INSIGHTS: Choosing the right business structure for your child care service

Whether you are entering into an existing child care business, intending to set up a new structure or restructuring an existing business there are a range of legal structures which may apply in your circumstances. Different legal risks and liabilities associated with each business structure may apply:

Sole Trader

• Appropriate for sole owners who intend to control and manage the business on their own
• Simple and may be relatively cost efficient
• A sole owner can retain all profits but has unlimited legal liability for all debts and liabilities of the business
• Personal assets may be used to pay off debts of the business
• Sole traders should consider and assess asset protection strategies

Partnership

• Appropriate if there are two or more partners who wish to jointly hold ownership of the business
• A written partnership agreement should address how profits are to be distributed, the share or proportion of ownership of each partner, dispute resolution and transfer of ownership if one partner exits
• Upon the exit of a partner, the partnership structure may need to change or even be dissolved depending on the terms of the partnership agreement
• Each partner is personally liable for their own acts and may be personally liable for the acts of other partners

Proprietary Company

• Appropriate for setting up a business with a separate legal entity responsible for liabilities of the business that is separate to its owners or shareholders
• Must comply with the Corporations Act including governance and reporting requirements which may lead to higher compliance costs
• A company must have at least one director and one shareholder (who can be the director) and up to 50 shareholders
• Liability of owners/shareholders is limited to share capital subscribed
• A company structure can provide asset protection not otherwise available under a partnership
• The company structure continues if a director/shareholder leaves or joins the business
• Profits can be distributed by way of dividends to owners/shareholders
• A company structure may be more attractive to prospective purchasers

Trust

• Appropriate where a person or a company wishes to carry on the business and hold assets acting as trustee for the benefit of the beneficiaries
• A trust can be structured as a service entity to employ administrative staff, purchase equipment and lease premises
• All income is accumulated in the trust and the trustee has the power and discretion to distribute the income to the beneficiaries
• Ownership of the business by a trustee may provide an asset protection strategy
• A trust structure may be complex and the establishment and ongoing management of a trust may be expensive

Checklist of factors to consider for each structure:

1. Set up costs and ongoing regulatory costs
2. Retirement and exit strategies
3. Corporate structure and associated risks
4. Regulatory and reporting and liabilities requirements
5. Management control, participation and ownership
6. Asset protection

We can help

Our corporate advisory and commercial team can advise you on a business structure for your child care business and prepare necessary documentation including:

• Business Sale and Purchase agreements
• Employment contracts
• Partnership and Shareholder agreements
• Funding and loan agreements
• Protection of business data and intellectual property ownership
• Company Constitution
• Board governance issues
• Compliance and regulatory considerations such as employment, data security and privacy
• Dividend and distribution policies

If you would like more information about business structure, please contact Principal Georgina Odell.