The Application of Legal Principles in Business Corporations & Trusts Law

Chapter 1 Choosing a Business Structure

Types of Business Structure The law defines and regulates types of business structures differently. In choosing the business structure, owners should consider the following: The size and type of business. Whether it is intended to trade locally, nationally or internationally. Formation costs and ongoing costs of the structure chosen. Future capital requirements. Management and employment requirements. Liability of the owners. Taxation. Regulation and compliance.

Sole Trader A sole trader is a business owned and controlled by an individual. Legal liability falls entirely on the owner of the business. Owner personally liable for all debts of the business and can collect all profit as personal income.

Sole Trader Advantages The most basic form of organisation and the easiest to set up. No requirement to disclose results other than through tax obligations. Retains all profits. Disadvantages Difficult to raise capital. Business and owner are legally one and the same.

Partnership Business structure usually with 2 to 20 people all with unlimited liability. Limited liability partnerships can exist but these partners must not have an active role in business management. For a partnership to exist all three of the following elements must be in place: A commercial relationship exists between persons; A common business is conducted by those persons; The business is conducted to make a profit.

Partnership Advantages Easy to set up. No requirement to disclose results except through taxation obligations. Capital can be raised with the introduction of a new partner. Each partner can bring expertise to the business. Can take advantage of income splitting. Disadvantages Limited to 20 members except for professional partnerships. Partners are bound by the actions of other partners. Achieving agreement between partners can be difficult. Unlimited personal liability for the business decisions of all partners.

Associations An Association is an organisation formed by two or more persons for a common purpose, whether it is for profit or not. Two types: 1. Incorporated associations. Formed under legislation in each State or Territory. legal liability of its members limited to their outstanding fees. Can sue or be sued. Can own property in the name of the association. Can enter into contracts in its own name. 2. Unincorporated associations. Formed by persons with a common interest and objective Not recognised as a separate entity by law

Associations Advantages Easy and cheap to set up. Limited liability for incorporated associations. Disadvantages Formal accounts must be prepared.

Companies A company is an incorporated body that has undergone the process of registration under the Corporations Act 2001 (Cth) and is therefore a separate legal entity from its members. A company has its own contractual capacity separate from the human beings who own it (the shareholders) and those who manage it (the directors) and can therefore: sue or be sued. own property enter into contracts with anyone, including its own employees and members.

Companies Limited Liability Companies Shareholders only liable for the costs of their shares. Shareholders not liable for any debts the company has incurred Separate legal entity from its members. Required to have the word ‘Limited’ or ‘Ltd’ in the company name.

Companies Public Companies Can raise funds by offering their shares for sale on the ASX. Usually large companies. Subject to heavy reporting requirements.

Companies Proprietary Companies Cannot raise funds by selling shares to the public. Less reporting burden than public companies. Usually smaller than public companies. May be classified under law as small or large proprietary companies depending on revenue, assets and the number of employees.

Companies Advantages Ability to raise capital Limited liability Lower tax rate Separate legal entity, able to exercise its own contractual authority Registered nationally Disadvantages Difficult and expensive to set up Formal accounts must be prepared Accounts must be audited

Cooperative A cooperative is a form of business entity which is owned and run by their members for their mutual benefit and/or the benefit of the public. Must have at least 5 members Is a separate legal entity can sue and be sued

Cooperative Advantages Suitable for activities that benefit the community Limited liability for members Disadvantages Conflict between members can make decision making difficult Not suitable for most types of businesses Reporting obligations

Joint Ventures A joint venture is a legal collaboration formed between two parties who intend to take on an activity together for the individual gain of each. Usually set up by a formal agreement which states the rights and responsibilities of each party May be incorporated or unincorporated. Not a separate legal entity, cannot sue or be sued.

Joint Ventures Advantages Permits two parties to combine expertise and resources Often creates a new product or service that would not be available otherwise Disadvantages Can be difficult to set up, need a formal agreement. May lead to sharing of a party’s confidential information

Franchises A franchise is a form of contract where expertise, knowledge , methods of operation and/or intellectual property rights are granted by a franchisor to a franchisee for a period of time in return for payment. Same choice of ownership structure as in any other business. The franchisor is the supplier of a good or service, or the owner of a business system, copyright or trademark. The franchisee is the resellers who trades under the franchisor’s name.

Trusts A trust is a relationship where one person, known as the trustee, holds property on behalf of another, known as the beneficiary. May be set up to hold land or property for someone that cannot legally hold title themselves or for taxation purposes. The trustee has legal ownership and control of the property but has a legal obligation to act in the best interests of the beneficiary. Must be actioned (i.e. property given to the beneficiary) within a certain time frame.

Trusts Advantages Limited liability for beneficiary. Tax benefits. Disadvantages Can be difficult and expensive to set up and maintain. Dissolution of the trust can be difficult. Not a separate legal entity.

Business Names Businesses operating as a sole trader or a partnership must register a trading name, if they decide to use a name besides their own. Business names must be registered: To ensure that people know who they are trading with So business names can be monitored and controlled Names cannot be registered if: They are too similar to existing business names and the similarity will mislead people, They are undesirable, They contain foreign language characters, They suggest a connection with the government.