1.You have the task of advising clients as an accountant. John Smith has come to your office and has told you that he is considering the establishment of a small business in the fashion industry, particularly in men’s clothing. He seeks you advice in relation to the formation of the most appropriate business structure to operate his new venture.
Draft a short letter to John advising him of the key issues that you consider important. Your answer should be set out in the form of a letter. You should try and present you letter in the most informative manner that is suitable for a client.
2.Outline the various directors’ duties that exist and discuss their importance in relation to the governance of companies.
To John Smith
XXXX
Subject: Advice on the best business structure
Sir,
In Australia, there is no single form of business structure that is prevalent. The kinds of structures that prevail are sole trader ship, partnership and company. (Australia 1993)
Now, as per the requirements made by you, you need to establish a small business in the fashion industry. To be more specific you like to initiate business in men’s clothing. Now, as already submitted that there is no one forms of business that is operative in Australia, thus, before recommending you the best business structure as per your requirements, it is advice that a brief introduction must be provided relating to all the business scenarios.
When any single or individual person wants to establish a business then the best form of business structure is sole trader ship. It is a structure wherein the owner of the business is the exclusive controller of the business. He is the person who is accountable for all the incomes of the business and does not require much of the paper work in the business. (Needle 2004)
But, it is advised that you must not indulge in a sole trader ship mainly because you will also be liable for all the liabilities of the business. If any finance is needed then the only way is to seek loan or to bringing in self capital. Also, the business will be wound up as soon as the owner ceases to exist. Since you want to initiate business in men’s clothing which require range of people and capital it is advisable not to indulge in sole trader ship.
The next option that is available is partnership. A partnership is based on the law of agency wherein the partners are the agents of each other and that of the partnership firm. In order to form a partnership, it is necessary that two or more person must join together with common intention to carry a business with the main aim to share profits and losses and is rightly analyzed in United Tankers Pty Ltd v Moray PreCast Pty Ltd (1992). It is very easy to formulate a partnership and does not require much of the capital. (Morse 2010)
However, before advising you that you must trade your business in the form of partnership, it is advisable to compare the same with the company.
A company is a form of business organization which is only formulated after incorporating or registering the same as per the norms of the company law. When any company is formed then it has a separate legal personality which implies that company officers are separate from the company and is rightly analyzed in Salomon v A Salomon and Co Ltd [1897]. A company has its own existence and has the capacity to make contracts on its own behalf, purchase property, sue or be sued etc. (Bottomley et al. 2017)
It is submitted that when any company comes into existence than it is a person in the eyes of law but its existence is artificial in law. In requires officers to carry out its activities in the name of the company. But, the acts that are carried on will be binding on the company alone and not on the officers who are taking the acts on behalf of the company. Thus, a company has a separate legal personality in law and has the capacity of being sued and be sued alone and is rightly analyzed in Foss v Harbottle (1843). (Puig 2000)
Now, when the same is compared with that of a partnership, a partnership does not have any separate legal personality in law. Thus, any acts that are carried on by the partners of the firm will be binding not only on the partnership firm but also on all the other partners.
It is thus advice that if you will operate as a partnership then firstly you cannot initiate the business alone; rather, you need one more person for the initiation of the partnership. Also, the acts of such other person will result in making you bound regardless of the fact you want to bound by the same or not.
Another feature that is associated when any company is formed is that it has limited liability. The liability of the company is limited to the extent that the shareholders are only answered to the liability which is equal to the value of their shares and is rightly analyzed in Winthrop Investments Ltd v Winns Ltd [1975]. (Puig 2000)
In partnership there is no limited liability and the debts that are incurred in any partnership will make all the partners liable and the liability is not limited and can also make the partners personal liable for the same. Thus, if you operate the business by way of partnership, then, if any liability ill be raised and if the firm is not able to pay the same from its assets, then, you will be held person liable for such liability along with the other partners.
Further, if a company is formed then it has perpetual succession. Perpetual succession implies that the life of the company is not limited but the life is unlimited and the company never ceases to exist unless a proper procedure for its winding up is followed. (Puig 2000)
But, in partnership, the partnership is dissolve automatically if any partner dies, enters in the partnership, leaves the partners, becomes unsound, bankrupt etc,
Thus, if you chooses to form the business by way of partnership then it is not advisable because then you can never be able to leave the business because of you intend then the partnership will be dissolved. However, if a company is selected then you can take benefits of the perpetual succession of the company;
Also, when a company is formed then it can easily raise finance by selling shares. But, the same is not possible in the partnership form of structure.
After comparing the business structure of a partnership, company and sole trader ship, it is advisable that the best business structure for you is to operate by way of a company.
If you operate your business by way of a company and as intended by you, you need to start with a small business; thus, you can easily raise finance and carry on the acts in the name of the company. Since you will be the shareholder of the company thus the liability will be limited. The business is means clothing requires diversified professionals which can be made part of the company by employing them.
Thus, it is advised that it is better that a company must be formulated instead of a sole trade ship or a partnership in order to achieve better results, an artificial status in the eyes of law and a distinction can be made amid you and the other officers of the company thereby attaining the feature of a separate legal entity and perpetual succession.
