Written by Principal, Jennifer Tutty
One of the key decisions you need to make when starting or growing a creative venture is which business structure you will use to own and operate the business.
There are many things you need to consider, and professionals you need to consult with, when deciding what structure is right for your creative business.
In this blog, we break down the common business structures used by creatives, explain the pros and cons of each structure and provide some general guidance on when a creative might choose to use each of the structures.
Important Disclaimer: Don’t forget to speak to your accountant and lawyer before working out what business structure is right for you!
What is a Business Structure?
A business structure describes the legal structure of a business, and how you operate as a business. Some business structures are highly regulated by laws (i.e. companies), and other business structures less so.
Each business structure has its own features, benefits and disadvantages. It is important for creative businesses to choose a business structure that suits their needs and business goals.
What Business Structures do Creatives Commonly Use?
In Australia, there are 5 key business structures creatives might use to run their creative venture.
These are:
1. Sole trader structures.
2. Partnership structures.
3. Company structures.
4. Trading trust structures.
5. Joint ventures.
The first 3 are the most commonly used.
Want to know more about each? Keep reading…
1. Sole Trader
What is a sole trader?
A sole trader business is a business that is operated by an individual by themselves.
To start a sole trader business, the individual needs a business name (this can be registered with ASIC) and an ABN (this can be obtained from the ATO).
A sole trader business is not considered a separate legal entity from the individual (like a company is for example).
When would a creative use a sole trader business structure?
Creatives may choose to use a sole trader business structure when they are just starting out, there is not yet much risk associated with running their business, they are not yet making significant profits, or when they are just ‘testing the waters’.
A sole trader business structure can be best for low risk businesses.
What are the advantages of using a sole trader business structure?
Some advantages of conducting your business as a sole trader include:
– It’s pretty cheap to set up.
– It’s easy to set up.
– There are less reporting requirements.
What are the disadvantages of using a sole trader business structure?
Some disadvantages of conducting your business as a sole trader include:
– You will be personally liable for the acts and omissions of your business.
– Your personal assets might be at risk.
– You will be taxed at personal tax rates which might be higher than tax rates available for other structures (for example, company tax rates).
2. Partnership
What is a partnership?
A partnership is a business that is operated by more than one person (i.e. a partner). Partners can be individuals or other business structures (such as companies or trustees on behalf of unit trusts).
To start a partnership business, the partners need a business name (this can be registered with ASIC) and an ABN for the partnership (this can be obtained from the ATO).
A partnership is not considered a separate legal entity from the group of partners (like a company is for example).
What is a partnership agreement?
It is strongly advised also, to have a carefully drafted partnership agreement. This should outline the terms upon which the partnership will be operated (for example, how decisions are to be made, what portion of expenses each partner pays for, what share of profit each partner receives and other key terms).
If an agreement is not put in place, default partnership laws will apply to the partnership which may have negative consequences for certain creatives.
When would a creative use a partnership business structure?
A creative may choose a partnership business structure when just starting out, not yet to making much money, or ‘testing the waters’ working with someone.
Partnerships should be treated with caution however (read below).
What are the advantages of using a partnership business structure?
Some advantages of partnerships are that they:
– Are relatively cheap and easy to set up (although you should make sure you have a partnership agreement prepared by a commercial lawyer experienced in the creative industries).
– Can have tax benefits.
What are the disadvantages of using a partnership business structure?
The disadvantages of using a partnership business structure are many! It can be described as akin to ‘marrying’ your business partners.
The risks with operating as a partnership include:
– Default rules will apply if a bespoke partnership agreement is not in place.
– Partners can be liable for debts and actions of other partners in relation to business.
– Partnerships can be messy and hard to break up.
– It can be harder to attract investors using a partnership structure.
3. Pty Ltd Company
What is a company?
At law, a proprietary limited company (otherwise known as a Pty Ltd company) is a separate legal entity from the person or people running it.
Companies have at least one shareholder and one director. Therefore, creatives can run a company as the only shareholder and director or can run a company with other shareholders and directors.
To start a Pty Ltd company business, a Pty Ltd company must be formally incorporated and registered with ASIC. Upon incorporation and registration, the company will be given an Australian Company Number (or an ACN) from ASIC.
Companies generally need to register a business name if they are running a business, and they also need to register an ABN with the ATO.
What is a shareholders agreement?
If creatives are owning and operating a company with other people, it is strongly advised also, to have a carefully drafted shareholders agreement (prepared by a commercial lawyer experienced in the creative industries).
The agreement should outline the terms upon which the company will be owned and operated (for example, how decisions are to be made, how the shares are owned and can be sold, who has rights to dividends and who has the right to appoint directors).
When would a creative use a company business structure?
Creatives may choose a company business structure when they:
– Are running a high risk business.
– Are starting to make decent profits.
– Have staff.
– Have personal assets to protect.
– Are committed to the business long term.
– Have business partners (not to be confused with partnerships).
– Are taking on a lease.
– Want to distribute income to different people.
– Want to take advantage of company tax benefits.
What are the advantages of using a company business structure?
There are several advantages of using a company business structure including that:
– They are relatively cheap to setup.
– They help protect personal assets.
– You will generally NOT be responsible for company liabilities (except if you breach your directors duties, but this is outside the scope of this article).
– They can appear more professional.
– They have tax advantages.
– They can make it easier to bring in new shareholders and investors.
– They can enable access to government incentives such as R&D and ESIC.
