The structure you choose for your business should fit comfortably. A poor choice of business structure can prove painful. The most common business structures are sole trader, partnership, proprietary limited company, association and co-operative. Each has advantages, and disadvantages.
When deciding what structure to choose, you should consider taxation, type and size of business, finance requirements and establishment costs. Talk to your accountant or solicitor before you settle on a business structure.
Sole trader
This is the simplest and most inexpensive form of business structure to set up. As a sole trader you can trade under your own name. If you operate under another name, it must be registered under the Business Names Registration Act 2011 (Cth). Business names are administered by the Australian Securities and Investments Commission (ASIC). Visit the ASIC website to register, cancel, renew or search for a business name.
Partnerships
A partnership is defined by the Partnership Act 1892 (NSW) as the relationship which exists between persons carrying on a business in common with a view to profit. It's wise to have a formal written partnership agreement because it sets out each partner's responsibilities and reduces the likelihood of disputes. An agreement can also cover what happens if the structure ends or changes.
The Partnership Act (PA) allows three types:
- a partnership (normal partnership)
- a limited partnership
- an incorporated limited partnership.
There are different requirements and features for each of these types.
The Partnership Act only requires limited partnerships and incorporated limited partnerships to be registered.
Normal Partnerships
A ‘normal partnership’ or just simply a ‘partnership’, does not need to be registered under the Partnership Act.
Normal partnerships are a suitable structure when more than one person wants to carry on a business together but use a simpler model than a company structure.
Example: a husband and a wife may form a partnership, where one of them does the ‘front end’ work and the other looks after the ‘paperwork’ for the business.
If you’re considering a normal partnership, you should:
- read the parts of the NSW Partnership Act dealing with normal partnerships,
or - discuss your circumstances with your accountant or solicitor.
Limited Partnerships
A limited partnership has two types of partners – ‘general partners’ and ‘limited partners’ and their duties and liabilities vary.
There must be at least one general and one limited partner in the partnership.
General partners are responsible for the day-to-day management of the limited partnership and their liability for its debt is unlimited. The partnership must not have more than 20 general partners.
Limited partners play no role in managing the limited partnership and their liability for its debts is limited to the amount contributed to the partnership and as recorded in the Register maintained by NSW Fair Trading.
There is no upper limit to the number of limited partners in a limited partnership. A person may be admitted as a partner in a limited partnership without the need to obtain consent of any other limited partner
Raising funds with a limited partnership is more flexible. The limited partners can contribute funds for the operation of the partnership in return for a share of its profits, without having to be involved. Essentially, they are passive investors in the limited partnership.
Limited partnerships can be used in most businesses needing to raise capital.
Examples where a limited partnership might be a suitable business structure include:
- industrial or real estate developments,
- agricultural schemes,
- mining projects,
- arts, theatrical and film ventures or
- other small to medium businesses needing to raise funds in a relatively straight forward way.
Registration of a limited partnership
Limited partnerships are formed by and on registration of the partnership under the Partnership Act 1892.
Complete the Application for registration of a limited partnership (form LP1) to register a limited partnership in New South Wales.
All details requested in the form must be provided. A certificate of registration will be issued at the time of registration.
Changes to the Register
If any change occurs in relation to the registered particulars of a limited partnership the changes must be notified to Fair Trading within seven days after the change occurred. An Application for changes in registered particulars of a limited partnership (form LP2)
is used to notify changes to the Register. A new certificate of registration may be issued following registration of changes to particulars.
Dissolution or cessation of limited partnership
Fair Trading must be notified if a limited partnership is dissolved or ceases to carry on business.
A Notice of dissolution or cessation of a limited partnership (form LP6) is used for this purpose.
Incorporated Limited Partnerships
Incorporated Limited Partnerships (ILPs) are legal entities that can be set up under most State and Territory partnership legislation.
ILPs appear to be the preferred entities when applying for registration under Commonwealth legislation for venture capital purposes.
NSW Fair Trading is responsible for registration of ILPs under the NSW Partnership Act 1892.
