Types of Law and Business Legal Structures

Common Law

The first main source of law is common law, also called judge-made law or case law. Common law is a body of common legal principles (or rules) developed by judges over time. These principles originally derived from the common law of early England. They were created by judges when deciding cases in their courts.

The existing common law comprises of established and accepted legal rules made by judges of the highest courts in our legal system. These rules are commonly followed by all judges within the system to decide legal disputes in their courts. Some areas of law, such as contracts and negligence, are based almost entirely on common law principles.

There is also a separate body of judge-made law known as equity, once dealt with in a special court. Equity rules are based on fairness. These principles were originally developed because the application of strict common law rules to situations sometimes produced unfair results. The application of equity rules in appropriate cases was intended to give fairer outcomes. Today, the same courts apply both common law and equity rules.

Common law is maintained because of precedent. Precedent is a legal convention followed by all judges in our legal system. It requires the same legal rule to be applied to similar fact situations in subsequent cases in the same court hierarchy. Judges of lower courts in the system follow the same legal principle to decide similar facts arising in later cases. This ensures there is uniformity, certainty and consistency in the application of common law rules by judges.

Legislation (Statute Law)

The second main source of law is legislation. Legislation is a law passed by parliament, which is an arm of government. Legislation can also be referred to as a statute, an enactment or an Act of Parliament. A statute contains numbered sections called statutory provisions.

Parliament is an assembly of elected members. It is an arm of government whose role is to make legislation. In Australia, we have a federal system of government. There is a Commonwealth (federal) parliament as well as various state parliaments. Each parliament is given power under its respective formal written constitution to make legislation in respect of defined matters.

There are two levels of parliament that have law-making power with respect to Australia. They are:

• Commonwealth (or Federal) Parliament
• State Parliaments

The Commonwealth (or national) Parliament passes legislation that applies to the whole of Australia, for example, the Income Tax Assessment Act 1997 (Cth). In contrast, a state parliament passes legislation that applies only to the particular state, for example, the Fair Trading Act 1987 (NSW) applies only in New South Wales.

A parliament can make new laws, as well as amend or cancel existing ones, provided that it has the power to do so under the relevant constitution. Parliament-made laws are superior to common law. This means that if there is ever conflict between legislation and a common law principle, the legislation always prevails.

To ease its workload, parliament may sometimes delegate specific legislative powers to other bodies. These other bodies are empowered to make their own delegated legislation.

Examples of delegated legislation are:

• Regulations (to support statutes) made by the Australian governor-general or state governors
• Regulations (to support statutes) made by government ministers or departments
• By-laws and ordinances made by local councils
• Mandatory industry codes of conduct made by statutory authorities
• Industrial awards made by industrial relations authorities

Other Laws

Other laws that make up our legal system are:

• Private/civil law: Concerns disputes between individuals. Here we get a plaintiff and a defendant where the law aims at compensating the injured party, e.g., a payment of money.
• Public/criminal law: Concerns the suppression by the state of anti-social behaviour. The aim is to punish wrong doers and hopefully deter others from crime.
• Tort law: ‘Tort’ means wrong. A tort is a wrongful omission which gives rise to a civil action against a wrongdoer or ‘tortfeasor’.

One of the most important decisions you will make regarding your business is its legal structure. There are different types of structures for running a small business for profit.

These can include:

• Sole trader
• General partnership
• Joint venture
• Private company
• Trading cooperative

It is also important to note about Director Identification Number (DIN). It applies to Company Directors only and is quite new. It came into effect 1/11/2021. If a person became a Director before 1/11/21 they have until 30/11/22 to register for a DIN. If a person became a Director between 1/11/21 and 4/4/22 they must register for a DIN within 28 days of their appointment as a Director. From 5/4/22 a person must register for their DIN before they are appointed as a Director.

There are also other business structures such as unincorporated and incorporated associations. Any chosen ownership structure can be changed further down the line if your circumstances change. For each kind of business structure, we will examine the main legal features including the liability of business owners.

Your choice of the most appropriate type of company will depend on:

• Size of the business
• Number of people involved
• Type of business
• Cost to establish
• Taxation considerations
• Financial considerations
• Superannuation
• Management and control
• Skills required
• Your own personal preference

Sole Trader

This means that only one person owns the business. A proprietor is another word for owner and a sole trader can be sole proprietor. A sole trader is the most simple and cheap structure to operate. There are no particular legal requirements for a sole trader. A sole trader can use employees, just as any other ownership structure can.

A sole trader is completely liable for any debts the business incurs. If the debts cannot be settled using company assets, the sole trader will be personally liable.

