Many small to medium enterprise (SME) owners earn their income through multiple businesses. There are several options available to you when setting up your business ventures, the most common being sole traders and limited liability companies. The options attract different registration requirements, as well as reporting, legal and tax implications.
Below, we look briefly at how some SME owners tend to operate their businesses through these two structures for multiple business ventures and some of the issues to consider.
Option 1: Sole Trader Operating Under Multiple Business Names
A sole trader business structure is when a person trades as an individual. This option will give you full and exclusive control over your assets and any business decisions. Operating as a sole trader means you are responsible for all aspects of the business – including liability for any debts or losses incurred, consequently placing your personal assets at risk. Although setting up as a sole trader is relatively inexpensive and simple to register and administer, the risks of potential liability tend to outweigh any benefits.
Registering as a sole trader
To register as a sole trader, you will need to apply for a Tax File Number through the Australian Taxation Office’s website, and an Australian Business Number (ABN) through the Australian Business Register’s website. All ABN registrations are free. Once set up as a sole trader, you will have the option to register a business name, or multiple business names with the Australian Securities Investments Commission (ASIC). Fees to register your business name with ASIC are $34 for one year or $79 for three years.
Operating as a sole trader exposes your personal assets (e.g. your house) to satisfy any outstanding debts, and you would likely have unlimited liability for the business’ losses. Further, if you became liable for the debts and losses of one business, this may affect your other businesses. For example, if creditors chased you for a debt, you might need to sell assets from another business, or worse, all your businesses, to cover your costs. If you were to become bankrupt, voluntarily or involuntarily, a trustee in bankruptcy would collect your business’ assets (the assets belonging to you as a sole trader).
Option 2: Operating as One Company with Multiple Business Names
Unlike a sole trader, a company structure is a separate legal entity. This means that your company, which owns the business, will have the same rights as a natural person and the company will be liable to incur debts, sue or be sued. There are various types of companies, however, the most common is limited liability companies.
Registering your company
Companies face higher registration fees compared to a sole trader (costs vary depending on the selected company structure). There are also additional administrative costs that are ongoing due to certain reporting requirements.
You will need to register your company with ASIC. To do this, you will do the following:
- Select a name that is not in use;
- Adopt a company constitution; otherwise, you can defer to the replaceable rules (or a combination of both);
- Obtain written consents from each person who agrees to become a director, secretary or member of the company. Note that a proprietary (private) company requires that you have at least one director. Therefore, if it is just you, you will need to indicate this;
- Complete ASIC’s application form, and lodge it through ASIC with the applicable fee.
Similar to a sole trader, a company can operate multiple businesses with different business names. If the company became liable for the debts and losses of one business, this may also affect the company’s other businesses. If the company became insolvent and an administrator or liquidator appointed, the directors of the company would no longer have control over the assets, and if wound up, the assets of the various businesses would be sold to satisfy creditor claims.
If the same beneficial owner(s) owns and ultimately runs multiple businesses that are distinct and separate, they should consider setting up a holding company and an operating company structure. Here, the holding company would own all the businesses’ assets and intellectual property.
Each business would be run through separate subsidiary operating companies that would trade on behalf of their respective business, enter into contracts with third parties, incur liabilities and employ employees. If someone made a claim against the business under a contract, they would generally need to sue the operating subsidiary company, not the holding company (which would own the subsidiaries and hold all the assets).
Separating subsidiary operating companies enables the holding company to isolate its risk. Each company will be considered a separate entity by the law (although there are circumstances where the corporate veil may be pierced).
If you run multiple businesses simultaneously, it can be complex and so it’s important that you are organised and have the appropriate business structures in place to limit liability. It is highly recommended that you speak to an accountant/tax advisor and a lawyer to determine your unique structuring needs, otherwise, if one business fails and you do not have the right structure in place, your other businesses might go down with it.
Questions? Get in touch with our business lawyers to assist you with structuring your business ventures.