Business Management for Builders – 2182GG Business Structures

Sole Trader Partnership Company

Items We Will Consider Formation Owners Liability Tax Treatment Costs & Regulation Availability of Finance Management Control

Sole Trader - Definition An individual carrying on a business with a view to profit

Sole Trader This is the most straightforward structure for a business. Basically it means the business is owned by the individual Individual has total control of the business Individual solely responsible for – Raising of Capital – Risk – Payment of Taxes

Sole Trader – Who Regulates Australian Constitution excludes Sole Trader from regulation by Federal Government Regulated by Department of Fair Trading (NSW)

Formation Business Name Act 2002 If a Sole Trader uses their own PROPER name it does not need to be registered in NSW eg John Citizen If any other words added eg “John Citizen Carpentry” name must be registered. The Business and The Person are the same entity

Proper Name means: (a)in relation to an individual: (i)the individual’s full name, or (ii)the individual’s family name, together with the initials or abbreviations of one or more of the individual’s given names, and

Owner Liability – Sole Trader Business is not a separate entity from its owner Any Business debts are direct debts of the owner and liability is unlimited Owner is Personally Liable for Crimes & Civil Penalties The Business cannot own assets but are owned by the owner personally Business cannot be sued but owner is sued Owner has no Fiduciary Duty to others

Owner Liability – Sole Trader Personal Liability Under Contract Personal Liability Under Torts Can Employ and will be personally liable for acts and omissions by employees

Taxation – Sole Trader Business & Owner are same entity Business Profit belongs to owner Profit added to other income and taxed at Marginal Rates Profit Taxed during period earned, cannot be deferred Profit cannot be split or diverted

Taxable Income 08-09Tax Payable $0 -$6 000Nil $ $ c for each $1 over $6,000 $ $80 000$4,200 plus 30c for each $1 over $34,000 $80,001 – $180,000$18,000 plus 40c for each $1 over $80,000 $180,001 and over$58,000 plus 45c for each $1 over $180,000 Taxable IncomeTax Payable $ $ X ($ $6 000) $ = $2 100 $ $9 000 $ ($ $ ) $ x 0.30 = $9 000 $ $ $ ($ $80 000) $ x 0.40 = $ $ $ $ ($ $80 000) $ x 0.40 = $ $ $ $ ($ $ ) $ x 0.45 = $

Cost Very Simple Structure Register Business Name Application fee $146 Renewal fee $110 or online renewal $105 Must have Builders Licence for Residential Work Individual - new licence - 1 year $534 Individual - renewal - 1 year $357

Regulation HOME BUILDING ACT 1989 BUILDING AND CONSTRUCTION INDUSTRY SECURITY OF PAYMENT ACT 1999 BUSINESS NAMES ACT 2002 FAIR TRADING ACT 1987 / TRADE PRACTICES ACT 1974 LOCAL GOVERNMENT AND ENVIRONMENTAL PLANNING ACT 2001 OCCUPATIONAL HEALTH AND SAFETY ACT 2000

Availability of Finance Finances raised by Individual Due to lack of regulation finance usually harder Any Finance raised must be repaid back

Management Control Total Management Control vested with owner Sole Trader can employ and will be personally liable for the vicarious acts of employee

Sole Trader - Disadvantages Unlimited Liability Finance harder to raise Heavily Taxed if High Income is Earned No Workers Compensation for Owner Harder to Manipulate Tax (i.e. Income Splitting, FBT etc)

Sole Trader - Advantages Simple Structure Easily Formed Little Regulation Total & Exclusive Control Not a Disclosing Entity Tax preparation simple

Partnership - Definition A Partnership is the relationship which exists between persons and or entities carrying on a business in common with a view to profit May consist of 2 to 20 members If no Partnership Agreement, Partnership will apply May exist – Written Agreement (Express) – Oral Agreement – Implied by Actions

Partnership - Formation Partnership Agreement Business Name Registration requirements same as Sole Trader

Partnership - Liability Partnership has no separate existence from partners Liability is Unlimited for each Partner Unlimited Liability for Partners “Partnership” debts Unlimited Liability for Partners “Partnership” acts or omissions Have a Fiduciary duty to other partners Vicarious Liability for Employees actions Jointly liable for Contracts Jointly & Severally Liable for Torts, Trade Practices

Taxation – Partnership Business & Partners are same entity Business Profit belongs to Partners Business Profit split according to Partnership Agreement Profit added to other income and taxed at Marginal Rates Tax is paid during period when earned, cannot be deferred

