between the partners

• Terminating the partnership/buy back of shares

• Disputes resolution

If Partnerships do not agree to the terms and conditions outlined in the Partnership Act it is imperative that they seek professional assistance in drawing up a Partnership Agreement. A Partnership Agreement takes president over the rules and regulations outlined in the Partnership Act. 

Advantages & Disadvantages

Small Proprietary Company (‘Pty Ltd’)

Define

A proprietary limited company, often abbreviated as Pty Ltd, is the most common company structure in Australia that many entrepreneurs and small business owners choose for their ventures. It is a separate legal entity from its owners (the shareholders), which means that the company can enter into contracts, own assets, and incur liabilities in its own company name.

Features

• Shareholders: The company is limited to having between 1 and 50 shareholders, who must not be employees of the company. This ensures the company remains a private entity and is not publicly owned.

• Employee Limit: A proprietary company can employ up to 100 employees, making it suitable for small to medium-sized enterprises while remaining manageable in terms of operations and regulations.

• Board of Directors: The company is governed by a board, and it is mandatory to have at least one director who oversees the company’s operations and ensures compliance with legal obligations.

• Shares Not Traded Publicly: The company’s shares cannot be bought or sold on the stock exchange, which maintains its status as a private business and provides more control over ownership.

• Limited Liability: Shareholders have limited liability, meaning they are only responsible for the company’s debts and obligations up to the value of their investment. This protects their personal assets from business liabilities.

• Separate Legal Entity: The company is a separate legal entity, which means it exists independently of its shareholders and directors. This allows the company to enter into contracts, own assets, and incur liabilities in its own name.

• Simplified Reporting Requirements: Proprietary companies must register with the Australian Securities and Investments Commission (ASIC). However, their reporting requirements are less complex compared to public companies, making compliance more straightforward.

• Expensive to Set Up: Establishing a proprietary company involves higher costs compared to other structures like sole traders or partnerships. These costs include registration fees, legal expenses, and ongoing compliance costs.

Setting Up

To become a company, an entity must be incorporated under the Corporations Act 2001 (Commonwealth Act) and registered with the Australian Securities and Investment Commission and apply for an Australian Company Number (ACN).

Unlike business names, once registered, a company name can trade throughout Australia. Every Australian company receives a unique nine digit Australian Company Number (ACN) which must appear on the company seal and every public document issued, signed or published.

When ASIC receive the completed application with the correct fee it will give the company an ACN and issue a Certificate of Registration.

1. Name: → Select company name → Search ASIC names database

2. Rules: → Outline basic rules for internal management → Create constitutes if modifying or adding to the rules

3. Consent: → Written consent from members, directors, and secretary

4. Apply: → Lodge application form with ASIC → Pay fee

5. Register: → When company is registered it will be issued with an ACN (Australian Company Number)

Advantages & Disadvantages

Not For Profit Organisations

Define

NFP organisations provide services to the community without aiming to make a profit for members or shareholders. Examples include childcare centres, sports clubs, neighbourhood associations, and art centres. All profits are reinvested into the organisation’s services and cannot be distributed to members, even if the organisation winds up.

Describe

Types of NFP Organisations

1. Charities

Charities are a type of NFP focused on:

• Supporting people in poverty, sickness, or old age.

• Promoting education or religion.

• Benefiting the community in other ways.

• Examples: religious groups, aged care homes, animal welfare organisations, and environmental protection groups.

2. Other NFP Organisations

These include:

• Sporting and recreational clubs.

• Community service organisations.

• Professional associations.

• Cultural and social societies.

Non-charity NFPs can self-assess eligibility for income tax exemption but must register for other tax concessions.

Common Steps for Settings Up a NFP Organisation

When setting up an NFP organisation, it is important to follow these common steps:

1. Define the organisation's purpose and ensure it aligns with NFP principles.

2. Determine the legal structure that best suits the organisation's goals and operations.

3. Register the organisation with the Australian Government to obtain an ABN (Australian Business Number).

4. Register for tax concessions such as GST (Goods and Services Tax) and PAYG (Pay As You Go) withholding, if applicable.

5. Develop a governing document, such as a constitution or rules, to outline the organisation’s operations and governance.

6. Set up bank accounts and financial management systems to ensure proper handling of funds.

7. Ensure compliance with state, territory, or federal reporting and regulatory requirements.

Advantages & Disadvantages

Franchise (not a business ownership structure)

Define

• A franchise is not a business ownership structure but a way of operating a business.

• It involves a contract, known as a franchise agreement, between a franchisor (the owner of the business model) and a franchisee (the person who runs the individual outlet).

Describes

• Franchise Agreement: A franchise agreement is a legal contract between the franchisor and the franchisee. It outlines the terms and conditions of the partnership, including the rights and responsibilities of both parties and how the franchise business should be operated.

• Franchise Fees: Franchisees are required to pay initial setup costs and ongoing fees. These can include royalties (a percentage of the profits) and contributions to marketing expenses.

• Established Brand: Franchises operate under a recognised and trusted brand name, which gives the business instant credibility and customer trust in the market.

• Proven Business Model: Franchises provide a tested and successful operational system. This reduces the risk for franchisees, as they are working with a business model that has already proven effective.

• Training & Support: Franchisors offer guidance to franchisees in various areas, including operations, marketing strategies, and customer service. This ensures that franchisees are well-prepared to run the business successfully.

• Marketing Assistance: Franchisors manage local and national marketing campaigns on behalf of the franchise network. This ensures consistent and professional promotion of the brand.

• Standardised Operations: Franchisees are required to follow uniform standards for products, services, and processes, ensuring consistency across all franchise locations.

•  Supply Chain Access: Franchisees benefit from access to pre-approved suppliers, often at discounted rates, ensuring they can source high-quality products at competitive prices.

• Limited Autonomy: Franchisees must operate the business according to the franchisor’s rules and guidelines. This can include restrictions on products, pricing, and how the business is marketed and managed.

Describe Role

Franchisor’s Role:

• Provides the brand, business system, and training.

• Controls how the business is run, including the use of the name, brand, and operational processes.

• Offers marketing support, supply chain systems, and advisory services.

Franchisee’s Role:

• Pays an upfront setup cost and ongoing fees (e.g., royalties or a percentage of profits).

• Operates the franchise business under the franchisor's rules.

• Bears the financial risk and handles day-to-day operations.

Advantages & Disadvantages