LexisNexis Practical Guidance®

A partnership consists of two or more individuals or entities who carry on a business in common with a view to a profit. A partnership does not have a separate legal identity.

Partners will generally be jointly liable for obligations that arise from the partnership. However it is possible to form a limited partnership (whether incorporated or unincorporated) in most jurisdictions.

Partnerships are governed by state and territory legislation, contract law and common law.

It is generally not necessary to have a written partnership agreement to constitute an ordinary partnership, (although it is highly advisable to have one).

Important considerations in commencing business under a partnership structure will be obtaining necessary registrations and ensuring an appropriate partnership agreement is drafted, but a lack of these things will not affect the existence or validity of the partnership itself.

Costs of establishment can be confined to business names and other registrations for which fees are charged and costs of obtaining professional advice.

See Commencing a business as a partnership.

A partnership will have ongoing compliance obligations with various regulatory requirements which will include taxation reporting and compliance, keeping business names and other registrations up-to-date. Partners should also have regard to their duties both to each other and to outsiders.

See Ongoing compliance requirements.

The advantages of a partnership structure include:

• •ease of establishment;
• •minimal reporting obligations and often fewer compliance burdens;
• •relative privacy;
• •taxation advantages including the ability to distribute losses and the application of certain capital gains tax concessions;
• •responsibility and control is shared; and
• •the availability of finance can be greater with multiple parties pooling their collective resources.

The disadvantages of a partnership structure include:

• •with the exception of some professional partnerships, there is a limit of 20 partners;
• •partners are jointly liable for debts and other contractual obligations and jointly and severally liable for wrongful acts;
• •a partnership is not a distinct entity and so does not enjoy perpetual succession;
• •the ability to transfer ownership of a partnership interest may be restricted and absent a partnership agreement which deals with continuity, the retirement and admission of new partners can cause practical difficulties;
• •inflexibility for estate planning, succession planning and asset protection; and
• •partners are taxed on their share of profits at their marginal rate, which may not be tax effective in some instances.

See Advantages and disadvantages of a partnership structure.

Changing from a partnership structure to another form of business structure will ordinarily involve a winding up of the partnership and, after liabilities have been satisfied, a transfer of the assets and undertaking to the desired structure.

See Changing to another business structure.

In some states and territories legislation allows for the creation of limited partnerships. A limited partnership must consist of:

• •at least one general partner, who has the same rights and liabilities of ordinary partners; and
• •at least one limited partner, who contributes capital and shares in profits, but is not entitled to take part in management of the partnership, and is not liable beyond their capital contribution.

A body corporate may be a general partner or a limited partner.

See Limited liability partnerships.

Company structures are one of the most widely used business structures in Australia. Key attributes of a company include:

• •it is a legal entity (distinct from its members), has perpetual succession, can sue and be sued and own property in its own name;
• •the liability of the members of a company is limited to the money they owe on any shares they own and/or for any amount of money they guarantee to contribute upon winding up of the company; and
• •shares in a company may be readily transferred (subject to any restrictions in a company's constitution).

See Commencing a business as a company.

A company as a business structure has a number of advantages. These include:

• •being a separate legal entity;
• •perpetual succession;
• •ease of transferring interests;
• •flexibility;
• •limited liability;
• •familiarity;
• •favourable tax rates; and
• •protection to the company name.

However, there are also disadvantages to consider. These include:

• •onerous ongoing compliance obligations;
• •complex governing law (ie Corporations Act 2001 (Cth); and
• •lack of privacy.

See Advantages and disadvantages of a company structure.

Corporate structure is the arrangement of separate legal entities within a group of entities with a common ultimate controller. Corporate structures are often established on an ad hoc basis, sometimes without much consideration for the appropriate makeup of the group.

Each company within the corporate group is a separate and independent legal entity capable of incurring its own debts and having its own creditors. However, arrangements could be made that result in liability shifting between companies within the corporate group, sometimes deliberately, sometimes unintentionally. Further, there are provisions in the Corporations Act 2001 (Cth) under which the activities of one company within the corporate group have an impact on another company within the group.

When implementing an appropriate corporate structure, all aspects of the group’s business should be considered, including the nature of the assets, particularly intellectual property, and the nature of liabilities, particularly intra-group finance facilities.

See Corporate structure explained.

