Part 1
To
Mr John Smith
Subject: advice on business structure to be selected for the proposed venture
Respected sir
Please consider this letter as a formal advice to the requirements you have in relation to your proposed business venture in the fashion industry specifically in the men’s clothing segment for the business structure which would be most suitable for you.
We would like to inform you that the business structure which we have selected for the purpose of your proposed venture is that of a proprietary company limited by shares. This company can be formed under section 112 of the Corporation Act 2001 (Cth). The reasons because of which we have selected this business structure for your proposed venture over the other business structures available in Australia is explain to you in this letter by comparing the advantages and disadvantages of the business structures available. Please go through the following in order to better understand why we have selected this business structure for your proposed business venture (Kubasek et al. 2017).
One of the business structures which you are available to you is known as sole trading business structure. The sole trading business structure is only carried out by a single person. This business structure is very easy to form and simple to run. If this business structure would have been selected for the purpose of carrying out your business venture it would have provided you with immense control over the functioning of the business. As it is very simple and cheap to form it would have saved you with significant amount of time money and effort in relation to its formation. However you must be wondering that even after so many advantages this kind of business structure proposes to your venture why we have not selected this has the best suited business structure for your venture. One of the primary reasons is that this business structure does not have any separate legal entity or identity (Mann and Roberts 2015).
This means that the law will consider you and your business as the same person. This situation may be very risky at law because if anything goes wrong in your business any person will have the ability to bring direct legal proceedings against you personally. This structure also has very limited scope of expansion as you know cannot raise capital from the market by using this structure.Any income which you gain by the virtue of this business would be your personal income this means that your tax liability would be much higher if you fall within the highest slab of income tax percentage in Australia which is around 47% for the year 2017-2018. One of the most significant disadvantages which this business structure would pose to you is that it does not include rules of limited liability. In the light of absence of such rules you may be liable personally for the losses which has been incurred by the business. Therefore we did not recommend you this business structure
You must have also heard about a business structure known as a partnership form of business. This is a kind of business structure which is carried out by two or more individuals. A partnership may or may not be registered. There are various rules which are applied by the course in order to determine whether a partnership is present or not. The court will generally considered a business to be a partnership when two or more people carry out business commonly having a common motive of profit making on an ongoing basis. This business structure is also easy and cheap to form. However as it involves two or more people decision making may sometime be at dispute. This structure would allow you to bring the additional resources of funding and expertise into the business in form of and partner. This would make you feel that this would have been a suitable business structure for your venture. However this is not the case as there are many rules which do not make partnership as a suitable venture for your business.
One of the most significant rules which come along with a partnership structure of business is that of a partner being jointly and severally liable to the actions of other partners. To make it simple anything which is done by your partner in relation to the business would also be binding upon you legally. Another very important disadvantage of this form of structure is in line with that of a sole trading structure in relation to limited liability rules. The limited liability rules also do not apply in a partnership business structure. Therefore if you wish to select this form of business structure for your venture then in the same way of a sole trading business you would be personally liable to losses which have been incurred by the business. To make it worse if you select this form of business structure then any actions which have been committed by your partners would also create a claim on your personal assets. You would also not have any provisions of raising the required funding for your venture when you plan to expand your business. Therefore for these reasons we have not recommended you to select a partnership form of business success for your venture.
We will now bring to your attention that why we have selected the company form of business structure for your venture. The primary reason of the selection is the features with this form of business structure possesses. A Corporation is a separate legal entity as opposed to a partnership or a sole trading business. Corporation has limited liability which is not available in the above discuss business structures. A company can sue or be sued under its own distinct identity.A Corporation can be further classified into two categories.
The first is a proprietary company and second is a public company. The proprietor company can be formed by only a single person where has a minimum of 3 directors are required for the formation of a public company under the provisions of the Corporation Act. In a proprietary company you are not allowed to raise public funds but this can be done so the help of a public company structure. As we have selected this business structure for you it is our obligation to inform you about the drawbacks which selecting this business structure would pose to your venture. The formation of a company is a complex process and is relatively expensive as compared to other forms of business structures. In addition there are many regulatory requirements which have been imposed by law on this form of business structure to prevent fraudulent activities and therefore constant and stringent vigilance is kept over functioning of a company for your business by the corporate regulator Australian securities and investment Commission (Clarkson, Miller and Cross 2014.).
However even if such drawbacks are present there are numerous advantages which good support you to run your business venture with the minimum possible risk through the use of this business structure. The first and foremost advantage is of the limited liability rule. There is a corporate veil present between members of a company and the company itself. According to the application of the rules of limited liability the members cannot be made liable personally for the loss is which have been incurred by the corporation rather they would only be subjected to liability in line of the investment which has been made by them or any unpaid amount of shares held by them in the company. Therefore to make it simple you would not be personally liable to your assets in case liabilities in relation to the business arise.
Your company would be managed by you where you would be the director of the company and would have sole discretion over how the company would function. You would be allowed to gather investment into the company by issuing shares but not to the public rather private investors looking for investment. When you select a company form of business structure there would be more trust on the part of the suppliers and clients of the business as they will feel that their interest is protected by law when they are dealing with a company. Your company would be able to own assets in personal capacity. It would be able to bring a legal proceeding and be a part of a legal proceeding by the virtue of its own distinct identity. This would also allow you to expand your business with minimum risk possible in the future. Therefore in spite of drawbacks we have selected this form of business structure for your proposed business venture.