A sole trader is legally responsible for all business debts and all business profits; taxation, reporting of income to ATO, record keeping, workers compensation insurance for staff. Must pay any tax the business must pay. The owner should apply for an Australian Business Number and Register the Business Name. If employing staff, must register for PAYG withholding obligations.

It has one owner, no director: The owner has full control over the business but is also personally liable and responsible for all aspects of running the business.

A sole trader is personally liable for financial or tax debts in a sole trader business. There is no division between business assets or personal assets. Assets in the owner’s name can be used to pay business debts.

They must register for an Australian Business Number. The tax-free threshold for individuals is $18,200, and a sole trader is taxed as part of own personal income.

Money earned in the sole trader business is treated as the owner’s individual income. Sole Trader can claim deductions for costs incurred in running the business. Sole Trader can withdraw money from the business bank account – as personal drawings.

Report any withholding tax and send it to the ATO.

If employing staff, they must prepare payroll advice, withhold tax and send superannuation contributions to the employee’s superannuation fund.
Can use an individual bank account or can establish a separate business bank account.
All business transaction records must be kept, including Invoices, Receipts, Bank Statements, Expenses, Sales Records, Stock/Inventory, etc.

Advantages of being a sole trader can include:

• Easy and cheap to establish
• Total control of the business
• No profit share

Disadvantages may be:

• Holidays may be hard to take
• Illness can stop the business
• Bank finance
• The business ceases to exist if the owner dies
• Personal responsibility for debts creditor claims

Partnership

Each state has similar legislation to regulate partnerships, for example, the Partnership Act 1892 (NSW). These acts define a general partnership as the relationship that exists between a number of people running a business with a view to making a profit. A partnership is also called a firm.

Partnerships, like other ownership structures, can also employ people. There is a maximum number of partners in a firm; it stands generally at twenty but this number can be higher in professional partnerships.

Partners also need to be trustworthy. They are all equally responsible for the actions of each other, so any partner’s business actions will bind the whole firm.

The legal responsibility of partners are they must obtain an Australian business number, register the company, and register the business name (if applicable). The business can operate under their own name or use a separate business name, which must be registered.

They must register for GST if annual GST turnover is $75000 or more.

Two or more owners/partners (up to 20) and must have a view of making a profit. Profits are shared between partners. 

All partners are liable for their own actions and each other’s actions. A partnership is not a separate legal entity. Liability is unlimited and shared equally between partners. Creditors can take personal assets of partners to pay debts.

The partnership has its own Tax File Number and ABN and must lodge its own tax return. 
The partnership is not taxed. Profits are shared among the partners. Each partner pays tax on their share of the partnership profit at the individual tax rate and may be eligible for the small business tax offset. A partner cannot claim deductions for money drawn from the business. Amounts taken from the partnership are not wages for tax purposes.

Report any withholding tax and send it to the ATO. Partners are not employees, but the business can employ other workers. If employing staff, they must prepare payroll advice, withhold tax and send superannuation contributions to the employee’s superannuation fund. They must have separate bank accounts from the owner.

They must retain records as per personal tax records. Records of the partnership must be retained. Create and keep a partnership agreement.

Advantages can include:

• Pooling of skills
• Income tax savings
• Responsibility sharing

Disadvantages may include:

• Disagreements or personality clashes
• Personal responsibility for debt and creditors

Private Companies

Companies are regulated under the Corporations Act 2001 (Cth). The Australian Securities and Investments Commission (ASIC) is responsible for administering and enforcing the Act.

Companies are all registered with ASIC. A company will come into existence at the very date displayed on the certificate of registration issued to it by ASIC.

There are several different types of companies allowed under the Corporations Act. A small business is usually a proprietary company (PTY), limited by shares. It can be run by a lone person who acts as the only director and only shareholder.

In a company, there is a clear separation of control and ownership. The company is owned by shareholders and controlled by directors. Shareholders are, of course, entitled to distributions of profit, also known as dividends, determined by the directors.

The owner is legally responsible for obtaining an Australian business number, register the company, and register the business name (if applicable). The company is liable for all business debts, but the directors can be liable to pay debts if the company can’t pay them.

Ensuring the business has a principal place of business, regular company meetings and a written record of meetings and resolutions. It can have one director – who has full control of the business, but certain decisions must still be recorded as resolutions of the company.

If there is more than one director, all directors govern the company's internal management and comply with certain rules, e.g. company constitution or the replaceable rules. Obligations for directors such as a duty to act in good faith, act in the company's best interests, exercise care and diligence, prevent the company trading while insolvent and report to and help the liquidator on the company's affairs if the company is closing.

They must have a registered officer. Directors are liable for pay as you go withholding and superannuation debts. The business has its own tax file number. There is no tax-free threshold for companies – pay tax on every dollar the company earns. 

