Retail businesses are regulated by a wide range of business, competition and consumer protection legislation. In the initial stages of establishing a retail business, retailers are protected under the Retail Leases Act 1994 when leasing a retail premises. The level of protection shifts rapidly once the retail shop is opened, as Australian Consumer Laws impose certain implied warranties for consumer goods and transactions. There are also various legal issues in-between, such as fitting out the retail premises, securing wholesale or distributed goods, opening bank accounts and employing staff.

Vincent Cheng leads our retail business law team with experience in representing and advising clients on business structures, retail and commercial tenancies, supply and distribution contracts, and consumer good transactions.

Choosing a Suitable Business Structure

Prior to starting your business, you should first set up a suitable business structure to suit your long term needs as it could be costly and complex to transfer your business once your business is established. Choosing the correct business structure could save you considerable amounts of money in the future on stamp duty, income tax and capital gains tax. More importantly, starting a new business is risky and you need ensure that you and your family’s assets are separated and protected from your business creditors.

The following are an example of factors which you should consider when choosing a suitable business structure:

Management and Decision Making

How are important decisions made in the business? If you are not the only person with powers to make decisions of the company, then you may need to enter into a formal agreement and/or structure different voting rights for different persons depending on the nature of decision that needs to be made.

Asset Protection

Establishing a business through a separate legal entity will protect your business creditors from having direct access to you and your family’s personal assets. This is important when you want to limit your investment into the business or when you have significantly more assets than your business partner(s) who share liability with you.

Taxation

Individual tax rates can get up to 45 cents for every $1 of income depending on the taxable income of your business. Corporate tax rates are fixed at 30 cents for every $1 of income notwithstanding the amount of profit earned. Certain business structures will also allow you to retain profits within the entity to minimise the amount of income received and/or to distribute to several people who can benefit from tax free thresholds.

Growth and Expansion

Once your business is established, you may wish to expand the business into different services or industries. This may include introducing a new business partner or monetary investments or setting up a separate legal entity. Your current business structure will have a significant effect on the costs to implement the expansion your business or the attractiveness of your business to potential business partners or investors.

Legal Obligations

Reporting and accounting obligations may be time consuming but is particularly important when conducting business with other people. Simple business structures have minimal reporting requirements but more complex business structures may require retaining accountants or other professionals to assist. Your legal obligations owed to customers will also be an important factor. Your business structure may determine whether you are personally liable for your products or services if something goes wrong.

Set-up Costs

Saving costs in setting up your business structure could prove more expensive in the long run in taxes and costs to change your business structure. However, this may still be viable if you want to keep your initial running costs low to test out your new business idea or if you do not intend to expand your business.

Different Types of Business Structures

The main type of business structures are outlined below. Depending on your personal circumstances, the most appropriate business structure for you may be a combination of two or more structures.

Sole Trader

This is the simplest and most straight forward business structure where usually one person makes all the decisions of the business.

Advantages

  • One person makes all the decisions
  • Minimum legal obligations
  • Low set-up costs

Disadvantages

  • No asset protection
  • High profits result in high tax
  • Not suitable for large businesses

Trust

This is a common add-on to a business structure mentioned above where trustees hold property administer trust property (such as the business and assets) for the benefit of its beneficiaries.

Advantages

  • Asset protection
  • Distribution of trust income to a number of beneficiaries can have tax benefits
  • The beneficiaries of the trust do not have to be disclosed

Disadvantages

  • Higher set-up and compliance costs
  • Most trusts have a perpetuity period
  • Penalty rates apply to retained profits

Partnership

This is a simple business structure where two or more persons join together for a common purpose.

Advantages

  • Low set-up costs
  • Pooling of assets, skills and knowledge
  • Obligations of all parties can be governed by one single partnership agreement

 Disadvantages

  • No asset protection
  • High profits result in high tax
  • Partners are liable for actions of the other partners

Company

This is a common business structure for businesses comprising of shareholders who own the company and directors who run the company.

Advantages

  • Limited liability – your personal assets are separate from that of the company
  • You can sell or issue shares to attract investments
  • Can be owned by one person at the start but still have a good structure for future growth

Disadvantages

  • Higher set-up and compliance costs
  • Directors owe an overriding duty to the company and shareholders
  • Companies generally have higher insurance costs due to limited liability

Business Name

Choosing an appropriate and protectable business name is very important as this will be how your potential clients will associate your goods or services with your business. There are a variety of avenues as to how you can protect your business name and logo. You would want to protect your business name for two main reasons, firstly to protect the goodwill in your brand name and prevent other people from using it to your detriment and secondly, to have your brand name protected in such a way which can easily be sold or commercialised in the future.

There are state and federal based registration systems for business names. Your brand name and/or logo can also be further protected by way of trade mark. It may not seem important when you are first establishing your business but when your business prospers, many people will want to imitate your business and having a protected brand name minimises the risk of these contraventions and/or makes enforcement cheaper and cheaper.

Retail Leases

Retail Leases are governed under the Retail Leases Act 1994 in New South Wales and covers your rights and obligations as a tenant or landlord.

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