Alternative Business Structures – Sole Traders, Companies, Partnerships, Trusts and Associations
I was excited to learn that we would be taught about the various aspects of corporate law.
But I was late for my first class. However, my professor was kind enough to allow me to sit in spite of being late for 15 minutes. It started with an introduction to the structures of business which are carried on in Australia. There are four main types of business structures which the businessman uses to carry on their commercial activities. They are a sole trader, partnership, trusts, companies and associations.
A sole trader is an individual who operates the business solely. He is legally responsible for carrying out all the aspects of the business. He can also appoint other people to assist him in conducting the day to day activities of the business. As a sole trader, the name of the company has to be registered with the Australian Securities and Investment Commission (ASIC). Since no distinct entity is created for the business the taxes related to the company are filed with the personal tax return (Business. Gov. Au, 2018).
Partnerships are an association of people who run the business jointly but they do not form a company. It allows the individual to merge their assets and skills so that the chances to increase the success of the business can be enhanced. Trust is an entity that holds property or income for the benefit of the beneficiaries. It is a relationship recognized and reinforced through legal procedures.
The company is a legal entity which is separate from its shareholders. In order to get a company into existence, it has to be registered with ASIC. A registered company can operate its business all over the country without being registered under the individual laws of the states.
As per Rivera (2018) it was held that starting a business is a not an easy job to do. It requires time, hard work and effort to accomplish the task. The proper business plan should be formulated in order to make a business structure successful.
I was pretty much excited about this lecture. It was about how to incorporate a company in Australia. As I am aspiring to start my own business so I was keen to know about the various aspects of the incorporation of the company. The Corporations Act 2001 (Cth) provides for the registration of the corporations. It delivers a vast knowledge about the administration of the dealings of the company by its representatives (WIPO, 2013).
As the businesses is the blood of the economy. It thrives on the funds generated by the businesses in this regard. The Australian Securities and Investment Commission (ASIC) supervise and regulate the incorporation processes as provided by Corporations Act 2001(Cth) (the Act). In order to register the name of the company, it should be kept in mind that its name should not be the same as those of an existing one. The terms as bank, trust, incorporated and royal should not be used.
The name of the company can be reserved through form 410. Prior to its registration, it should be decided about how the company is to be administered. It can be administered by the its own constitution, replaceable rules or a blend of both.
As per Post (2016) it was stated that the articles of incorporation which are also known as a certificate of formation are required for the creation of a company. These documents contain information about the company like its name and location.
The constitution of a company administers the internal management. A constitution is a significant document governing the activities of the company along with managing relationships with its directors and shareholders. All the companies are managed by the Corporations Act. It contains a set of replaceable rules which can be applied in lieu of constitution and govern the internal management of the company. The replaceable rules comprise of the director’s power, the procedure for conducting the meetings of the directors, permission granted to the members for inspection of books, the procedure carried out for voting and for paying the dividends.
So, the internal management of the company is administered by the regulations of Corporations Act 2001 which relates to the company, also known as replaceable rules. It can also comprise of a constitution or a combination of both. A constitution is a agreement between each member and the company. The contract is also carried on by the organization and every director and company secretary and lastly amongst the members themselves. A special resolution is approved in order to adopt the constitution of the company.
The no liability public companies and the special purpose companies which aspire to reduce the annual review fees must be governed by the constitution. Also, a proprietary company which is a special purpose company must also adopt the constitution.
As per News OK (2018) it was decided by Murphy Oil Corporation that there would be changes in the executive management.
Since there are many activities which are to be conducted prior to giving life to a company, so one of the crucial aspects in this regard is the role of promoters. Promoters are the individuals which initiate the funding and consolidating of the business or enterprise. The capital is raised by them and they enter into contracts and make sure that smooth and efficient foundation of the company is laid down.
The promoters have fiduciary duties in the company. They have the legal duties so that they can act in the interest of the other parties. They have a duty of good faith to the other parties in a business venture. They must adopt an approach of honesty and frankness in the company. They must make sure that the welfares of the company are served before their own personal benefits.
The promoters should not keep the corporate funds for their own benefit. They should not take the advantage of their special positions which can pose a threat to the company. A promoter is a person who has the responsibility to execute his preliminary duties apart from the formation of the company. It comprises of promotion, incorporation and floatation. They solicit the people to invest in the company.
As per Stech (2016) it was stated that Life Partners’ Inc . which was operating in Texas, has been alleged for committing the largest and longest standing fraud schemes and reimbursement has been sought from its promoters and shareholders by the trustees in this regard.