A basic corporate structure commonly consists of a holding company with a number of subsidiaries which may be operating or holding subsidiaries. Operating subsidiaries are subsidiaries which operate a business within a particular field or geographical region. Holding subsidiaries are subsidiaries which do not conduct any business but merely hold shares in one or more operating subsidiaries. The assets required to conduct such business are ideally held by the holding company or by holding subsidiaries. However, often transaction costs, including capital gains tax, prevent the moving of assets to appropriate locations so alternative asset protection strategies need consideration.

See Basic structure.

Corporate groups commonly utilise an asset protection strategy whereby the holding company provides financing to an operating subsidiary in return for security over the assets of that operating subsidiary. Adopting this strategy is designed to protect the assets against unsecured creditors of the subsidiary as it keeps the debt level of the operating subsidiaries high and secured and enables the holding company to take possession of those assets and retain or sell and apply the proceeds to its debts ahead of other creditors.

When considering a financed-based asset protection strategy in respect of foreign operations, the thin capitalisation rules, which limit a company’s deductible interest expense in respect of foreign operations, may reduce the commerciality of such arrangements.

See Asset ownership and licensing of intellectual property.

In circumstances where external finance is sought, where possible, an appropriate policy should be adopted to minimise cross-collateralisation of the companies within the group so that assets are not linked together. Cross-collateralisation exposes other assets to additional risk as they are used to secure a loan for a different asset.

Corporate groups commonly implement financing and securities structures designed to protect the group’s assets from claims by creditors. This strategy aims to reduce the level of recourse available to creditors and creates a limited recourse risk. To manage this risk to those who deal with the group, creditors may require guarantees to be provided.

See Finance and securities.

Notwithstanding the protection afforded by the separate legal entity principle, there are circumstances that undermine the principle. There are various provisions in the Corporations Act 2001 (Cth) under which the activities of one company within the group may have an impact on another company within the group. Further, there is a risk which arises during insolvency which displaces the application of that principle and focuses on the common commercial practice of managing corporate groups as a single economic entity. This risk arises from the statutory pooling provisions which enable the assets of the companies within a corporate group to be pooled for the purposes of satisfying creditors’ claims in an insolvency. As such, while the implementation of an appropriate corporate structure is important, appropriate systems and measures must also be put in place to avoid the intermingling of assets between companies within the corporate group and to reduce confusion among creditors as to the precise identity of the debtor company.

See Guarantees, letters of comfort and insolvency.

Board composition means the makeup of the board. The composition of the board must be set-up properly to maximise the effectiveness of the group structure.

Each company within the corporate group is a separate legal entity and requires its own board. A company’s board composition varies depending on whether the company is the holding company, an operating or holding subsidiary or a joint venture company.

Suitable members of the board need to be chosen carefully to:

• •manage each entity separately;
• •ensure that decisions are made in the best interests of that entity; and
• •limit the liability of that entity in respect of other entities within the group.

Board members of wholly owned subsidiaries are usually drawn from the holding company's executive and the most senior executives in the group are responsible for business conducted by the subsidiary.

See Composition of group boards.

The benefits of corporate structuring include risk management and asset protection. The separation of companies within the group may be "ignored" in certain circumstances.

A holding company may be considered a director of the subsidiary where:

• •the holding company acts in the position of a director; or
• •where the directors of the subsidiary are accustomed to acting in accordance with the instructions or wishes of the holding company.

Where a holding company is considered a director of the subsidiary, it would owe the same duties to the subsidiary as those directors who were formally appointed to the board of the subsidiary.

See Shadow/de facto directors and officers.

External parties dealing with a corporate group member may require guarantees or letters of comfort from a subsidiary's holding company, other corporate group members or the entity's director.

If a company (usually the holding company) gives a guarantee in respect of another company (usually the subsidiary), the holding company may then be liable to the external creditors of the subsidiary in the event of default. A deed of cross guarantee makes each group company who is a party to the deed liable to the external creditors of each other company in the event of company default. Creditors may also require personal guarantees to be given by the directors of the company with which the creditors have contracted.

Letters of comfort are given by holding companies to an external party who requires a written expression of the holding company's ongoing financial support for the subsidiary. Generally, letters of comfort are not enforceable undertakings but can be legally binding depending on the terms and circumstances of the letter and the companies involved.

See Cross guarantees.

