Discuss about the Business Structure Incorporation Company.
After going through the facts that have been provided in this question, it becomes clear that Richard and his sons, David and Liam will obtain certain benefits if they go ahead and incorporate a company in order to expand their current business. The reason is that when the business structure of sole trader or partnership is compared with the company, it is easier to expand the business. Significant cost has to be incurred for the purpose of registration of a company as against the case where the business is run as sole trader or in partnership Management. However in the long run, the cost incurred in the incorporation of the company can be considered as a part of the business expenses (Sweeney, O’Reilly and Coleman, 2013). Similarly, only registering a business name is less expansive as compared to register a corporation. But after the registration of a corporation management, the business name is not required to be registered (Lipton, Herzberg and Welsh, 2016). The reason behind this situation is that after the incorporation of a corporation, the full name of the corporation, ending with “Pty Ltd” has to be used. Regarding the ongoing costs, the registration of a business name requires renewal after a fix interval. The government also charges a fee for this purpose.
But in case of a company, the law requires that an annual fee has to be paid to the ASIC by every registered company. The major advantage that is associated with the incorporation of a company is present in the form of the Limited liability of its members. Therefore the law provides that when a company has been incorporated, the liability of its members is confined to their shares (Graw, 2011). However, the situation is different, in case of sole traders and partners. They are treated to be personally responsible for the debts and obligations of the business. Similarly, among other benefits available in case of the incorporation of a company deals with the rate of tax. Therefore the persons managing business by registering a business name are required to pay income tax at the normal, marginal rate but in case of the companies registered in Australia, a flat rate of tax is applicable. This rate is significantly less than the rate of tax that applies in case of individuals.
Due to the reason that a company is treated by the law as a distinct legal entity, the law allows the company to own property in its own name. A corporation can also enter into a contract in its own name. In this way a company is considered by the law as a separate legal entity that is separate from its members and directors (Pentony et al., 2009).
Before discussing the steps that need to be taken for the purpose of the registration of a company, the first issue is to decide which business structure will be most appropriate in the present case. Therefore, Richard and his sons are also required to decide the appropriate business structure for the expansion of their business. In order to make this decision, the parties have considered all the circumstances. For instance, in this case, Richard owns a successful business. Soon, his sons, David and Liam are also going to join him in business. However, in this case, they want to expand the family business. For this purpose, the parties are required to select the most appropriate business structure. The most appropriate business structure, in the present case will be that allows the parties to easily raise funds that are necessary for expanding the business.
Similarly, there is another issue present in this question. Richard wants that the company should be named “Ridali”. On the other hand, his sons was that the name of the business should be “Rich’s Guarantee Olives”. At this point it needs to be stated that there is a difference present between the registration of a company and only the registration of a business name. When the parties are going to select a name for their business, there are certain issues that have to be looked into. For instance, the name selected by the parties should not be similar to the name of a present business. Therefore, only the name that does not match any present corporation or business management name can be used. Thus it can be recommended that a name availability search should be made in order to ensure that the name selected by the parties is available or not. In this regard, the law provides that if the parties also have an identical name, such name may be registered by the parties as the name of the business. The law also provides that there are certain words due to which people may be misled regarding the activities of the company. Therefore, it is not permissible to use these words for example, any relationship with the government, Royal family or ex-servicemen.
It is also insisted that company’s name should also reveal the liability of its members. For instance, if the members have limited liability regarding the debts and obligations of the company, it is necessary that company’s name ends with “Proprietary Limited”. In the same way, when the members of the company have unlimited liability, the law provides that the name should end “Proprietary”. However if the parties want to exhibit a diverse name, an alternative is accessible to them according to which they can register another name as the business name. Therefore in this case, Rich’s Guaranteed Olives can register a business name “Ridali”. Therefore in such a case the business can trade under the name “Ridali”. This name will be displayed on all the signage of the business.
After going through the facts of this question, it appears that the issue in this case is if Terry and the other employees are allowed by the law to sue Cosmo Mine Ltd (CM). The reason behind this issue is that they were working for Cosmo Mining Services Pty Ltd (CMS). Cosmo Mine Ltd was a subsidy of CMS. The shareholders of CMS passed a resolution according to which they were going to establish a new corporation and CMS’s business was going to be sold to this company. Therefore, CMS was going to be wound up. Under these circumstances, the question before Terry and the other employees of the company is if any action can be initiated against the parent company, CM or their employer company CMS.
