Companies and trusts are two of the most commonly used business structures around Australia. Establishing and understanding how these business structures function can be confusing due to the complex legislative requirements and regulations that must be met in order to operate them.
How to create a company
A company is created through the process of registration. The process to register a company is outlined in the Corporations Act 2001. A company will come into existence upon incorporation which occurs once it is registered. When a company comes into existence, it will be recognised as a separate legal entity and be required to meet the obligations under the Corporations Act 2001. If you are a director of a company, it is very important to be aware of the director’s duties owed under the Corporations Act 2001 as if you are found in breach of these duties, you may be found personally liable.
Determining which company type is appropriate for your business
First and foremost, it is necessary to determine whether your company will be incorporated as a proprietary company or a public company as this will impact the requirements that you need to meet in order to register. In both cases, the registration process can be quite confusing – particularly if you have never done it before. Our lawyers at GLG Legal have assisted numerous companies in the incorporation process and we encourage you to contact our office if you require advice on the different requirements for a proprietary and public company.
Generally speaking, businesses who do not have many members and that do not have an intention to list themselves on the Australian Securities Exchange (ASX) will usually register as a proprietary company. With that said, there are still many considerations that you will need to take into account regarding the registration requirements and the continuing obligations required under the Corporations Act.
Proprietary companies are the most common type of company used in Australia. Shares in a proprietary company are not available to the public but rather, are usually held privately by a small group of persons. A company can become a proprietary company if it follows the registration process to become a proprietary company under the Corporations Act 2001. Entities wishing to incorporate as a proprietary company must have no more than 50 non-employees as shareholders.
Proprietary companies are also further categorised into small proprietary companies and large proprietary companies. Both a small proprietary company and a large proprietary company have certain threshold requirements that will determine whether your company is eligible to be classified as one. The main difference between a small proprietary company and a large proprietary company is that a large proprietary company will have further reporting requirements with the Australian Securities and Investments Commission that are similarly required for public companies.
GLG Legal has extensive experience in advising clients on the registration process for proprietary companies. We take the time to understand your company to ensure that the most appropriate company type is chosen for you.
A public company is classified as any company that is not a proprietary company registered under the legislation. Often a public company is recognised as one that is listed on the ASX however, there are many public companies which are not listed on a securities exchange. Public companies have a number of obligations that proprietary companies do not have because the Corporations Act aims to protect those in the public who are investing in the company. Therefore, if you are considering incorporating your company as a public company, it is important to seek legal advice regarding these additional obligations. Failure of any of these obligations may result in a penalty.
The decision on whether a public company is the most appropriate business structure for your business involves consideration as to whether the benefits of using a public company are greater than the obligations and restrictions imposed on a public company.
What is a trust?
A trust is a legal relationship between a trustee and beneficiary whereby the assets of the trust are placed under the control of the trustee for the benefit of a beneficiary. In effect, the trust will create a separation between the legal and beneficial interest and for that reason, trusts are considered to be one of the more complex business structures to operate and understand.
The main characteristics of a trust are:
- The trust itself cannot enter into transactions which means the trustee must enter into all transactions on behalf of the trust, making the trustee the owner of the legal interest in the trust property
- Trust assets are separate and not included in the trustee’s own assets or estate
- The trustee has the obligation to manage and dispose of the assets
- The beneficiaries will gain a beneficial interest from the trust assets and can expect the trustee to act in their best interests.
The establishment and management of a trust are very important as if it is found to be incorrect, the trust may be found to be a sham. Our commercial team at GLG Legal have extensive experience in drafting and reviewing Trust Deeds and we encourage you to contact our team today to seek advice on trusts.
How are trusts made?
Trusts can be created in three different ways, these are:
- By operation of law
- Intentionally by the settlor;
- By statute.
In a commercial context, trusts that are created intentionally by the settlor or by operation of law are the most common. Depending on how you establish your trust will determine what type of trust you have. Most trusts are referred to as Express trusts as they are created by a trust document.
What can trusts be used for?
Trusts have many applications, including:
- Holding property for those who cannot legally hold property (i.e., children)
- Protecting property and assets against claims brought against the beneficiaries
- Holding property for future generations
We understand at GLG Legal the confusing nature involved in the establishment of trusts and companies. We aim to simplify the process and take the time to understand your needs and interests to ensure that the legal documents and decisions are made in your best interests.
If you are thinking about creating a trust or a company and are unsure where to start, contact our commercial team at GLG Legal today who can assist you through the process. If you have a trust deed that needs reviewing, our expert lawyers are able to assist you as well.