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.
1.To,
Mr. John Smith
Re: Advice on the structure of the business that might be used for your fashion business
Respected Sir,
There are certain things that we have got to know about requirements for business. We have heard that you are willing to open a small business in the fashion sector and especially you want to open Men’s clothing section. You are willing to know that which will be the best suitable structure of business for your idea. I will be providing you with the advice that will help you in incorporating all the information that is related to the kinds of structure of the business that are present legally. It is because we want you to have a proper understanding of the business structure that will be suitable for you.
There are various structure of the business that are available but we are letting you know about limited ones that are relatable to your idea of business. They are the partnership, joint venture, sole proprietorship, and company(Latimer 2017).
A sole proprietorship means that a business is carried out by an individual. If you want to run your business in this form, then sole proprietorship is a suitable structure of business. If you wish to choose this kind of structure of business then you will be having the entire control over your business and how you want to operate your business. By selecting this kind of structure of business you will be having an advantage of lessprice. This kind of business structure is the cheapest alternative comparatively. There is no need of registration cost regarding the name of the business. There are some legal regulations that will be imposed if you choose this structure of business and it will be very less as related to any other kind of structure of business. You can run your business smoothly by using your personal name. However there are certain cons of sole proprietorship and we would like you to know before we advise you anything else about it. Initially there are no such difference between your business and you. Your own identity and the business’ identity is almost similar. Subsequently there are no such provision that forms the limited liability. This also states that the liability of a business and your own liability is all the same. The loss of your business and your loss is the same. Secondly, as theincome is same, they come within the utmost part of taxation that is 47% and you might have to pay more tax. The third point is assets that you have might be at risk if there is any loss in your business. Therefore the features that has been enlightened above states that there are too many risks regarding your own liability and we would not suggest you to choose this kind of structure of business.
A business structure that is known to be as partnership, has been carried by more than two people together and they are known to be as partners. This kind of business structure might or might not be legalised and the presence of it can be identified by relating the common law rules and Partnership Act 1963 (cth). If you wish to run the business in the form of partnership then you need to operate your business in a joint form and that is why including another person or persons to make profit on the daily basis. The formation cost of the business might be low as it might or might not be legalised and the formation and registration process is simple. However you will be required to acquire the partnership deed that is based on the duties and rights of an individual who is involved and identified. If you wish to select partnership as the structure of your business then you might have some additional resources like skill and capital that the other partner will get it into your business. Certainly there are some disadvantages by selecting partnership as the structure of the business and that is why we will not be advising you to choose this kind of business structure (Fitzpatrick et al. 2017). Partnership is related to the ability that is limited. Therefore you might be liable for the debt of the business personally. Another feature of partnership is “severally and jointly liable” that states that partner is made liable for all the actions of another partner during the business course. A partner is the principal and the agent of the business. This means if there is any action that is committed by your partner then you will be bound by his actions and your assets to the liabilities. However this idea of business is your own idea and if you have a partner then it might cause unnecessary interferences in the management of business and also in decision making. They will also be involved jointly in the decision of the business as they are the partner of the business (Latimer 2017).
The term company is the most common kind of structure of business. There are some distinct feature of the company and none other business structure has this kind of feature. They are perpetual existence, legal entity, transfer of ownership and limited liability.There are certain featureslike separate legal entity that states that the owner’s identity and the business’ identity are unlike to each other. When the organization is formed then that organisation developsto be a separate legal entity and it is treated to be a different citizen in our society. The organisation has their own liability and rights. The right of the organization is to get in the contracts as if they are a natural person (Hanrahan, Ramsay and Stapledon 2017) . If any person has notcomplied with the terms of the contract then they can be liable for the breach of contract and also has the right to sue that person. As per the section 9 of the Corporation Act, the organisation is managed by some officers known as directors. The organisation has the right to execute any kind of document on its own name and by using common seal of the organisation or by any other individual who is acting on the behalf of it. However the organisation hold some assets in its own name.The company’s name is different than that of the owners. There is no need of any owner to take part in their management. There are some types of organization in Australia but to you the most applicable will be a proprietary or a public company. There is no such feature of a proprietary company that will help you to raise funds but in a public company you will have the ability to raise the funds from the public. The requirement of compliance is more in the public company than that of a proprietary company. I have known that you will be operating a small business, so the most suitable type of company will be the proprietary company than that of the public company (Harris, Hargovan and Adams 2015). There is a feature of limited liability that a company holds, that means it will limit the liability of yours to the investment that you made in your business and your assets will also be untouched and safe unless it has been found by you that the director’s duties have been contravened. Furthermore, using the company means you might be the one and only company’s directorand that all the powers that are required to manage the organizationwould be totally in your hand and there will be no interference from outside. Another advantage you will be getting is the private investment that will be issued to shares in the business. These kind of shares can be easily transferred to another person from one person. There are some disadvantages of this kind of business that you might face. Under the requirements of the Corporation Act 2001, the Australian Securities and Investment Commission checks out how this kind of structure of business is functioning. The registration of the business is required but the procedure is complex as mentioned in the section 112 of the Corporation Act 2001. The form 201 needs to get filled that has been given by ASIC. You must also know that the name of your business will be different and it should not match with any other kind of business (Bottomley et al 2017). The business’ name must be registered. There is another disadvantage of this kind of business and it is that the cost of maintenance and formation is high with the surplus legal compliance. Therefore, we would like to advise you to choose the company kind of structure of businessspecially the proprietary company so that you could carry out your fashion business. This kind of business structure will guard you from the personal liabilities totally and it will reduce the tax obligations because it totally depends on the turnover of the business and it will be 27.5% or 30% of the business’ profits. You can balance any losses that your business will face in the coming years so that you can claim for the deduction of the tax that comes underIncome Tax Assessment Act 1997. Therefore, if there is any other question regarding this matter, then do let us know as we are ready to assist you.
