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BL629 Topic Two. Governance Issues. Available business structures. Sole trader owned & operated by one person all benefits & all responsibilities & liabilities all personal assets at risk issue of tax minimisation easy to start & operate. Available business structures.

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BL629Topic Two

Governance Issues

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Available business structures

  • Sole trader

    • owned & operated by one person

    • all benefits & all responsibilities & liabilities

    • all personal assets at risk

    • issue of tax minimisation

    • easy to start & operate

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Available business structures

2. Partnership (State Partnership Acts)

  • agreement between 2 or more people to carry on a business for profit

  • partners agree on terms

  • each individually liable for partnership liabilities because no separate legal identity, hence personal assets at risk

  • note limited liability partnership

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Available business structures

3. Unincorporated Associations

  • group of people joined together for a common, not-for-profit purpose (clubs, societies)

  • no separate legal existence and hence severe restrictions on what it can do

  • liability of office bearers/members an issue

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Available business structures

4. Incorporation under Associations Incorporation Act

  • State legislation for not-for-profit groups

  • separate legal identity

  • extensive legal rights

  • protection for members/executive

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Available business structures

5. Corporations [Corporations Act 2001(Cth)]

  • distinct separate legal identity, a ‘legal person’

  • extensive legal rights

  • members own shares and have limited liability – personal assets not at risk

  • many types to suit different circumstances

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Available business structures

6. Joint Venture

  • two or more people/companies come together to conduct a business

  • often each party has special expertise

  • often not joined as partners

  • often used in big start-up projects like mining or exploration

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Available business structures

7. Trading trust

  • one person/company (the trustee) legal owner of business but operates it for the benefit of another (the beneficiary who has equitable ownership)

  • sometimes used to reduce taxation or protect/disguise the real owner

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Available business structures

8. Co-operative

  • similar to corporation

  • persons join together to provide benefits as well as dividends

  • members own shares & limited liability (e.g. farmers co-operatives)

  • regulated by State legislation

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Available business structures

9. Franchise

  • contractual arrangement between the owner of the franchise and the franchisee that permits the franchisee to use the franchise name, product, business model, etc under strict terms

  • no rules about which business structure each uses

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Factors influencing choice of structure

1. Simplicity of establishment and operation

2. Ability to operate as a ‘legal person’

  • what is a legal person and what does it mean?

  • problems of not being a legal person

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Factors influencing choice of structure

2. Ability to operate as a ‘legal person’ (cont’d)

a) Contracts

CASE: Carlton Cricket & Football Social Club v Joseph [1970] VR 487

b) Liability of office bearers & members

CASE: Bradley Egg Farm v Clifford [1943] 2 All ER 378

c) Limited rights of members

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Factors influencing choice of structure

3. Liability

  • who has to pay up if something goes wrong?

    CASE: Salomon v Salomon & Co Pty Ltd [1987] AC 22

  • when will the court lift the ‘corporate veil’?

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Factors influencing choice of structure

  • Obligations of company directors

    • act for proper purpose and in best interests of the company

    • exercise reasonable care & diligence

    • no improper use of information

    • no trading while company insolvent

      CASE: Commonwealth Bank of Australia v Friedrich & Ors (1991) 9 ACLC 946

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Factors influencing choice of structure

4. Taxation

  • different rates of tax for different structures

  • should not be the main criterion

  • use of companies and trusts

  • not such a problem for not for profit organisations

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Factors influencing choice of structure

5. Capital & Finance

  • businesses often require capital to start or expand

  • finance from institutions and finance from the public

  • providing security

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Factors influencing choice of structure

6. Control

  • what sort of control does the ‘owner’ of the business want

  • issue of the orderly passing of control onto others

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Factors influencing choice of structure

7. Maintenance costs & effort and privacy

  • each structure has some legal obligations regarding the running of it

  • the more sophisticated the structure the greater the maintenance

  • legal reporting obligations and the issue of privacy

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Factors influencing choice of structure

8. Surviving the first generation

  • issues around the death or retirement of the founder

  • relationship breakdown (family &/or business), introduction of other people (for example, other family members)

  • do I need a suitable will?

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People dealing with the organisation

  • The implications for people dealing with each of these business structures

    • employees

    • contracting parties

    • other people effected by its operations

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  • An agent can legally bind another (the principal) in a contract, when acting on behalf of that principal, with a third party

  • Extent of the power of the agent to bind principal depends on their role in the business and the circumstances as they appear to the third party

  • All companies operate through the actions of their employees acting as agents