We hope that we are able to address your concerns and you are satisfied with the business structure which has been selected for your venture. In case of any queries feel free to write back to us.
Yours faithfully
Part 2
Directors’ duties and importance to corporate governance of a Corporation
The duties of a director are outlined in the Corporation Act 2001 (Cth). The duty set out in the legislation cover all duties which are present via the provisions of common law.The primary rules which the directors of a company incorporated in Australia mandatorily needs to comply with are provided in section 588G, 180-184 and 191 of the CA. A few other rules are provided under section 674, 1041H and 728 of the CA along with meeting conducting requirements under section 249 (Keay 2014).
Under the rules provided in section 588G any officer or director must refrain from what is known as insolvent trading. Insolvent trading means trading when a company is insolvent or is likely to become insolvent. Insolvency refers to the position of a company when it is not able to pay it’s creditors as defined under section 92A of the CA. The directors and officers of a company are prohibited to indulge into any transaction when the company has become insolvent under the provisions of section 92A or they have reasonable belief that if they indulge into the transaction the company is likely to become insolvent.
Under the rules provided in section 180(1) any officer or director have to show reasonable degree of diligence and care towards their operations in relation to the company. Reasonable degree is the degree of care and diligence which would be depicted by a reasonable director in same situation and position.
Under the rules provided in section 181 any officer and director have the duty to observe good faith honesty towards making decisions for the company and direct such decisions for a proper purpose in the best interest of the company. The best interest of the company is to be regarded as the interest of the overall shareholders in case of normal course of business and the interest of the creditors in case of insolvency. This section does not specifically require the directors to base their actions in the interest of any stakeholders of the company.
Under the rules provided in section 182 of the legislation the position which is provided to the directors or officers of the company must never be misused by them to pursue personal interest or the interest of any related third party with me eventually cause any sort of damages or losses to company.
Under the rules provided in section 183 of the legislation the information which has been provided to the director or any other officerby the company must not be misused in a way as to cause damages or losses to the company in pursuit of personal or any third party interest.
Under the rules provided in section 184 where the directors deliberately and negligently or recklessly which is the above discuss sections of 180 to 183 they may be held criminally liable for such breach.
Under the rules provided in section 191 any officer or director of the company has the obligation of disclosing any relevant information which may be related to an interest of such person in the subject matter of a decision taken by the company to the board of directors.
The way in which the directors of a company operate has a significant role to pay towards ensuring good corporate governance (Stout and Blair 2017). It has been provided by the ASIC that “good corporate governance goes hand in hand with the role of the directors. According to Kraakman and Hansmann (2017) corporate governance can be defined as a system of rules, processes and practices based on which the form is control and directed. Essentially corporate governance takes into consideration balancing the stakeholders’ interest such as the management, supplier, government, customers, the community and financers (Tricker and Tricker 2015). The concept of corporate governance also encompasses all spheres of management practically as it also strives to achieve the objective of the organization.
Thus the process initiates form actions plans and internal control to corporate disclosures and performance management. From the definition of corporate governance it can be inferred that the directors’ duties are very important to deploy good governance principles into an organization. The performance management of an organization is ensured by the application of section 180(1) of the CA. As discussed above the section provides that any officer or director have to show reasonable degree of diligence and care towards their operations in relation to the company. Reasonable degree is the degree of care and diligence which would be depicted by a reasonable director in same situation and position. This further signifies that the directors must make informed decisions for the company and act in a reasonable way.
The provisions provided under section 181 deals with the issue related to balancing the stakeholders’ interest such as the management, supplier, government, customers, the community and financers. The section asks the directors to observe good faith honesty towards making decisions for the company and direct such decisions for a proper purpose in the best interest of the company. In addition case laws such as Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 have signified that the best interest of the company is to be regarded as the interest of the overall shareholders in case of normal course of business and the interest of the creditors in case of insolvency ensuing that the interest of the shareholders as well as the creditors is taken into consideration. Best interest of the company also means ensuring the good will of the company and the good will is enhanced by making the corporation participate in community betterment ensuring that the company is viewed as a responsible corporate citizen by the society (Lim 2017). The interest of the financers are also protected with provisions such as section 182 and 183 whereby the directors cannot utilize the resources of the company for personal or third party interest at the cost of the corporation. A provision such as section 674 of the CA also asks the directors to make proper disclosures which address the disclosure requirements of good corporate governance.
Thus it can be evidently inferred that the directors’ duties have a significant role to pay in deploying good corporate governance principles in the company.
References:
Clarkson, K., Miller, R. and Cross, F., 2014. Business Law: Texts and Cases. Nelson Education.
Keay, A.R., 2014. Directors’ Duties. Jordans.
Kraakman, R. and Hansmann, H., 2017. The end of history for corporate law. In Corporate Governance (pp. 49-78). Gower.
Kubasek, N., Browne, M.N., Dhooge, L.J., Herron, D.J., Williamson, C. and Barkacs, L.L., 2015. Dynamic business law. McGraw-Hill Education.
Lim, E., 2017. CORPORATE GOVERNANCE AND COMPANY LAW: THE DISCONNECT BETWEEN ACCOUNTABILITY AND DIRECTORS’DUTIES. HONG KONG LAW JOURNAL, 47, pp.733-761.
Mann, R.A. and Roberts, B.S., 2015. Business law and the regulation of business. Nelson Education.
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
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