Yours Faithfully
2.One such implication by choosing an organization is being exposed to the duties of the directors that is if an individual is company’s director. The duties of director can be found both in CA, 2001 (cth) and common law. The duties of the directors have been mentioned below.
The duty of care and diligence
This duty has been mentioned in section 180 (1) and asks the directors or the officers to perform their duties regarding the standards of the company which the concerned person or director or the officer would do if they would have been in similar position and face the similar circumstances. These standards are needed to encounter this duty and they are not associated with any expert but they are compared to a sensible person. If the decision seems to be not good for the company that has been taken by the reasonable person then the director of the officer will be responsible for the breach of this section. The rule of business judgment that was mentioned in the case of ASIC v Rich [2005] NSWSC 256 states that as it has been given under the section 180 (2), it is also examined to see the compliance with the duty of care and diligence. Certain factors have been taken into consideration by the court includes that informed decision making is done by the directors. The term corporate governance is associated with the legal and ethical functioning of the corporation. This states that there must be compliance with the legal principles and ethical guidance by the Corporation. The directors will be responsible for the contravention of section 180 (1) where it has been stated that they have breached the law by giving the financial advice that is defective in nature to those people who had no chance of recovering from the losses they have suffered and it has been stated in the case named ASIC v Cassimatis (No. 8) [2016] FCA 1023. Therefore, this duty assures that director must operate their duties in a legal way.
The duty of company’s good faith, best interest and proper purpose (section 181)
This type of duty provides with the advice that the directors must be honest and also portray good faith while dealing with the affairs of the company as given in the provisions of section 181 of the Corporation Act 2001. According to the caseWhitehouse v Carlton Hotel Pty Ltd [1987] HCA 11, the court has stated that the duty of proper purpose and good faith must be determined individually. The directors are being asked to act in the company’s best interest to ensure the proper purpose. Furthermore, the company’s best interest would be the member’s interest collectively and when the organization is solvent. When the organization is insolvent, the creditor’s interest is the best interest of the company. Corporate governance is addressed by the duty by protecting the stakeholders of the organization and by eliminating the dishonest conduct by directors and officers. These provisions for the corporate governance have been mentioned under the “Corporate Governance 3rd edition” that has been provided by Australian Securities Exchange.
Not misusing the company’s position (section 182)
This duty forbids the directors and the officers concerned from misusing the company’s position so that they can achieve the personal advantage or for the third party that can be the company’s cost of losses that has been mentioned under the section 182 of the Corporation Act 2001. By giving them the protection, the interest with regards to the corporate governance of the shareholders and the creditors are being taken care (Lipton and Herzberg 2018).
Not misusing company’s information (section 183)
This duty forbids the directors and the officers concerned from misusing the company’s information so that they can achieve the personal advantage or for the third party that can be the company’s cost of losses that has been mentioned under the section 183 of the Corporation Act 2001. By giving them the protection, the interest with regards to the corporate governance of the shareholders and the creditors are being taken care.
The duty of revealing the material personal interest regarding the transaction (section 191)
As per the section 191 of the above-mentioned act, it has been stated that all the directors have been provided with the responsibility to inform all the directors of the board about the facts that are relevant about their own interest and they must be having information regarding the resolution ordecision of an organization. This duty assures that the facts are not been hidden by them (MacIntyre 2018).
The duty of Insolvent Trading
The term insolvent trading is not permitted by the section 588G of the Corporation Act 2001. The word insolvent means that when the organization is not able to repay all the debts that are on them and whenever they arise. This act describes that an individual must not involve in any kind of trading when the organization is insolvent or is likely to become insolvent if that trading is being done by them. An individual might be removed from the responsibility if they have depended on the advice that has been given by an individual who seems to be liable for all the company’s financial affairs. The interest with regards to the corporate governance of the shareholders and the creditors are being taken care of and it also holds the corporate governance’s principles (Peirson et al. 2014).
Therefore, from the above discussion, it can be seen that the duties of the directors have been given so that they could take care of the interest of the creditors and the shareholders of the organization. These duties also assure that the organization is functioned in the legal and an ethical way by the directors and the officers and also by assuring the corporate governance and the corporate culture of health
References
Bottomley S, Hall K, Spender P, and Nosworthy B, Contemporary Australian Corporate Law 1st edition 2017 Sydney Cambridge
Fitzpatrick, Symes, Veljanovski, Parker, Business and Corporations Law; LexisNexis 3rd edition 2017
Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. Oxford 18th edition 2017
Harris, J. Hargovan, A. Adams, M., Australian Corporate Law LexisNexis Butterworths 5th edition, 2015
Latimer, P, Australian Business Law CC, 2017 Edition
Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 18 edition Thomson Reuters 2018.
MacIntyre, E., 2018. Business law. Pearson UK.
Peirson, G., Brown, R., Easton, S. and Howard, P., 2014. Business finance. McGraw-Hill Education Australia.
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