Structuring For Success (for Australian filmmakers)

Please note: This does not in any way constitute a replacement for informed legal or taxation advice. The author is not a lawyer or accountant.  You should always get proper advice from a qualified source before committing to any business structure.

Boring as it sounds to those of us who live to be creative, if you’re about to launch into producing your own film, you’re going to need to look at what kind of business structure will be behind it – as investors will be doing exactly the same thing. Here is a brief rundown of the different kind of company and legal structures available in Australia that may help to give you a better idea of what’s available.

You’re about to start your own business, you’ve got a great idea for a new film or film industry service, you have put together your business plan, and are about to approach investors to get the money.

All of that is well and good, but what kind of business are you going to run?

By that, I don’t mean what are you going to offer in the way of services or genre of film, I mean what kind of legal company structure are you going to put in place? Are you a sole trader? A limited company? A partnership? Are you going to start as one and end up as another? Do you see where I’m going with this?

You might think that you need to get your film up before worrying about all this legal company stuff, but, trust me, sorting out your type of business will only help you with getting your funding.

If you’re a bit vague on what all this means, let’s have a closer look at company structure – it will save you a lot of headaches and uncertainty (and legal problems) if you start looking at this now, rather than later.

What Are You?

Sole Trader
When most businesses start, they begin with one person doing everything, operating under a business name. This is known as being a Sole Trader. This is a perfectly fine way of doing business initially. Many businesses start in this capacity. But if you want to go on to be a bigger player, you will need to look at eventually changing the type of business you are running, for both legal and tax reasons.

Even at Sole Trader level, you should register and secure your business name. If you are running your business under your own name, no registration is required, but it is still recommended. This is done via the Business Names Registrar – an office of which you’ll find in any capital city.

Advantages:

  • low cost and immediate establishment when starting up;
  • complete control of the business;
  • all financial returns coming straight back to you;
  • minimal account keeping and no complex legalities to wade through;
  • because of the nature of sole trading, you can work from home, therefore reducing overheads; and
  • you can claim all expenses on tax (from petrol used to get to clients, to half the home phone bill if operating from home).

Disadvantages:

  • If the business goes bust – so do you. You, as the owner, have unlimited liability – this means that whatever happens financially, you are personally responsible. The law doesn’t see a difference between you and your business when you are a Sole Trader;
  • You are taxed as an individual, not a business – so, as your business brings in more money, you therefore pay more tax;
  • Although working for yourself sounds wonderful, the reality is something altogether different – holidays and time off become nearly impossible, as you alone are responsible for all projects the business takes on;
  • you are responsible for all management decisions. If you don’t have all the skills necessary to run all areas of your business, or have a friendly mentor you’ve found for yourself for advice, then your business may suffer;
  • The ownership of the business can’t be transferred unless you sell it; and
  • you may find that your larger competitors can offer more flexibility and more of a range of services than you, due to the kind of business structure they have adopted.

Running a Sole Trader business can also be a disadvantage when trying to attract investment. Most venture capitalists want a company structure in place – i.e. A Board of Directors, limited liability and more than one person signing the business checks. If you’re serious about running your business in the film industry, it’s okay to start as a Sole Trader, but plan to upgrade your structure within a few months of commencing operation.

Partnership
So there’s two or more of you who want to go into business together. This would be known as a Partnership. Obviously. Under this structure, you’d share the costs of the business and therefore the profits. But be cautious if you intend to go into a Partnership with a friend, family member or spouse. The pressures of business invariably puts a strain on Partnerships at some stage – make sure that the ground rules are clear if you also have an emotional connection to your business partner. Also make sure that both of you are bringing different and complimentary qualities to the business, you’re both committed to it’s success, and prepared to put in the work to achieve it.

NEVER go into a partnership on a “Gentleman’s Agreement” – in other words, a handshake or verbal agreement. That is just inviting trouble down the track – as much as you may feel that your sister/uncle/brother-in-law/best friend would never do you wrong – put an agreement in writing. It saves any misunderstanding, disputes or confusion later on. It also sets the terms clearly as to what each partner is responsible for and how the profits and costs are divided up. This should be drawn up by a solicitor, with all parties’ signatures on the dotted line. Even if you don’t sign an agreement, if you are operating as a Partnership, you are answerable to the Partnership Act in your respective State.

Advantages:

  • You operate much the same way as a Sole Trader
  • Low start up costs;
  • flexibility of work times;
  • you have a greater skills base, due to having a partner who compliments your own skills with different ones;
  • you share the costs of tax;
  • your financial accounts are not open to the public; and
  • with two or more of you, you can have some time off occasionally.

Disadvantages:

  • If you fall out with your partner, you fall out of your business. With two or more involved with equal status, that means two or more potentially different opinions in how the business should be run, which could lead to the business failing if no resolution is found;
  • If your partner doesn’t meet their share of costs, so putting the business in the heavy debt bracket, you can be hit by creditors for the money owed by your partner. Legally, you are your brother’s keeper in this scenario;
  • You have to share the profits; and
  • if one partner decides to go – you can’t just transfer the business to another partner, you have to dissolve it. (however, you can avoid this by putting a clause in your Partnership Agreement that states an alternative arrangement in this event).

Again, investors will be cautious about backing a Partnership (for most of the reasons outlined above).