Thanks
XYZ
2.In Australia, one of the forms in which a business can be carried is company. A company once incorporated is an artifice person which has the sanctity in law. When a company is made then it has a separate legal personality which implies that company officers are separate from the company and is held in Salomon v A Salomon and Co Ltd [1897]. (Bottomley et al. 2017)
Now, though a company is an artificial person thus it possesses all the powers, rights and responsibilities that of a natural person. But, being artificial, a company requires natural person for its working. Section 9 of the Corporation Act 2001 submits that a director of the company is the officer of the company and is such a person who is appointed by the company in order to carry the acts on behalf of the company and is analyzed in Grimaldi v Chameleon Mining NL [2012]. Any person who is carrying the functions of a director is also a company director. A company is empowered to represent the company under section 198A of the Corporation Act 2001 and is analyses in Imperial Hydropathic Hotel Company Blackpool v Hampson (1882). (Bottomley et al. 2017)
But, with the powers comes the responsibilities. There is numerous numbers of duties that are expected from a company director. In common law, some of the duties comprises of fiduciary duty, duty to flow the command of the company, duty to act in the interest of the company, etc. But, the corporation Act 2001 has made an attempt to bring these common law duties within the frame work of the statutory law and thus there are various provisions that are enacted within the Act which deals with the directorial duties. (Bruce 2015)
In it is important to understand the various duties that are imposed on the company directors as the scope of its importance will help in understating as how relevant are the same in the working of the company.
So, the duties include:
But, if the company officer or the director of the company is found to be in violation of section 180 (1) of the Act, then his duties are breached. However, if the requirement of Section 180 (2) is met then the director can be protected. Section 180 (2) lay down the business judgment rule according to which when the decision that is made by the company director is made in good faith or when the director does not have any material interest in the transaction that is undertaken by him or when the decision is taken by the director after taking an expert opinion or rationally believes that the judgment that is made is in the best interest of the company, then, it is assumed that the acts that are carried by the directors and officers of the company are carried out with care and diligence and is analyzed in ASIC v Rich & Ors [2009].
Duty to act in good faith- This is also one of the fundamental duties that are imposed the director and is incorporated under section 181 of the corporation act 2001. Section 181 of the Act submits that the director must act with honesty and is in the fiduciary relationship with the company and his acts must be carried in the interest of the company and for the proper purpose and is analysed in the leading case of ASIC v Adler(2002). This duty is present all the times and must be discharged at all times. If the duty results in the occurrence of an improper purpose then the duty is considered to be violated even when the director believes that he has acted in good faith and is analsyed in ASIC v Fortescue Metals Group Ltd [No 5] [2009].
Duty not to misuse the position – when the director is appointed at the post then there are several powers that are attained by such director. Now if the director uses his position in order to bring gain fir himself at the cost of the company and which is not in the interest of the company then it is an act which is not permissible in law and is considered to be in violation of section 182 of the Corporation Act 2001 and is analyses in R v Byrnes (1995).
Duty not to misuse the information – When a director is appointed at the post of the director then the director is using the company details and thus gets acquainted with several details of the company. It is the duty of the company director that the information that is attained by him must not be used in order to bring again for him and to bring disadvantages to the company or is not in the interest of the company. This duty is incorporated under section 183 of the Corporation act 2001 and is analyzed in R v Byrnes (1995).
Duty to avoid insolvent trading – The foremost duty of any company director that he must take the acts on behalf of the company so that no unnecessary liability is incurred by the company so that the interest of the shareholder or members or any other person who is connected with the company is affected. This duty is incorporated under section 588G of the Act according to which if any transaction that is taken by the company which results in the incurrence of dent on the company and which ultimately results in the insolvency of the company then there is breach of section 588G of the Act and is analyzed in Woodgate v Davis (2002). So, there is a duty on the director to avoid any kind of trading those results in insolvency of the company. A company director can protect himself by proving the defense mentioned under section 588H of the Act in his favor.
Duty to avoid conflict of interest – Section 191-195 of the corporation Act makes sure that the acts which are carried out but the director are such that results in the conflicting situation, then, it is the duty of the company director that the interest of the company must supersede the interest of the director.
Duty of reporting – Section 285-318 imposes a duty of reporting on the directors of the company and must be cater in each and every scenario.
Now, these duties are very much important in the proper governance of the company as the director is the foremost officer of the company and the duties that are not cater by him effectively will hamper the interest of the members of the company and will untimely hamper the very existence of the company. If the duties are not cater properly, then penalties can be imposed on the director of the company under section 184 of the Act wherein both civil and criminal provision is made to deal with the defaulting director.
Reference List
Books/Articles/journals
Australia. (1993). Doing Business in Australia: A Guide for Small and Medium Sized Enterprises of the Member States of the European Community. Office for Official Publications of the European Communities.
Bruce, M. (2015). Rights and Duties of Directors 2015. Bloomsbury Publishing Plc.
Bottomley et al. (2017). Contemporary Australian Corporate Law. Cambridge University Press.
Morse, G. (2010) Partnership Law. OUP Oxford.
Needle, D. (2004). Business in Context: An Introduction to Business and Its Environment. 4th Edition. Cengage Learning EMEA.
Puig, G. (2000) A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine. Volume 7, Number 3. < https://www5.austlii.edu.au/au/journals/MurUEJL/2000/32.html#n25>. Case Laws
ASIC v Rich & Ors [2009] 75 ACSR 1.
ASIC v Fortescue Metals Group Ltd [No 5] [2009] FCA 1586
ASIC v Adler (2002).
Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023
Foss v Harbottle (1843) 67 ER 189.
Grimaldi v Chameleon Mining NL [2012] FCAFC 6.
Imperial Hydropathic Hotel Company Blackpool v Hampson (1882) 23 Ch D 1.
R v Byrnes (1995) 130 ALR 529.
Salomon v A Salomon and Co Ltd [1897] AC 22
United Tankers Pty Ltd v Moray PreCast Pty Ltd (1992).
Woodgate v Davis (2002) 55 NSWLR 222.
Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.
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