According to the general rule applied by the corporations’ law, a company is considered as having its own separate legal identity. The rule of separate entity was mentioned by the court in Salomon v Salomon (1896). The court affirmed that every company enjoys a distinct identity in the eyes of law. Therefore, this rule provides that, according to the corporations’ law, every company has its own separate legal identity after its registration (Vermeesch and Lindgren, 2005). As a result of the doctrine, a company can own property in its own name and enter into contracts in its own name. Therefore, the liabilities of the company are company’s own liabilities and can be enforced against the company only. Similarly, a company can also be sued under its own name. In the same way, the doctrine of limited liability provides that the members of the company are not individually accountable for the liabilities of the corporation. Consequently, the debts and obligations of a particular company have to be enforced against the company only and the members of the company (directors and shareholders) cannot be held personally liable regarding these obligations.
However, the rule related with limited liability of the members of a company is a general rule. There is an exception applicable to the general rule. It is known as piercing the corporate veil. In this regard, the corporations’ law provides that in certain cases, the courts are allowed by the law to ignore the distinct legal identity of a company and therefore the courts may decide to lift the corporate veil. Such decision can be made under the circumstances where the court is willing to inflict legal responsibility on the persons who have control over the corporation. This obligation is also present under the tort law, where it has been mentioned that in cases involving negligence, there should be a relationship of proximity present between the parties.
The same requirement is also present in case of lifting the corporate veil. In Barrow v CSR Ltd (1988) the court was of the opinion the company needs to be considered liable for the tort of its subsidiary company towards its employees. Consequently, due to negligence of the subsidiary company, an employee of the company suffered asbestosis. The court concluded that in such a case it was not important if the principles of agency law were used to describe the case or if the proximity between the employees of the parent company and its subsidiary has been used or if the doctrine of lifting the corporate veil has been used, or the issue has been discussed in terms of the control of the parent company. The court stated that in all the cases, the final effect will be similar. Similarly in Briggs v James Hardie& Co Pty Ltd (1989), the court found that the issue deals with negligence. The court had to consider the issue of lifting the corporate veil, along with the notion of foreseeability.
In view of the decision given in the cases related with this issue, the current legal position can be described as follows. If sufficient resources are not available to the subsidiary company to compensate the other party under the law of tort, the other party can claim compensation from the party that has ultimate control over the subsidiary. In view of this legal position, in the present case also, it can be concluded that Terry can bring a claim against the parent company, CM. It was unanimously decided by the shareholders of CMS that the company is going to be wound up and the business of CMS was going to be sold to Lazarus Pty Ltd., a new company formed for this purpose.
However in this case, it is clear that this new company has been created only for the purpose of evading the liability of CMS towards his former employees as well as the other residents of the town. These persons are suffering from cancer due to the reason that as a result of the mining activities of CMS, their drinking water has been contaminated. Now the situation is that the subsidiary company does not have the resources to pay compensation to these residents. The payment company CM owns 120, out of the 200 shares of its subsidiary, CMS.. At this point, it also needs to be mentioned that CS has complete control over the activities of its subsidiary. CMS had also leased the mining equipment from CM.
In view of this situation, it can be concluded in the present case that Terry can sue the parent company, CS or the newly formed company, Lazarus for compensation. Under the circumstances, the court may decide to let the corporate veil and impose liability on the parent company which has ultimate control on the activities of CMS.
References
Harris, J. Hargovan, A. Adams, M. 2015, Australian Corporate Law LexisNexis Butterworths 5th edition,
Lipton P, Herzberg A and Welsh, M, 2016, Understanding Company Law, 18th edition, Thomson Reuters
Pentony, Graw, Lennard & Parker, 2009, Understanding Business Law 3rd ed Butterworths
Stephen Graw, 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters.
Sweeney, O’Reilly & Coleman, 2013, Law in Commerce, 5th Ed., LexisNexis.
Vermeesch, R B, Lindgren, K E, 2005, Business Law of Australia Butterworths, 11th Edition
Barrow v CSR Ltd (1988) Unreported
Briggs v James Hardie& Co Pty Ltd (1989) 16 NSWLR 549
Salomon v A Salomon & Co Ltd [1896] UKHL 1
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