Luật học - Chapter 4: Business organisations

This is the prescribed textbook for your course.Available NOW at your campus bookstore!Business organisations Chapter 4Learning objectivesAt the end of this chapter you should understand:the essential characteristics of sole traders, partnerships, joint ventures, associations, companies, and truststhe legal obligations imposed on each type of business entitythe liability of the parties involved in each type of business entitythe advantages and disadvantages of each form of business operationbusiness name registration.IntroductionThere are various ways that a business can be carried on.Each business structure has advantages and disadvantages that need to be considered.DefinitionsSole trader—business is owned and operated by one person with all profits or losses attributed to the owner.Partnership—relationship between 2 to 20 persons who carry on business in common with a view to profit.Joint venture—usually a one-off enterprise, with participants receiving profits separately, based on contractual agreement.Unincorporated association—body of two or more persons, organised for a particular purpose, which may or may not include the purpose of carrying on business with a view to a profit.Definitions (cont.)Incorporated association—body of two or more persons, organised for a particular purpose, which may not include the purpose of carrying on a business with a view to a profit.Company—incorporated body created by a process called 'incorporation', regarded by law as a separate legal entity.Trust—relationship recognised by the law of equity, where a trustee holds property for a beneficiary or beneficiaries.FormationSole trader—simple; little documentationPartnership—partnership agreement advised; easy to formJoint venture—normally involves a one-off enterprise based on contractual agreement between two+ entities; relatively high establishment costsUnincorporated association—formed by persons with similar interests; no separate legal existenceIncorporated association—unincorporated associations can incorporate, but not if they have a view to trading; relatively high establishment costsCompany—relatively high establishment/compliance costsTrusts—relatively high establishment costsControl Sole trader—makes all the decisionsPartnership—depends on partnership agreement. If no agreement, all partners are considered equal and each partner is considered as agent of the partnership and every other partner for the purposes of partnership business.Unincorporated association—control rests with committee of associatesCompany—power is vested in the board of directors to make decisions, unless power delegated to othersTrust—trustee has power vested in him/her to make decisions, subject to the terms of the trust deed and the trustee legislation.Management Sole trader—in hands of individual; absences from business difficultPartnership—leave other partner in charge when absences requiredJoint venture—depends on terms of joint venture agreementAssociation—in hands of committee of associationCompany—undertaken by board of directorsTrusts—undertaken by trusteeFlexibilitySole trader—nature of business can be alteredPartnership—nature of business can be altered with agreement of all partnersJoint venture—depends on terms of joint venture agreementCompany—nature of business can be altered but may have tax consequencesTrusts—nature of business restricted by trust instrumentExpertiseSole trader—limited to one person’s knowledge, unless additional personnel are hired.Partnership—several areas of expertise available from individual partners.Joint venture—can draw on the skills of those involved in the joint venture.Association—can draw on the skills of the members.Company—can draw on the skills of all the directors.Trust—relies on the skills of the trustee.TaxationSole trader—dependent on level of profits. Large profits mean high taxation, as income only attributable to one person.Partnership—profits of partnership are shared as agreed. Taxed in the hands of the partners.Joint venture—income received separately.Company—special company tax rates. Can be distributed to access tax advantages.Trusts—income taxed in hands of individual beneficiaries. Can be distributed to access tax advantages. (Discretionary trusts allow changing distributions of income and capital between beneficiaries in different years.)Liability LIMITED UNLIMITED limited liability no limit to liability of the owners for the business debtsLiability (cont.)Sole trader—unlimited liability. Personal assets available for business debts.Partnership—unlimited liability. Personal assets of partners available for business debts.Joint venture—unlimited liability for individuals who may be sued collectively or individually for the debts of the joint venture. No liability for actions of other participants.Liability (cont.)Unincorporated associations—limited to the amount of a member’s subscription. Liability for agents and breach of warranty of authority may fall on members of committee.Incorporated—limited to payment of outstanding fees of members.Companies—limited by shares or guarantees.Trusts—limited, if trustee is a company, to the assets of the company. If not a company, trustee personally liable for tortious and contractual liabilities.Limitations of business lifeSole trader—for life of owner, without interruption.Partnership—death, bankruptcy or withdrawal of a partner will end partnership.Joint venture—subject to the terms of the joint venture agreement; normally has limited business life.Association—perpetual succession.Company—separate entity from owners; perpetual succession.Trust—terminates if trust property