Part A
To: Jack Smith
Date: ________
Dear Jack,
This letter is written regarding your visit to our office. You are considering establishing a small business in fashion industry, particularly dealing in men’s clothing. As a result, you were looking for advice regarding the formation of the most suitable business structure for operating this new venture. By starting a new business in Australia, a number of options are available regarding the business structure. As a result of business can be operated as a sole trader, partnership, company or a joint venture. All these business structures have their own advantages and disadvantages. Under these circumstances, it becomes important to be aware of all the relevant factors so that the most appropriate business strategy can be selected for starting the new venture. Here it appears that the business center of a company with the most appropriate for starting your new venture (Clarke and Clarke, 2016). It needs to be noted that, as is the case with all the business structures, the business sector of a corporation also has its own advantages and disadvantages. However, after going through all the relevant factors, it appears that in the present case, the business structure of corporation will be the most appropriate for starting the new venture (Khoury and Yamouni, 2010). Hence, the advantages and disadvantages related with business structure of corporation had been discussed below so that you can make an informed decision. Even if there are some disadvantages also in the business structure of a corporation, but the advantages that are going to be available after the incorporation of a company outweigh the disadvantages.
The advantages of incorporating a company:
Limited liability: the most significant advantage that is available after the incorporation of companies that of limited liability. Therefore as compared to a sole trader or partnership, where the owner of the business is lawfully accountable for different facets of business including its debts and liabilities, in case of a company which is treated as a separate legal entity, the liability of the owners of the company is limited. Therefore, while the owners of sole trader business or partnership business can be considered as liable for selling a defective product or an injury caused to the consumers in the course of business, the owners of the business can be held personally liable (Dunncliff, 1990). Under these circumstances, the personal assets of the owners of the business can also be at risk. This is not the case with the company. In view of the principle of distinct identity of a company (Solomon v Solomon, 1897), the personal assets of the owners of the business are not at risk.
As a result of the limited liability of an incorporated company, the company can be forced to pay the creditors only out of the assets over by the company itself along with any money unpaid on the shares of the company. Moreover, the company is considered as a distinct legal entity or a legal person (Terry, Giugni and Brace, 1994). Therefore, the company is distinct from its owners (shareholders) and the persons controlling the company (Directors). In this way, generally speaking, and by assuming that the directors of the corporation have acted honestly and fulfill their duties, particularly the directors have not allowed the company to trade while it is insolvent, and when the owners/directors of the corporation did not provide a individual guarantee regarding the debts of the corporation,. In such a case, the private assets of the shareholders/directors of the company are beyond the reach of the creditors of the company and industry they are protected from them.
Owning Property in its Own Name. Due to many reasons sometimes it is suitable for the persons that the property should be owned at the deal should be made in the name of the corporation in place of their own name. At the same time, the company now in Australia now allows for the formation of a one-person company. This means the company having a single person as the sole owner (shareholder) and the director of the company. However, it always needs to be remembered that a company is an entity that is disconnected from its owners and directors. Therefore, the company should not be considered as an alter ego of its owners.
Impression created on outsiders: generally the outsiders are impressed by the name of an incorporated company instead of merely a registered business name. The reason could be that the other people are aware of the fact that the cost of establishing a company is known as compared to the registration of a business name. In this way, the impression of more seriousness is created in case of the registration of company in Australia.
Tax: the individuals who are doing business under registered business name are required to pay tax at standard rate. On the other hand, the corporations in Australia have to pay tax at a fixed rate of 30%.
Perpetual succession: another advantage available in case of the incorporation of companies that of perpetual succession. The law provides that unless a company is bound up, the corporation carries on even if the members have left the company.
However, the presence of a large number of advantages does not mean that there are no disadvantages associated with a Corporation. Therefore the disadvantages associated with the company can be described as follows:
The establishment of a company can be more expensive as compared to the establishment of a sole trader or partnership. Similarly, it is costly to maintain and wind up a company as compared to the business structures. Therefore the initial cost of registration of a company is more than the cost of setting up a sole trader or partnership. However it needs to be noted that the benefits available in case of company outweigh the higher initial cost of incorporated.
The reporting requirements are also complex. The corporations law has imposed a number of reporting requirements on the companies. It is the duty of the directors to ensure that all the reporting requirements are fulfilled by the company.
In case, the directors of the company failed to fulfill the legal obligations imposed on them by the law, they can be held personally liable regarding the debts of the company. At the same time, certain duties have been imposed on the directors by the common law and the statutory law. These duties have been imposed on the directors by the Corporations Act.
The profit made by the company that is going to be distributed among the shareholders is taxable.
After considering advantages/disadvantages that the present in case of the incorporation of a company, it can be recommended that the most appropriate structure for starting the new business will be the incorporation of a company.