Company
Most people refer to their Sole Trader business as a Company, but they’re no such thing. A Company (also known as a Pty Ltd Company) is a totally separate entity from the person running it – legally and financially. All profits go to the shareholders (owners), but all losses remain with the Company, due to it’s limited liability status. Therefore the shareholders (owners) are not personally liable for losses incurred. But, if you’re on the Board of Directors, that’s another matter, as the Directors can be held personally responsible for the losses, if it is seen that they acted in dereliction of their directorial obligations.

If you are going to form a Company, you’ll need to register it with the Australian Securities and Investments Commission (ASIC). They will then give you an Australian Company Number. You will then need to apply to the Australian Taxation Office for an ABN (Australian Business Number) as well. You’ll also require a Constitution. This is a job for the solicitors, and is legally required for every Company in Australia. If you’re forming a new Company, it can take up to six weeks to get all the paperwork through.

Alternatively, you can buy a Company “off the shelf”. This involves purchasing a Company that already exists, but is no longer trading. Although cheaper in the initial purchase, you still have to operate under that existing Company’s name and may have to change the Constitution, which involves legal fees.

This is the best kind of business structure for those of us in the film biz.

Advantages:

  • You are not personally liable for any losses;
  • You get a better tax rate as a Company;
  • As a Director of the Company, you can become an employee of the Company, so getting a regular wage;
  • If one Director leaves the Company, it will continue regardless;
  • You can also transfer the Company’s ownership, or sell it;
  • Also, a Company can keep some of it’s profits in order to expand, and not be taxed on those profits; and
  • losses can be carried forward forever and claimed as a tax deduction in any financial year.

Disadvantages:

  • when forming a Company, you have to legally establish it, which means fees and lots of paperwork;
  • Registering a Company usually costs between $1300 and $2500, depending on the complexity of the legal paperwork and the fees charged by solicitors and accountants;
  • You have to comply with Corporations Law, which means professional advice (and fees);
  • the paperwork required each quarter is time-consuming at best;
  • As the Company is a separate entity, it also has to file separate tax returns to the ATO and reports to the AISC (it also requires a separate ABN and Tax File Number); and
  • all Company records are available to the public.

A distinct advantage with owning a Company, is that investment is a lot easier to secure. Investors perceive that you have taken your business seriously, have a ‘checks and balances’ system in place, and so are reassured that their investment is more protected than if you were a Sole Trader or Partnership.

Limited Company
A Limited Company (also known as a Limited Liability Company) differs from a normal company in one thing only – it is a Listed Company (on the ASX) and therefore a public company, as opposed to a Company which is private.

A Company becomes a Listed Company once it begins to sell shares in the Company. This process is again time-consuming and costly and is usually only done when it is deemed necessary to “float” the Company for a greater income. This is usually a second phase stage of company structure.

Advantages:

  • Gives you a greater capacity for profit
  • Gives you “Listed Company” status
  • A wider shareholder base

Disadvantages:

  • Costs involved in “floating” the company
  • A wider shareholder base that you are answerable to

Incorporated Association
An Incorporated Association (also known as a non-profit organization or Charity), is governed by separate legislation to that of profit-making concerns. It is usually undertaken by community groups or charities, and is a voluntary undertaking.

The purpose of becoming an Incorporated Association is to create a separate entity from the Association’s members, which protects the members from being liable for any debts or liabilities the Association might incur, as well as the costs of closing the Association. It works in much the same way as a Company or Trust, but with one major difference – the members of the Association are only free from liabilities incurred by the Association if it doesn’t participate in any kind of trade, or make a profit.

You’ll need a core of five members to form an Association. You must then issue a notice to all members calling a meeting, 21 days before the date of that meeting. The members then vote at this meeting to nominate a legal adult (over the age of 18) to incorporate the Association, agree on the stated purpose of the Association and sanction the rules of the Association. That all done, you then need to register the Incorporated Association with the relevant Government department (for example, in Victoria, you would register it with the Office of Fair Trading and Business Affairs).

Advantages:

  • Limited liability to members of the association
  • A more informal legal set up than a Company or a Trust

Disadvantages:

  • You cannot make a profit
  • You must work with a committee

This kind of entity is best used for a research project, or a similar venture that you do not expect will make money. If you wish to make a profit, then look to forming a Trust or Company.

Trust
A Trust is a more complex business structure which is created to generate its own income. It’s function is to hold property or income for selected beneficiaries. This is done by the creation of a Trust Fund. All income from the business goes into the Fund, which then becomes the owner of the properties and profits (capital). From there, people or companies (the beneficiaries) are appointed to receive the Trust Funds as income. There are two kinds of Trust Funds – discretionary or a unit trust. Discretionary involves net income decided by the trustee allocated to beneficiaries. A Unit Trust distributes income in direct relation to the beneficiaries’ unit holdings in the Trust.

Advantages:

  • Trusts do not pay tax on their profits, as long as those profits are wholly distributed to the trust’s beneficiaries;
  • If the Trust has a Company as trustee, it is granted limited liability; and
  • The Trust’s financial records are not available to the public.

Disadvantages:

  • complicated legal and financial framework need to be set in place, and regulations to adhere to;
  • A Trust cannot offset it’s losses against any other income from the beneficiaries; and
  • a Trust cannot keep profits to expand without attracting heavy tax penalties.

Conclusion
Whatever your choice of company structure, remember that once you commit to running a business, you are also committed to a legal and financial framework that you must adhere to. Which is why you need a good accountant and business advisor as well!

Originally published June 2004 © Sally McLean. All rights reserved.

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