Taxable Income 08-09Tax Payable $0 -$6 000Nil $ $ c for each $1 over $6,000 $ $80 000$4,200 plus 30c for each $1 over $34,000 $80,001 – $180,000$18,000 plus 40c for each $1 over $80,000 $180,001 and over$58,000 plus 45c for each $1 over $180,000 Taxable IncomeTax Payable $ $ X ($ $6 000) $ = $2 100 $ $9 000 $ ($ $ ) $ x 0.30 = $9 000 $ $ $ ($ $80 000) $ x 0.40 = $ $ $ $ ($ $80 000) $ x 0.40 = $ $ $ $ ($ $ ) $ x 0.45 = $

Cost Very Simple Structure Register Business Name Application fee $146 Renewal fee $110 or online renewal $105 Must have Builders Licence for Residential Work Individual - new licence - 1 year $534 Individual - renewal - 1 year $357

Regulation HOME BUILDING ACT 1989 BUILDING AND CONSTRUCTION INDUSTRY SECURITY OF PAYMENT ACT 1999 BUSINESS NAMES ACT 2002 FAIR TRADING ACT 1987 / TRADE PRACTICES ACT 1974 LOCAL GOVERNMENT AND ENVIRONMENTAL PLANNING ACT 2001 OCCUPATIONAL HEALTH AND SAFETY ACT 2000 Partnership Act 1892

Partnership -Availability of Finance Finances raised by Partners Due to lack of regulation finance usually harder Any Finance will be a loan and must be repaid back

Partnership - Management Control Total Management Control vested with partners Partnership Agreement should specify structure Owner has no Fiduciary duty to other person

Partnership - Disadvantages Unlimited Liability May be Liable for Acts or Omissions of Other Partners Difficult if Disputes Arise Share of Partnership cannot be sold, unless others agree Heavily Taxed if High Income is Earned No Workers Compensation for Owners Harder to Manipulate Tax (i.e. Income Splitting, FBT etc)

Partnership - Advantages Simple Structure Easily Formed Little Regulation Total & Exclusive Control by Partners Not a Disclosing Entity Pooling of resources & experiences Income Splitting allowable in some circumstances

Company - Definition Is an artificial body created by law Has a separate legal entity from its owners May consist of 1 Shareholder Size of Company will determine type Must be formally created, cannot be implied Two Types Propriety – Min 1 Shareholder Min 1 Director Public Company – Min 1 Shareholder Min 3 Directors Owners are called shareholder

Company - Formation Must be created and registered with the Australian Securities and Investment Commission Must Exist for 2 Months before it can trade Business Name Registration requirements same as Sole Trader

Company - Liability Shareholder Liability is limited to the unpaid amount of the share value Shareholders are not liable for actions of other shareholders, Directors and employees Director, Managers are employees of the Company and are not personally liable for acts or omissions (Corporations Law Only) Directors may be held personally liable for – Insolvent Trading – Fraud – Issuing Documents without “PTY LTD” etc

Company - Liability Company can sue and be sued independent of its owners

Taxation – Company Business & Shareholder are differing entity Business Profit belongs to Company Company pays its own Tax Business Profit “may” be given to Shareholders as dividends Companies pay tax at a Flat Rate of 30% Tax is paid during period when earned, cannot be deferred Issue of Dividends to Shareholders may deferred to another tax period Shareholders pay Tax on dividends at Marginal Rate

Taxable Income 08-09Tax Payable Assessable IncomeFlat Rate of 30% Taxable IncomeTax Payable $ $6 000 $ $ $ $ $ $ $ $

Costs Creation of Company $3000 ASIC Registration fees $146 ASIC Yearly Fees $65 Accounting Fees $3000 as Proper Accounts must be kept Must have Builders Licence for Residential Work Individual - new licence - 1 year $1300 Individual - renewal - 1 year $850

Regulation HOME BUILDING ACT 1989 BUILDING AND CONSTRUCTION INDUSTRY SECURITY OF PAYMENT ACT 1999 BUSINESS NAMES ACT 2002 FAIR TRADING ACT 1987 / TRADE PRACTICES ACT 1974 LOCAL GOVERNMENT AND ENVIRONMENTAL PLANNING ACT 2001 OCCUPATIONAL HEALTH AND SAFETY ACT 2000 Corporation Act 2001

Company-Availability of Finance Initial Finances raised by Shareholders contribution May raise directly from the public (PTY LTD < 20 Persons Only) Company may raise loans without liability to owners – these need to be repaid Company may raise money by the issue of new share – this is not repaid.

Company - Management Control Management of Company vested with Directors Shareholders are specifically excluded Directors owe Fiduciary duty to company Company can employ staff to undertake management function

Company - Disadvantages Establishment Costs Running Costs Accounts may be public company Owners may not be able to take part in management of the company Highly Regulated Founders may loose control due to issue of shares to raise finance

Company - Advantages Owners Liability is limited Separate Entity to owners Shares can easily be sold Greater Facility to raise funds Not a Disclosing Entity Pooling of resources & experiences Income Splitting allowable in some circumstances