Selecting the right structure for a business has never been as crucial as it is today. This is due to several factors. They affect business structuring considerations for start-ups, spin-offs and business re-constructions. This article discusses how to cope with the complexity. 

With businesses striving to compete in globalising markets and operating under several legal, fiscal and regulatory constraints, selecting a limited liability company structure is no longer the easy choice it used to be.  

1.  Why is business structuring more complex now?

In Australia, as in other common law countries, the explosion of business law relevant to companies has dramatically increased the burden on company directors, management and the operation of companies. This has been accompanied by increased record keeping and disclosure obligations. Some of this is helpful, some ventures into regulatory overkill. Collectively the changes have dampened enthusiasm for use of company structures, here and abroad.

Now let's go up a level of complexity. Not only is more company law compliance required, but at times issues arise when a particular company structure is not appropriate given the impact of other law, such as tax, trade practices and employment law. 

Take the case of company law versus employment law in Australia today as applied in Jennifer May Wilkinson v. Hospitality Marketing Concepts Pty Limited (U2006/4478). This 2006 case was an unfair dismissal claim (under section 643(1) of the Workplace Relations Act 1996) in Perth by Ms Wilkinson, the employee. The company employer responded that it had no case to answer as it employed less than 100 employees. Now read what took place.

• In the case Commissioner Thatcher (the industrial relations commissioner) commented that she was of the view that the company employer was exposed to unfair dismissal law as the number of employees the constitutional corporation employer had was more than 100.
• The company employer thought it had only 96 employees because it regarded itself at law as a single entity in Australia. Simply stated, if it had less than 100 then as an outcome of the Work Choices law it would have been free of exposure to unfair dismissal claims.
• Yet the number of employees of the company were more than 100 at law if you could at law add the employees of the company's California-based parent company. This was the effect of applying corporations law. Reference was made to the definition of a related "bodies corporate" in sections 9 and 50 of the Corporations Act 2001 (Cth). Indeed, the commissioner's view was that this interpretation was feasible. However the commissioner did not have to decide the point as the matter was referred to a conciliation conference under section 650 of the Workplace Relations Act 1996 (Cth).

The decision illustrates the complexity at work in interpreting law. The short point is - structuring decisions should be made under laws and for purposes that do not turn out to be detrimental for other purposes under completely different laws. To make that clear, in the Hospitality Marketing Concepts case the Workplace Relations Act 1996 (Cth) (as amended by Work Choices law) when read with the Corporations Act 2001 (Cth) produced an unexpected outcome, ie potential liability for unfair dismissal law as the company employer while having 96 employees in Australia could in fact be said to have over 100 and hence be liabile.

2.  Will complexity reduce soon?

There has been a recent shift away from regulation overkill. We've noted that in the article Regulation overkill comes full circle. Nonetheless, governments and regulators in common law jurisdictions are likely to act cautiously and work slowly towards lessening the compliance burden on companies. To do otherwise could involve them in political risks and could result in even more legal confusion.

Also, there is just too much complexity at work in law to unravel it quickly.

• Laws in friction  The phrase "conflicts of law" is the legal category for situations where the law of two or more jurisdictions may apply. The concept of conflicts of law comes to mind increasingly even as regards the law of one jurisdiction, eg Australia. As more law is introduced in Australia it becomes more difficult to interpret the law which should apply to a particular factual situation. Worse still, sometimes new law conflicts with or sits uncomfortably with the principles and practices in pre-existing law.
• Jurisdictional "scope creep"  Now consider this example. Just because an e-commerce or Web venture entity's server is located in a low or no-regulation jurisdiction, or it uses a domain name linked to that jurisdiction, do not by themselves block action by regulators in Australia, a highly regulated market. Relevant principles assisting Australian regulators are contained in various Australian laws including in corporate law and in statues for spam, privacy and the soon to be established Do Not Call Register. In a globalising regulatory environment they are also found in three electronic contracting, electronic signatures and e-commerce conventions introduced over the last 10 years or so by the United Nations Commission on International Trade Law (UNCITRAL).

Others are going from highly regulated public company structures to less regulated private company structures. This is evident in the spate of private equity buy-outs in Australia and other common law countries, taking public companies private. It is developments such as this that inspire such headlines as "Death of the public company looms". This was an article in The Weekend Australian on 3-4 February 2007 by Robert Gottliebsen, one of Australia's most experienced business journalists on his return from meeting global CEOs and accountants at the World Economic Forum at Davos. (Private equity is discussed in Private equity or private debt? Beware the Ides of March).

3.  What types of business structures are available?

Although limited liability companies continue to provide significant advantages, other popular structures now include trusts and partnerships and even hybrid entities such as partnerships of trusts.

The following table sets out some of the considerations or structuring options for a start-up, spin-off or business re-construction. It is not a comprehensive list.

4.  Tax law - anti-avoidance and associateship considerations

One of the critical aims in structuring is to fall within anti-avoidance measures in law.

The most common form of anti-avoidance provision used in legislation is the use of an associateship clause in the case of entities. In a typical associateship clause an entity will be taken as having the characteristics of its associated entities. Such treatment of entities has both advantages and disadvantages and a business should select the most optimum structure, balancing its strategic aims.

For example in tax consolidation there are several tax advantages to businesses, notably only the head company is responsible for the income tax liability of the consolidated group, including lodging the tax return for the group and there is no capital gains tax implications in respect of transfer of assets within the group. However consolidation is available only to companies that are wholly owned by the head company and further once the election is made to consolidate, all companies that are wholly owned by the head company are automatically consolidated, which may not be desirable.

5.  GST law - grouping considerations 

Grouping does not involve the same principles when the focus shifts to goods and services tax (GST) structuring considerations. The ownership requirement for GST grouping is not the same as for income tax consolidation. For GST purposes, a company must satisfy only the 90% ownership requirement to become a  member of a GST group. The ownership can be direct or indirect. A 90% ownership is defined as: 

• controlling 90% of the voting power;
• the right to receive 90% of any dividends that may be paid; and
• the right to receive 90% of any distribution of capital.

6.  Company law - related bodies corporate consideration

In complete contrast to the above, the "related bodies corporate" concept in the Corporations Act 2001 (Cth) is less rigorous. This can work both ways for companies.

Under the Corporations Act, a holding company, its subsidiaries and subsidiaries of the holding company's subsidiaries are related bodies corporate as defined by the Corporations Act.

In the accompanying diagram the arrows denote that there is a 50% shareholding in the relevant company.

Companies 1, 2, 3 and 4 will be related bodies corporate, even though an unrelated person has a 50% shareholding in Company 3 and Company 4.

What must be noted here is that for a company to be a subsidiary under the Corporations Act, the holding company must either:

(a)     control the composition of the board of the  company;

(b)     have at least one half of the votes in the company;

(c)     have at least one half shareholder rights to receive distribution of profits or capital, in the company.

Unlike in the case of tax consolidation and GST grouping where companies are allowed to consolidate or group only if the subsidiaries are wholly owned or where there is a 90% ownership interest, related bodies corporate under the Corporations Act exist when the ownership interest is only 50%.

More importantly, under the Corporations Act there is no requirement that an election be made that the companies wish to be considered as a group or related to each other. The status of related bodies corporate is automatic when the necessary 50% ownership interest arises and therefore may come as a surprise to businesses as it probably did in the 2006 employment law case discussed above.

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