Venture capital
Venture capital is an important source of funds for start-up companies, expanding businesses and restructuring businesses.
Venture capital is high risk as it provides funding to companies at difficult stages in their development where the risk of failure is greatest.
Venture capital programs attempt to prevent this failure by working with the management of investee companies through the growth phase.
Limited partnerships for venture capital
Commonwealth legislation provides for four forms of subclasses for limited partnerships to be used for venture capital investments. These are:
- Venture Capital Limited Partnership (VCLP)
VCLPs invest directly in companies. - Early Stage Venture Capital Limited Partnership (ESVCLP)
ESVCLPs invest in entities with total assets of no more than $50 million before the investment is made. - Australian Venture Capital Fund of Funds (AFOF)
AFOFs invest either indirectly through VCLPs or ESVCLPs, or directly. Direct investments by AFOFs must meet specific requirements. - Venture Capital Management Partnership (VCMP)
VCMPs, according to the Income Tax Assessment Act 1936 (Cwth), can only be involved in the management of the partnership
Concessional tax treatment
To obtain concessional tax treatment under the Commonwealth legislation, the venture capital limited partnerships must be registered under the Venture Capital Act 2002 (Cwth).
International consistency
The Commonwealth legislation aligns Australian tax regime that applies to venture capital investment structures with most developed countries.
Registration forms and fees
To register an ILP in New South Wales complete the Application for registration of an Incorporated Limited Partnership form (form ILP1) which includes identification of the following subclasses.
- Venture Capital Limited Partnership (VCLP)
- Early Stage Venture Capital Limited Partnership (ESVCLP)
- Australian Venture Capital Fund of Funds (AFOF)
- Venture Capital Management Partnership (VCMP).
Relevant lodgement fees are provided on the forms or refer to the partnership fees page for the current list of fees.
Changes to the register
ILPs are required to notify changes to registered particulars.
The following forms are available for this purpose:
- Notification and evidence of registration as a VCLP, ESVCLP or AFOF (form ILP2)
- Notification of recognition as a VCMP (form ILP3)
- Notification of changes in registered particulars (form ILP4)
- Notice of revocation or registration as a VCLP, ESVCLP or AFOF/Notice of cessation of recognition as a VCMP/Notice of cessation of business (form ILP5)
Winding up an incorporated limited partnership
An ILP may be wound up voluntarily with Schedule 1 of the Partnership Act having effect.
An incorporated limited partnership must notify the Registrar in writing of the commencement of the winding up of the partnership within seven days after commencement.
The Registrar must also be notified in writing of the completion of the winding within seven days of its completion and the notice must specify the date of completion.
These notices should be sent to:
Registry and Accreditation
Better Regulation Division
by email: [email protected]
or by mail to:
PO Box 22
Bathurst NSW 2795
More information
Investors, interested persons and professional advisors should make their own inquiries to determine if registering an ILP is applicable to their circumstances.
This information may be useful:
Public Register
NSW Fair Trading is responsible for maintaining the Register of Limited Partnerships and Incorporated Limited Partnerships for these types of partnerships registered in New South Wales under the Partnership Act (1892).
Information recorded in the Register is available for public inspection upon payment of the specified fee.
Should you wish to inspect the Register please complete the search request form. Details concerning fees and lodging the search request are provided on the form.
Proprietary Limited Company
A private company is a business structure formed by one or more people who want to have a business that is a separate legal entity from themselves. When you form a company, you could become an employee, director and/or shareholder of the company.
Private companies are regulated under the Corporations Law which sets out substantial obligations for company directors. Establishment and ongoing administrative costs associated with Corporations Law compliance can be high. This is why the structure is generally considered to be better suited to medium to large businesses.
The Australian Securities and Investments Commission (ASIC) has a number of resources to help you form a company.
Associations
An incorporated association is an alternative to forming a company or a co-operative for small non-profit groups. Go to the about associations page on our website for more information.
Co-operatives
A co-operative is a form of business organisation which is member-owned. A co-operative must have five or more members. Go to the about cooperatives page on our website for more information.