Any funds a director receives from the company must show as funds on their individual tax return.
Report any withholding tax and send it to the ATO. If employing staff, they must prepare payroll advice, withhold tax and send superannuation contributions to the employee’s superannuation fund.

They must lodge tax returns and Business Activity Statements. They must provide an annual review.
It must have a separate bank account to the owner. All money belongs to the company. Directors cannot draw money from the company as personal drawings. Record all transactions and the financial position and performance, including Balance Sheets, Profit and Loss Statements, and Cash Flow Statement.

A company can, in its own name:

• Sue and be sued
• Buy, own and sell property
• Enter contracts
• Join partnerships or joint ventures
• Become a trustee
• Employ people
• Pay taxes

Being a separate legal entity, a company employer must arrange and pay compulsory workers’ compensation insurance for all of its paid employees, including directors.

Separate Legal Entity

A number of people (shareholders) each have a share, or shares, in the company. The values of the share(s) are determined by the amount of money that person has invested in the company to purchase those shares. The company itself is controlled by a board of directors and, therefore, has an identity separate from its shareholders.

A public company has shares available to the public, whereas a private company has restrictions on who can buy shares.

Advantages of a company can include:

• It has its own identity
• Debts and losses are the responsibility of the company and not the owners of it
• Tax advantages
• The raising of large amounts of money

Disadvantages may include:

• Time consuming, costly (e.g., setup and accountant’s fees, etc.)
• Compliance requirements

Trusts

A trust is the obligation one person (the trustee) has to look after the assets for the benefits of a second person (the beneficiary). The rights and duties of the trustee are set out in the trust deed. I.e., the trustee must administer the trust by the trust deed, which sets up the trust and determines the rules by which it operates.

Setting up the Trust: Establish the governing rules (trust deed); ensure the Trust has assets for the members' benefits; identify the beneficiaries (members). Trust Deed must be signed and dated by all Trustees; properly executed and regularly reviewed and updated as necessary, e.g. if a beneficiary passes away. The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

Trustee registers for the trust’s tax file number and ABN. Trust must have a trustee or directors of a corporate trustee. Different types of trusts include unit trusts, managed investment trusts, family trusts, deceased estates, super funds, charitable trusts, special disability trust. It isn’t liable for pay PAYG instalments. Beneficiaries may have to pay instalments based on their share of the trust’s instalment income.

A trust should have its own tax file number, which the trustee uses for lodging income tax returns for the trust. A trust can have an Australian Business Number. It must have its own bank account that is managed by the Trustee. It must retain records of all transactions and payments to beneficiaries.

Trusts are popular business structures usually set up for tax purposes. The main difference between a trust and a company is that the trust does not have its own legal identity. The main problem with trusts, however, is that they are complicated, can be expensive and are under close scrutiny from the tax office.

At this point, it is important to look at the requirements you will face when procuring premises for your business. The structure of your business will inform the type of premises, if any, that you will need. There are a number of options, which can include:

• Trade-based businesses:
  • Home base, no premises are required
  • Warehouse or manufacturing area with office for larger companies
• Retail/goods and services:
  • Shopfronts
  • Mobile capabilities
  • Warehouses
• Services:
  • Mobile ‘visit the client’ companies. This can include vehicles and home offices
  • Office space ranging from one room to many separate floors

These are just some of the examples you can consider, based on the size and legal structure of your organisation.

There are also options to:

• Lease, either short or long-term
• Rent
• Buy
• Share

A reputable business consultant will be able to assist you in making these decisions.

Workplace procedures to lease or own business premises includes:

• Business objectives, business plan and expectations of the new business venture.
• How much money is being invested and by whom?
• Size of the proposed business operations, the size of the premises required, duration, the features required e.g., delivery docks, stock room, floor space, equipment to be used internally e.g., forklifts, manual handling lifting devices, etc.
• Budget, assets, liabilities, and capital available for establishing the business.
• Location, e.g., suburb, retail shopping strip/street frontage, within a shopping centre, at a mall with furniture and white goods retailers.
• Intended operating hours, e.g., business hours, seven days per week, Thursday night, Saturday hours, Sunday hours.
• Delivery options – drivers, trucks, couriers etc. for goods too large for customers to transport.
• Seek advice from an accountant and business conveyancer.
• Research relevant law e.g., long term lease, legislation dealing with subdivisions – conveyancing legislation or planning and land use legislation, retail tenancy legislation etc. and check if they are applicable.

Watch

The following video is an explanation of business structures produced by Westpac Australia.

Business Structures

Use the following questions to check your knowledge.

1. Explain the meaning of ‘sole trader.’
2. Describe how a ‘private company’ works.
3. Explain a ‘trust.’
4. Explain what is meant by ‘common law.’
5. Explain what is meant by ‘legislation.’