Yours faithfully
(_________)
Part B
Duties of directors
A number of duties are prescribed for the directors of corporations in Australia. Simultaneously, the duties of the directors have also been incorporated in the statutory law. Therefore the Corporations Act, 2001 prescribed certain duties for the directors of companies. The company is governed by the directors other half of the shareholders of the company. According to section 198A(1) of the Act, the business of the corporation is to be managed by all under the direction given by the directors (Ford and Austin, 1995). All the directors have certain basic legal duties. The duties and responsibilities that have been prescribed for the directors by the Corporations Act are applicable to several different organizational structures like proprietary companies, public companies etc. The four major duties that have been prescribed by the Corporations Act for the directors can be described as follows:-
Care and diligence: it is the duty of the directors to act with the similar degree of care and diligence that can be anticipated in case of any other reasonable person. The city has been mentioned in section 180. A similarity is also been imposed on the directors by the common law. At the same time, a safe harbor is provided by the business judgment rule to the directors regarding a claim made under the common law under section 180 (Austin and Ramsay, 2013). The business judgment rule is also included in this section.
Good faith: another responsibility of the directors is to act in good faith and keeping in view the best interests of the corporation. Therefore, the directors should always ask for a proper purpose as mentioned in section 181 (Ford, 1978). This duty includes the responsibility of the directors avoid any conflicts of interest. On the other hand, if any such conflict arises, the directors have the responsibility to reveal and manage such conflicts as soon as possible. This duty is the duty of trust and fidelity (Farrar and Hannigan, 1998). Therefore it is known as a fiduciary duty that has been imposed by the common law and also by the duty prescribed by the Act.
Proper use of position: it is the duty of the directors that they should not act improperly. For this purpose, the position of the director should not be used improperly for the purpose of achieving your personal advantage or for causing a detriment to their corporation (Paterson and Ednie, 1976). This duty is present in section 182.
Proper use of information: This duty requires that the directors should not use the information improperly that has been received by them in the course of fulfilling their duties as the director of the company (Menzies, 1959). Therefore such information should not be used by the directors for the purpose of achieving your personal advantage of for causing any loss to the corporation. The duty has been stated in s183 of the Act.
It is mentioned in section 183 that a director of the company should not make an improper use of the information that has been acquired by the director on account of his or her position in the company. This position is also applicable on, the officers or employees of the company including the junior employees. Therefore it will be a breach of this duty if they have achieved an advantage for themselves or for any other person. It needs to be remembered that the provision applies where the improper use of information or position has been made, even if the director may have acted honestly (Cowen, 1967). On the other hand, if it has been discovered that the information was used by the directive dishonestly and with a view to achieve a personal advantage, then such action can be treated as a criminal offense.
Duty to prevent the insolvent trading: Apart from these duties, another important duty is also been imposed on the directors. This duty requires the directors to prevent the company from trading in the company has become insolvent. The other along with the general duties of the directors, a positive duty has also been imposed on the directors according to which they should prevent the corporation from trading if the company has become insolvent. In this context, a corporation can be described as insolvent if it is not in a position to repay its debts when they become due. Therefore it is the responsibility of the directors that while incurring a new debt by the company, the directors should consider if there are reasonable grounds to suspect that the company may be insolvent or it may become insolvent after incurring the debt. In context of this duty, merely an understanding of the financial position of the company at the time of signing the yearly financial statements of the company by the directors is not sufficient. In view of this duty, it is very important that the directors always remain aware of the financial position of the company.
The duty to prevent insolvent trading has been named in section 588G. This duty, along with the defenses and the consequences of breach has been mentioned in Part 5.7 B, Division 3.A of the Act. The duty mentioned in sections 588G(1) and 588G(2) will be pleased by a person if:
The person is a director of the corporation at the time of incurring a debt;
The company is insolvent at such time or it is going to become insolvent after incurring the debt;
Relevant grounds were present to suspect that either the company has become insolvent or, it is going to be so; and either
Such person is aware of the presence of these grounds
Any reasonable person in such position in the company would have been aware of these grounds.
The person had failed to stop the company from incurring such a debt.
However, the defenses available to the director with the director had failed to prevent the company from incurring a debt if:
At the relevant time, reasonable grounds were present for the person to expect and the person expected that the company was solvent and would remain solvent. Even after incurring the debt s588H(2)
The director had reasonable grounds to believe that a competent and reliable subordinate had been keeping an eye on the solvency of the company and keeping the director informed.
At the relevant time, the director was not taking part in the management of the corporation due to illness or some other valid reason.
The director had taken all the reasonable steps for preventing the company from incurring such a debt.
Section 191 to 195 of the Act provides the duties of the directors related with the disclosure of material personal interests. Therefore, apart from the sole director, proprietary companies, the director having a material personal interest in any major dealing with the affairs of the company should give a notice to the directors of the company regarding the presence of such interest in accordance with section 191(1). However and extensive list of the interests that need not be disclosed by the director has been provided with section 191(2).
Such notice shall provide the details of the nature and the extent of the interest. It should also be told how the interest is related with the affairs of the corporation. The notice should be given by the director to other directors as soon as reasonable after the director has come to know regarding the presence of such conflicting interest. It has been provided by section 194 that the directors of proprietary companies who have disclosed the material personal interest related to the affairs of the company can vote on the matters related with such interest and the transactions related with the interest we proceed if the disclosure has been made by the director before the company has entered into the transaction. NSA, by making proper disclosure, the director can retain the benefits and at the same time. The transaction cannot be avoided by the company only due to the presence of such an interest.
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