It is typical for some of the directors to be directors of different companies of the corporate group. For example, some directors of the holding company may also be appointed as directors of the subsidiaries. Holding several directorships across different companies within the group may give rise to various dilemmas such as:

• •how to manage overlapping or conflicting interests within the company (including where interests as directors and interests as shareholders diverge) and between various entities within the corporate group (one of which may be their appointor);
• •which entity the directors should act in the best interest of; and
• •what the directors must do to fulfil their duties to each company of which they are directors.

A director of a wholly owned subsidiary is taken to have acted in the best interests of that subsidiary where that director acts in the best interests of the holding company. This must be expressly authorised in the subsidiary company’s constitution and the subsidiary company is not, and does not become, insolvent because of that act. This is only available to directors of wholly owned subsidiaries.

Shadow directorship has implications both for the holding and subsidiary company. The holding company may be held liable for the subsidiary's actions where the subsidiary is found to have engaged in insolvent trading. The subsidiary company who acted in accordance with the holding company's instructions or wishes risk breaching their duty not to allow their discretion to be fettered.

Even where the holding company is not taken to be a director of the subsidiary and the subsidiary is not insolvent, a holding company may still be held liable for the subsidiary's actions where the directors of the holding company delegate their powers to the subsidiary. The subsidiary would be taken to be acting as the agent of the holding company.

See Corporate structure and directors' duties.

An effective corporate structure hinges on the independence and integrity of the decision-making process and the prevention of conflicts of interest. It requires:

• •providing directors with training in conflict of interests management;
• •meetings between and within corporate group members to be properly recorded;
• •third party interactions must clearly indicate which corporate group member the third party is interacting with; and
• •where necessary, separate company meetings should be held.

See Maintaining an effective corporate structure.

To minimise the risk that the integrity and effectiveness of the corporate structure are undermined, directors of holding companies and subsidiaries need to be aware of the duties that they must fulfil in respect of their companies. Failure to comply with the duties imposed by statute and common law can result in the directors facing a number of potential liabilities, including criminal and civil penalties and personal liability.

Directors who are on the board of a company within a corporate structure are typically exposed to more risks than directors who are on the board of a single stand-alone company and particularly where they are at risk of being considered de facto directors of another company within the corporate structure. Further, directors who are on the board of the holding company and a subsidiary, or the boards of two or more subsidiaries, would have a more onerous task of discharging multiple sets of duties in respect of all of their companies.

See Risks.

Given the responsibilities, duties and obligations associated with each directorship, and the exposure to potential liabilities which may be extensive, directors of companies within the corporate group should seek to obtain three main protections available to directors, including deeds of access, indemnity and insurance, amendments to the constitution of wholly owned subsidiaries and procuring appropriate directors’ and officers’ insurance policies to be acquired and held by the appropriate company.

Deeds of access, indemnity and insurance extend the statutory rights of access to the books of the company and provide for the indemnification and insurance of directors and may be given by different companies within the group. Typically, some of these protections are given by the subsidiary and others are given by the holding company. Generally, the subsidiary is the company that provides a deed of access and indemnity to the director, and the holding company provides a deed of indemnity and insurance (regardless of whether the director is director of the holding company). In addition to considering which protections should be given and which company is the appropriate company to be giving the protections, there are additional considerations if the companies are located in different jurisdictions.

The constitution of the wholly owned subsidiary should also be reviewed to ensure that it expressly authorises directors of the subsidiary to act in the holding company’s best interests.

Directors’ and officers’ insurance policies with appropriate and sufficient cover should be sought, and consideration should be given to consulting an insurance broker and understanding the relevant exclusions that may be applicable. However, de facto directors should be aware that coverage under these insurance policies is unlikely to be extended to them.

See Protections.

As with any transaction, the entry into a deed of access, indemnity and insurance, amendments to the constitution and taking out insurance must be approved by the board of the company. In those circumstances, and particularly in the context of corporate groups, there is a risk that related parties with an interest in the transaction may be accused of improperly influencing the decision-making of directors to the detriment of the interests of members. This issue is particularly prevalent, for example, where there are multiple directors who will be offered protection under the deeds of access, indemnity and insurance, and the decision of each director to approve a transaction in respect of another director may influence the second director to approve a transaction that relates to the first director. Such an accusation is not likely to be made at a time when the protections are needed or being relied upon and it is at that point in time that the approval process is most likely to be scrutinised.