The shareholders enjoy a number of privileges and authorities in exchange for their investment in the corporation. As the shareholders are owners of the company to some extent. They can be a natural person or a company. They must be legally authorized and must have at least one shareholder. The shareholder enjoys the rights regarding attending the meetings of the shareholders and voting on significant issues such as appointment and discharge of directors.
They possess the right to transfer their ownership and receive the reports and announcements of the companies. They are entitled to receive dividends and other distributions and participate in the corporate actions i.e. further issues of shares and mergers, demergers and buybacks. These rights are mentioned in the constitution of the company or the replaceable rules and in the legislation of the company or in the agreement of the shareholders.
However, there are certain obligations of the company. They include payment of the unpaid amount of shares held by them. The liability should be expressly stated in the constitution or in the agreement of the shareholders. In the case when the directors are considered to be shareholders, they are liable for the breach of their duties.
As it was stated in Solon and Gramm (2018) that there have been reforms to enhance the interests of the shareholders but still there are some norms which support the groups to serve their political objectives at the cost of shareholders.
The Australian Securities Exchange (ASX) governs the corporate governance framework in Australia. It has provided certain recommendations which are laid down by the ASX Corporate Governance Council. Laying solid foundations for management and oversight is one of them. The companies should formulate and reveal the roles of the board and management (ASX Corporate Governance Council, 2018).
The companies should institute the functions which are reserved for the board and those which are assigned to the senior executives. It should further reveal the process for evaluating the performance of the senior officials. Another principle for the management of the company is the structure of the board. It adds value to the company. The board should have an efficient composition, commitment and size so that it can discharge its duties. Majority of the board should comprise of independent directors. The independent director should head the board and the roles of chairman and chief executive director should not be executed by the one person.
The ethical and responsible decision making should be promoted in the company. The companies should institute the code of conduct and reveal the practices which are necessary so that the integrity of the company can be maintained. It should also disclose in each of its annual meetings that the measurable objectives are set for achieving the diversity of the gender as stated by the board.
As it was held in Bhattacharyya (2015) Toshiba which was a 140-year-old company of Japan Inc. was caught in the major accounting scandal in the year 2011. It was found that the company inflated its earnings by $1.2 billion during 2009-2014. It had acted in contradiction to its corporate governance standards as it was one of the early adaptors of corporate governance in the country.
The office holders should duly abide by their legal obligations as per the Corporations Act 2001. It comprises of maintaining the financial records, passing the solvency resolutions and updating the details of the company. The office holders of the company should make sure that they should update the records of the company. It comprises of financial records, register of members, deeds and minutes of the meeting.
The directors and officers should make sure that if their company is a public company, large proprietary company, registered scheme and company limited by guarantee, then they should lodge a financial report with ASIC. As a director or office holder, it is their prime responsibility, to be honest and careful in the dealings. They should make sure that the company pays its debts on time and make sure that they act in the benefit of the company (ASIC, 2016).
The job of the directors is to manage the affairs of the company. One of the significant duties of the director is to supervise the activities being conducted in the company. They should be cautious about how their actions would affect the company if the matter involves monetary aspects. They should be engaged in the meetings of the directors and give their unbiased advice in order to make informed decisions.
As per Scurria (2018), the independent directors of Puerto Rico public power has resigned owing to political interference. It was decided to cut off their packages.
The companies operating in Australia can be financed by two different ways viz. debt and equity financing. Debt finance pertains to money which is borrowed from external lenders. Equity finance which is arranged from internal sources of the fund or from other shareholders in exchange for fractional ownership. The main sources of debt finance are building societies, financial institutions such as banks and credit unions. The finance can be provided as loans, lines of credit and overdrafts (Business. Gov. Au, 2018).
Another source can be finance companies which offer financial products through retailers. They must be registered under the Australian Securities and Investment Commission (ASIC). The retailers purchase material for the business with the help of store credit through a finance company. The factor companies also are known as debt finance can also be an external source of funds for the business.
Factoring is when the accounts receivables are sold by the business to the third party known as a factor so that the cash can be received without waiting for 30-60 days due for payment by the consumers. The consumers can directly pay to the factor companies.
The main source of equity financing is personal finances, raising funds from venture capitalists and from family and friends. Funds can also be raised through angel investors or business angels who are wealthy individuals investing a large amount of money in return for equity and share of profit.
As per Kruger (2018), it was noted that the government of the US has been issuing more debt but it is not getting any foreign buyers yet.
The types of remedies available to the members in Australia can be stated as:
As per section 232 of the Act, the court is entitled to grant relief against the oppressive conduct if it believes that the conduct of the activities of the organization as per section 53 or the real or probable action or error by or on behalf of the company and the resolution or proposed resolution of the shareholders or proposed shareholders is conflicting to the interests of the entire class of shareholders. If it is oppressive against them in that ability or any other abity , then section 461(1) (e) of the act safeguards them by compulsorily winding up of the company where the directors have acted in prejudice against the affairs of the company (Commonwealth Consolidated Acts, 2010).