What are the disadvantages of using a company business structure?
Some disadvantages of company business structures include:
– They have more onerous regulations.
– They have more expensive set-up and ongoing accounting fees.
– Being a company director comes with directors being required to comply with onerous ‘directors duties’.
– They have more reporting requirements.
4. Trading Trust
What is a trading trust?
Trading trusts are less commonly used for creative businesses, however creatives should still understand what they are.
Trusts used for creative businesses consist of ‘trust property’ (i.e. business assets), a ‘trustee’ (typically an individual or company) and ‘beneficiaries’ (typically the operators of the business and their family members).
The most common types of trusts used for creative businesses are unit trusts (where beneficiaries own a fixed portion of units and trust property) and discretionary trusts (where trust property is distributed at the discretion of the trustee).
Trusts are not separate legal entities. Rather, trusts are a legal device by which one person (i.e. the trustee) holds property for the benefit of another person or a group of people (i.e. the beneficiary or beneficiaries).
To start a trust business, a trust needs to be established. A trust is governed by the terms of a trust deed.
The trustee of a trading trust will need to register a business name if they are running a business, and they also need to register an ABN with the ATO.
If you wish to operate a trading trust and sign legal documents, or you wish to sign a contract with a trading trust, the trustee for the trust will need to sign the document on behalf of the trust. Trusts per se, cannot sign legal documents.
What is a unitholders agreement?
If creatives set up a unit trust to run their business with other people, it is strongly advised also, to have a carefully drafted unitholders agreement.
The agreement should outline the terms upon which the unit trust will be owned and operated (for example, how decisions are to be made, how the units are owned and can be sold, who has rights to trust distributions and who has the right to appoint and replace trustees).
When would a creative use a trading trust business structure?
A creative may want to use a trading trust business structure for certain types of businesses (i.e. when owning a property).
Trading trusts are usually established on the express advice of an accountant.
What are the advantages of using a trading trust business structure?
Some advantages of trading trusts include:
– Tax and income distribution advantages.
– Better protection of assets from creditors if the business is in trouble.
– Less regulations compared with companies.
What are the disadvantages of using a trading trust business structure?
Some disadvantages of trading trusts include:
– Greater expenses for setting up and ongoing accounting fees.
– That they ideally should have a company as a trustee, which requires setting up and operating the company too.
5. Joint Venture
What is a joint venture?
A joint venture is business structure that can be used when 2 or more businesses come together with a view to make a profit for a specific project, but they don’t want to associate themselves together formally in a partnership, company or other structure.
Joint ventures can be operated by individuals or other business structures (such as companies or trustees on behalf of unit trusts).
A joint venture partnership is not considered a separate legal entity from the group of joint venture partners (like a company is for example).
When running a joint venture, those involved must be careful that the joint venture is not deemed a partnership, otherwise partnership laws will kick into place which might negatively impact certain joint venture partners.
What is a joint venture agreement?
It is strongly advised also, to have a carefully drafted joint venture agreement.
The agreement should outline the terms upon which the joint venture will be operated (for example, how decisions are to be made, what portion of expenses each joint venture partner pays for, what share of profit each joint venture partner receives and other key terms).
When would a creative use a joint venture business structure?
Creatives should consider using a joint venture business structure for a particular project or business goal (for example, a music event or creative art project) that has a defined end.
What are the advantages of using a joint venture business structure?
Advantages of joint ventures include:
– Joint Venture Partners retain their legal independence.
– Risks and costs can be shared equally or in defined proportions.
– There is no need to set up a new entity (although you can).
What are the disadvantages of using a joint venture business structure?
Disadvantages of joint ventures include:
– The potential for unlimited liability for partners for the joint venture’s debts and obligations.
– Might be deemed a partnership if the venture turns into more of an ongoing business.
– Might be harder to manage and operate due to not being one entity.
In Conclusion
When it comes to choosing the best business structure for your creative venture, you should keep the above tips in mind.
However, it is always best to consult with both your accountant and lawyer to work out what is right for you.
Key Takeaways
1. Setting up as a sole trader is inexpensive, easy and great for starting out. However, trading as a sole trader means you will be personally liable for your business affairs (which is not really ideal long term, especially if you have personal assets to protect).
2. Be wary entering into a partnership to run your business. You can be liable for the actions of your partners and separating from a business partnership can be just as difficult as a messy divorce.
3. Incorporating a company to run your business provides tax advantages, a sense of professionalism and reduces your personal liability. You need to be ready however to take on onerous legal obligations as a company director!
4. Establishing a trading trust to run your business could offer significant tax advantages and increased asset protection – however you need comprehensive tax advice before choosing to do so. This is not something to DIY!
5. Using a joint venture structure to work on a collaborative project with other people offers flexibility and keeps your business affairs more separate. JVs can be a great option to test out a business concept with other parties before committing long term to an ongoing business.
Further Information
For more information about starting and running a business, check out our blogs:
– Identifying Your Business’ IP Assets: A Guide for Business Owners
– 7 Key Considerations for a Shareholders Agreement
– Show Me the Money: 7 Ways to Get Your Start-up Into Shape for Capital Raising
If you have any business related legal questions, please contact us through our online form or via email at hello@studiolegal.com.au.
Written by Principal, Jennifer Tutty.
Published 15 February 2024.
Photo by Dstudio Bcn on Unsplash.
DISCLAIMER
The information in this article is of a general nature. It does not constitute formal legal advice and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.