Where a director has a material personal interest in a matter, he or she has a duty to notify the other directors of the interests. In some circumstances, the interested director may be restricted from voting on the matter or attending the directors’ meeting while the matter is being considered. While this issue is relevant to all companies, material personal interests may arise more frequently in the context of corporate groups where there are intra group transactions and/or common directorships.

Additionally, member approval may also be required where some financial benefit is given by a public company, or an entity controlled by a public company to a related party, subject to certain exceptions.

See Approvals.

In the formation of corporate groups, consideration should be made of the group’s tax structure to maximise its potential. Tax relief and incentives are available for transactions made by a corporate group.

Where a taxpayer disposes of an asset, the disposition will be subject to capital gains tax (CGT) unless one of the available exemptions applies. CGT might apply to the transfer of an existing business to a corporate structure. CGT rollovers allow for any capital gain to be deferred, or in some cases, disregarded. There are a number of rollovers relevant to restructuring a corporate group including scrip-for-scrip rollover.

See CGT rollover relief.

All jurisdictions have statutory provisions which allow for relief from stamp duty on a corporate restructure. Eligibility requirements apply and, the purpose must be to accommodate the required structural changes within the group and note for the purpose of avoiding any tax liability. Some jurisdictions also contain relief for corporate consolidation transactions which involves the interposition of an entity between a company and its existing shareholders.

See Stamp duties restructure relief.

The formation of a goods and services tax (GST) group for a corporate structure has the advantage of having certain intragroup transactions being disregarded for GST purposes.

See GST Groups.

Particular rules apply for pay as you go (PAYG) instalments of tax consolidated corporate groups. Taxpayers who meet certain threshold requirements in relation to business and investment income are required to submit income tax on an instalment basis. Those instalments will generally be due either quarterly or half yearly.

See PAYG instalments.

Tax consolidation allows eligible wholly owned groups to be treated as a single entity for income tax purposes. The benefits of tax consolidation include that a single tax return need only be lodged in respect of all entities in the group, and assets can be transferred between entities within the group without CGT consequences.

See Tax consolidation.

An incentive is available for research and development expenses of companies. The incentive comes in the form of a tax offset. There are eligibility requirements as to the type of company and the activities that may be undertaken.

See Research and development tax incentive.

A trust is a legal relationship. It involves a trustee, as the legal owner of trust property, holding and dealing with the trust property for the benefit of others (beneficiaries).

A trust is not a separate legal entity and does not have the benefit of limited liability, although it is common to install a company as the trustee.

Trusts used to carry on a business are frequently in the form of a unit trust or discretionary trust.

In a unit trust the beneficial interest in the trust is divided into defined portions or units. The holder of a unit is entitled to a fixed proportion of the profits (and possibly capital) from the trust. Trust units may be transferred in a similar way as shares in a company.

A discretionary trust is different in that the trustee has a discretion when distributing profits (and possibly capital) from the trust as to which of the potential beneficiaries should receive such distributions.

Before commencing business as a trust, a trust deed should be drafted by which the legal relationship of a trust is established over trust property in favour of beneficiaries.

Care should be taken when choosing a trustee to ensure that it has the legal capacity to hold property, namely that it is sui juris and not under a legal disability and is sufficiently skilled to understand the obligations and duties which follow from holding that role.

In a discretionary trust context, standard practice is to create a class of beneficiaries that is as wide as possible.

Consideration should be given to any required licences or registrations necessary to carry on a business in a trust structure, as well as registration of business names.

See Commencing a business as a trust.

Ongoing compliance in a trust structure will include the usual tax and revenue related lodgments, as well as compliance with business name registration rules.

Trustees should also have regard to their rights, powers and duties on an ongoing basis. Other practical ongoing considerations for trust structures include:

• •identifying trust property so that it is clear what assets the trustee is holding on trust and what assets (if any) it holds legally and beneficially in its own right; and
• •exercising caution when it is proposed to amend the trust arrangements in a way which change the essential nature and character of the original trust relationship.

See Ongoing compliance requirements.

Possible advantages of a trust structure include:

• •flexibility for splitting income;
• •estate planning;
• •asset protection; and
• •lesser levels of reporting and hence relative privacy.

Possible disadvantages of a trust structure include:

• •their relative complexity, particularly if they are bespoke structures established for particular asset protection and succession planning motives;
• •costs of establishment can be higher;
• •a trust is not a separate legal entity and the trustee can be held personally liable; and
• •trust structures can be difficult to restructure without adverse taxation and stamp duty consequences.