The acts such as improper division of the corporate business and exclusion from participation in the management of the company can comprise of oppressive and fairly prejudicial behavior. The dilution of interests of the shareholders and unfairly restricting dividends also institute oppressive and detrimental conduct. So, as section 233 of the Act, the court has the discretion to issue orders which are appropriate in association with the company. It can instruct to wind up the company. The existing constitution of the company should be altered and canceled. It can also order to control the activities of the company in the future.
As per Pritchett and Tiryakian (2017) the fiduciary responsibility of CEO is to protect the assets of the company as these belong to the shareholders. In this case, the shareholders have the right to move to the court for enforcing their legal rights.
Thus to conclude, it can be said that the Corporations Act 2001 (Cth) is the act passed in the Commonwealth of Australia which describes the laws to manage the business entities in Australia at the federal and interstate levels. It explains various aspects such as incorporation of a company, the duties of officers, it’s takeovers and raising of funds.
References
ASIC(2016) Directors’ key responsibilities[online] Available from: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-key-responsibilities/ [Accessed 21st August, 2018].
ASX Corporate Governance Council(2018) Review of the ASX Corporate Governance Council’s Principles and Recommendations [online] Available from: https://www.asx.com.au/documents/asx-compliance/consultation-paper-cgc-4th-edition.pdf [Accessed 21st August, 2018].
Bhattacharyya, A.K.(2015) Toshiba – a case of internal audit failure [online] Available from: https://www.business-standard.com/article/opinion/toshiba-a-case-of-internal-audit-failure-115080900760_1.html [Accessed 21st August, 2018].
Business. Gov. Au(2018) Business structures and types [online] Available from: https://www.business.gov.au/planning/business-structures-and-types [Accessed 21st August, 2018].
Business. Gov. Au(2018) Sources of finance: Debt vs. Equity finance [online] Available from: https://www.business.gov.au/finance/seeking-finance/sources-of-finance-debt-vs-equity-finance [Accessed 21st August, 2018].
Commonwealth Consolidated Acts (2010) CORPORATIONS ACT 2001 – SECT 232 [online] Available from: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s232.html [Accessed 21st August, 2018].
Kruger, D.(2018) Uncle Sam Wants You: Treasury Depends More on Domestic Bond Buyers. The Wall Street Journal. [online] Available from: https://www.wsj.com/articles/funding-secured-for-the-u-s-government-that-means-domestic-bond-buyers-1534507201 [Accessed 21st August, 2018].
News OK(2018) Murphy Oil Corporation Announces Changes in Executive Management [online] Available from: https://newsok.com/article/feed/5036449/murphy-oil-corporation-announces-changes-in-executive-management [Accessed 21st August, 2018].
Post, J.(2016) Articles of Incorporation: What New Business Owners Should Know [online] Available from: https://www.businessnewsdaily.com/4038-articles-of-incorporation.html [Accessed 21st August, 2018].
Pritchett , J.L. and Tiryakian, E.(2017) When CEOs Play Politics, Shareholders Can Take Them to Court. The Wall Street Journal. [online] Available from: https://www.wsj.com/articles/when-ceos-play-politics-shareholders-can-take-them-to-court-1503011944 [Accessed 21st August, 2018].
Rivera, A.(2018) How to Start a Business: A Step-by-Step Guide [online] Available from: https://www.businessnewsdaily.com/4686-how-to-start-a-business.html [Accessed 21st August, 2018].
Scurria, A.(2018) Puerto Rico Utility Directors Resign, Alleging Political Interference. The Wall Street Journal. [online] Available from: https://www.wsj.com/articles/puerto-rico-utility-directors-resign-alleging-political-interference-1531418056 [Accessed 21st August, 2018].
Solon, M. and Gramm, P.(2018) Keep Politics Out of the Boardroom. The Wall Street Journal. [online] Available from: https://www.wsj.com/articles/keep-politics-out-of-the-boardroom-1531952912 [Accessed 21st August, 2018].
Stech , K.(2016) One of the Largest Frauds in Texas’: Life Partners Trustee Files Rash of Suits. The Wall Street Journal [online] Available from: https://www.wsj.com/articles/life-partners-trustee-files-recovery-lawsuits-1458316739 [Accessed 21st August, 2018].
WIPO (2013) Corporations Act 2001 [online] Available from: https://www.wipo.int/edocs/lexdocs/laws/en/au/au196en.pdf [Accessed 21st August, 2018].
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