In Short
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Choose a structure (sole trader, partnership, company or trust) that balances liability protection, tax outcomes, control and set-up/ongoing costs.
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If handling client funds or scaling with staff, a company/trust is common; ensure the correct licences and a compliant trust account.
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Document ownership, decision-making and exits (shareholders’/partnership deed), and plan for insurance, payroll and franchise/brand obligations.
Tips for Businesses
Map your services and risk profile. Check state licensing and appoint a licensee-in-charge. Establish trust account and audit processes early. Put in place shareholders’/partnership deeds, employment/contractor agreements and commission policies. Register your trade mark and domain. Budget for ASIC and tax compliance. Seek tailored legal and accounting advice before restructuring.
When planning to launch a real estate agency, there are various business structures to choose from, each with its own advantages and disadvantages. Weighing up your options is critical, as different structures will impact your liability and growth potential. This article explores different business structures to run your real estate agency.
Sole Trader
A sole trader is a business that an individual runs. If you set up as a sole trader, the law considers you and your business to be the same rather than separate entities. In a practical sense, your tax return will include your personal income and the business’ income.
Setting up your business as a sole trader is relatively straightforward and has the lowest setup costs of the mainstream business structures.
The advantages of operating as a sole trader are that:
- you have complete ownership, control and management of the business without the interference of other business partners;
- your reporting requirements are minimal;
- you keep any profits of the business after tax plus any money you have gained after tax if you sell the business;
- you can offset any tax losses against any other income you earn (subject only to certain non-commercial loss rules); and
- as an individual, you are eligible for the 50% capital gains tax discount on the money you gain from selling an asset you have held for at least 12 months.
The major disadvantage to operating your real estate agency business as a sole trader is that operating as a sole trader also carries unlimited liability. For example, suppose your business experiences financial difficulty and cannot repay one of its creditors. In that case, you may be required to pay off any business debts using your own personal finances and assets, like your car or house. As a sole trader, the law classifies you and your business as the same legal entity. Therefore, your personal assets are at risk under this business structure.
Partnership
All partners jointly own the business and its assets in a partnership structure. However, this also means every partner is equally responsible for the business’ debts.
An advantage to operating through a partnership is that when the business makes a profit, the partners share in the profit in their respective ownership proportions. Likewise, they pay tax at their personal income tax rate. However, the same principle applies to losses. If the business makes a loss and owes debts to one or more third party creditors, each partner is liable, in their respective ownership proportions, to pay the debts.
Similarly to a sole trader entity, each partner carries unlimited liability. So, where your real estate agency business incurs a debt, each partner has unlimited liability concerning that debt and may need to use their personal assets to satisfy the debt. No matter how large the debt is, you will be personally liable to pay it off.
Continue reading this article below the formCompany
A company is a separate legal entity from its directors and shareholders. A company has the same legal rights as a natural person, meaning it can purchase assets and enter contracts in its own name. Generally, when the company incurs a debt, it is the company’s to pay as opposed to its directors or shareholders.
One of the main benefits of running your real estate agency business through a company is asset protection. Directors of a private company limited by shares are generally not liable for their company’s debts. As the company is a separate legal entity, the company’s debts are generally the company’s to pay.
Further, shareholders are generally not liable (or legally responsible) for company debts. As a shareholder, you are only legally responsible for any amount unpaid on your shares.
Trading Trust
A trading trust is a business structure that involves a trustee who owns the business assets and enters into contracts on behalf of the trust. The trustee is an entity that can either be an individual or a company.
A trust is not a separate legal entity. Rather, the trustee is a legal entity who is:
- responsible for the operation of the trust; and
- legally liable for the debts of the trust.
Commonly, however, the trustee is a company, meaning you benefit from a company’s limited liability and asset protection.
To illustrate how a trading trust works, suppose you run your real estate agency business through a trading trust. Company A is the trustee of the Trust. If you want to hire Person 1 as a real estate agent, Company A, as trustee of the Trust, will enter into the employment agreement. Similarly, if you want to purchase assets for the real estate agency business, Company A will purchase them and own them on behalf of the trust.
Trust vs Company
Compared to other business structures, at the end of each financial year, companies can retain any profit in the company and use those profits to grow the business. Alternatively, the company can pay out a dividend to shareholders. However, the company is not required to do so.
Broadly, a trust itself does not have to pay income tax. Unlike a company, a trust does not have to pay the corporate tax rate on its net income every financial year. Generally, if the trust distributes the trust assets to beneficiaries, the cash, for example, is taxed in the hands of the beneficiary or unitholders.
However, suppose your trading trust has net income for the year and does not distribute all the income to the beneficiaries/unitholders. In that case, the trustee has to pay tax on behalf of the trust at the highest individual marginal rate.
Further, the number of unit holders in your trust may impact your real estate agency. If the number of unit holders surpasses 20, and those unitholders do not have a say in the business’ day-to-day operations, you must register the unit trust as a managed investment scheme. There are fines if you do not do so.
On the other hand, a private company limited by shares can have up to 50 non-employee shareholders. Once it surpasses this 50 non-employee shareholder threshold, it must convert from a private to a public company.
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Investment Considerations
If you anticipate or intend for your business to raise capital through equity or debt financing, opting for a company structure may be more appropriate. This is because investors and institutional lenders are typically more comfortable investing in companies rather than trusts.
Licencing Requirements
When operating your real estate agency business, you must also consider whether you need a licence to operate the business. Likewise, if you do, which type of licence will you need?
Key Takeaways
There are various options when it comes to choosing an appropriate business structure to operate your real estate agency business. Each has advantages and disadvantages, and you must consider how much risk you are comfortable with and the benefits each structure can bring to your business.
If you have questions about any of the real estate business structures and which would be most appropriate for your real estate agency, our experienced real estate lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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