See Advantages and disadvantages of a trust structure.

Changing from a trust structure to another form of business structure will ordinarily involve a transfer of the assets and undertaking from the trust to the other desired structure. Tax rollover relief may be available in some cases.

See Changing to another business structure.

The term “joint venture” is more a term of commercial convenience than a term of art. Broadly, the term is often used in a business context to refer to a collaboration between two or more parties for a particular undertaking.

Key features of a joint venture include:

• •the relationship lacks the key indicia of a partnership;
• •property of the joint venture is owned by the joint venture parties as tenants in common;
• •management and operation of the joint venture undertaking is conferred on an operator;
• •the joint undertaking is commonly (though not always) directed at generating a product, rather than a profit;
• •the joint undertaking is a single venture, rather than a repetitious business activity;
• •a party's exposure is often limited to its several interest in the joint venture;
• •the joint venturers are not each others' agent; and
• •the parties' interests are transferable without the technical consequence of the joint venture dissolving.

Joint ventures can be unincorporated and incorporated. In an unincorporated joint venture the contract between the parties determines their rights and obligations. No separate legal structure is created which is distinct from the participants. An incorporated joint venture involves the parties collaborating for the relevant undertaking via a separate legal entity. Often this is a company established under the Corporations Act 2001 (Cth).

The terms of the joint venture should be set out in an agreement between the parties.

The taxation implications of a joint venture structure will be complex and depend largely on how the venture is structured and the parties' agreement regarding sharing of expenses and division of venture assets and product.

See Joint ventures.

Incorporated associations cannot be used to derive financial gain for their members, which confines them almost exclusively as a business structure used in the not-for-profit sector, such as religious bodies, clubs, hospitals and charitable institutions to limit the liability of their members.

The incorporated associations legislation is similar, although not uniform, throughout Australia. The Acts are administered by separate regulatory authorities in each state and territory.

Incorporated associations enjoy most of the benefits of companies including:

• •status as a separate entity, ie its own legal personality with perpetual succession;
• •limited liability of members;
• •the ability to sue and may be sued;
• •the ability to enter into contracts in their own name;
• •the ability to appoint agents to transact business;
• •the ability to acquire, hold, deal with and dispose of any real or personal property; and
• •the ability to pledge assets as security to raise debt finance.

An incorporated association will require a set of rules, akin to a company constitution. The entity is customarily run by a committee appointed in accordance with those rules. Under the state and territory Acts, the entity must also have a public officer. In Victoria, the term “public officer” is replaced with the term “secretary” under the new Associations Incorporation Reform Act 2012 (Vic). See Sch 4, cl 9 of Associations Incorporation Reform Act 2012 (Vic).

The process of registration is similar across the states and territories but not identical. Application is made in the proper form and a fee paid. The proposed name of an incorporated association must be acceptable and substantially the same analysis applies for association names as for business names generally.

Ongoing compliance obligations include financial and other record keeping, holding annual general meetings and filing annual returns. An incorporated association will be subject to the many laws which apply to running businesses generally.

See Associations.

Co-operatives are a democratic, separate legal entity business structure run by the members for their own benefit. The key features of a co-operative business structure are:

• •a focus on democratic control;
• •open membership;
• •distributions to members based on the extent of their dealings with the co-operative; and
• •limited return on capital.

There are two forms of co-operatives. Pure co-operatives are trading or non-trading entities registered under one of the state or territory Co-operatives Acts. Hybrid co-operatives are companies registered under the Corporations Act 2001 (Cth), but operate on co-operative principles.

Subject to meeting the criteria set out in the Income Tax Assessment Act 1936 (Cth) a favourable tax treatment can operate for co-operatives, including the availability of special deductions not usually available to other entities or business structures. The special deductions available to qualifying co-operatives include deductions for:

• •rebates or bonuses paid to members based on business done by members with the co-operative: s 120(1)(a), Income Tax Assessment Act 1936 (Cth); and
• •interest or dividends paid to members: s 120(1)(b), Income Tax Assessment Act 1936 (Cth).

See Co-operatives.

More complex business structures can involve a hybrid of individuals, partnerships, trusts and corporations in a series of layers. Such business structures are typically set up to minimise tax distribution from a “corporation” to members who might be trustees of a “trust” who in turn distribute income to its “beneficiaries”.

Careful consideration should be given to all facets of each type of business structure including detailed taxation advice.