vests in person ultimately entitled to it. If trust property has been transferred to beneficiaries, continued administration of trust would be illegal.Raising capitalSole trader—limited to ability of one person to gain finance.Partnership—limited to ability of partners to individually gain finance.Joint venture—limited to the ability of the joint venture participants to gain finance.Private company—limited to ability of directors to gain finance.Public company—capital raised by way of either share capital by issue of prospectus or by debenture issue.Types of companiesCompanies limited by shares:Shareholders liable for unpaid amount on their sharesPublic companiesProprietary companies (1 to 50 members):smalllargeCompanies limited by guaranteeUnlimited liability companiesNo liability companies—mining companiesIncorporating a companyFor a company to become a separate legal entity, it must go through a process called ‘incorporation’.Under the Corporations Act 2001, ‘to register a company, a person must lodge an application with ASIC’.Must nominate:shareholder(s)director(s).DirectorsA director is a manager or ‘mind’ of a company.Depending on the size and the nature of the company, is simply appointed or elected by shareholdersNatural personOver 18 years of agePower to manage company assetsUpper age limit of 72 years for public companiesDuties of directorsAct in good faith for the interests of the companyExercise powers for a proper purposeUse discretions properlyAvoid a conflict of interestAct honestlyNot to misuse company informationNot to obtain a gain by using their positionUse care and diligencePersonal liability of directorsDirectors may face personal liability for:making false and misleading statements or omissions in prospectusfailing to appoint a company secretaryincurring debts when the company had little prospect of repaying the debts.Criminal offences for directors in breach of their dutiesThese include:recklessly or intentionally failing to act in good faith to protect the interests of the companydishonestly using the position of director within the company, either intentionally or recklessly, to gain an advantagedishonestly using company information, either intentionally or recklessly, to gain an advantage.Rights of shareholdersEntitled to:Notice of meetingsAttend meetingsReceive dividendsFinancial informationSue on behalf of the companyWinding up a companyReasonsNo longer carrying on a businessFails to commence business within 1 year of incorporationOutstanding debts of at least $2000Members have passed a special resolution to wind the company upMembership falls below a certain numberCan be initiated by a director, a member or a liquidator of a company.TrustsFive elements constituting a trustSettlor—person responsible for creating trustTrustee—person to whom trust property is givenBeneficiary—person to benefit from the trustTrust property—property that is the subject of the trustTrust instrument—document detailing terms of the trustExpress (direct or declared) trustsIntentional act of a settlor, created by words (written or spoken):Identifying the trust propertyIndicating nature and purpose of trustIdentifying beneficiariesCan be discretionary, where trustee will choose the amount to be distributed to beneficiariesNon-express trustsNo intentional action by the settlor:Implied trusts (presumptive trusts)—law draws inference from the circumstances that a trust was intendedResulting trusts—where property returns to the creator of the trustConstructive trusts—result from the operation of law (of equity)Classification of trustsPrivate—for the benefit of private individualsPublic—for the benefit of some public purposeTrading—the property of the trust is used in the running of a businessUnit—the beneficiaries own units of the trustDuties of trusteesMaintain fiduciary relationshipFamiliarise themselves with the trust propertyObey instructionsNot delegate dutiesNot derive profit from their positionKeep proper accountsMaintain impartialityExercise reasonable skill and carePay and transfer property only to those entitledRights of trusteesReimbursement for expenses incurredIndemnification against all costsSeek contribution for lossesOn completion of administration of trust, entitled to receive a dischargeLiability of trusteePersonally liable for tortious and contractual liabilitiesA court or the beneficiaries have the power to relieve a trustee from liability.Business names legislationBusiness name must be registered unless all names of operators or traders are included in business name, i.e. the full names of the operators or the surname, plus:the first name or namesthe initial(s) of first name or namesa combination of first name and initialsthe first name or names (or initials) by which individuals are commonly known.National Business Names RegisterPreviously, business names were registered on a state and territory basis.From April 2011 business names are registered nationally for between one and three years.The system is managed by ASIC and registration can occur online and a joint application can be made for a business name and ABN.Business names previously registered in the states and territories will automatically be transferred to the National Business Names Register.Purpose of registering business namePublic knows who they are dealing with—public can search online at www.asic.gov.auTo protect the goodwill of the business.Restrictions on names registered:identical to or closely resemble a name already registeredundesirablesuggestive of connection with the government or bankslikely to be confused with names of companies or incorporated associations‘crown' or 'royal' must not be used.