Corporations And Business Structure

Questions List

Discuss about the Corporations and Business Structure.

The given case presents a scenario where there is intention on the part of the clients to open a new business. There are various business structures which the clients may choose for the business but due to limited information on this aspect, advice needs to be extended in regards to choosing the most relevant structure. The various options in this regard that are available to Australian businesses are corporation, sole trader, joint venture and partnership (Latimer, 2015). However to take a decision in this regards, it is imperative to extract relevant information about the nature of the business and its requirements coupled with future plans for the business. These answers would serve as driving information for the relevant analysis of potential options in a bid to recommend the most suitable choice. 

What is the new business that you plan to open?

Answer: We intend to set up a café in the university campus and cater to the huge amount of university students.

What do you think is the capital requirement of this business?

Answer: Well, at present the capital requirement would be in the vicinity of $ 250,000 which would include six months of working capital.

How do you plan to arrange the finances?

Answer:  We are three of us and each of us would pool equal amount of money into the business. For any further requirement of financing, commercial banks would be obtained to seek finances in the form of term loan.

How soon do you intend to set up the business?

Answer:  We intent to set up the business at the earliest as this is a lucrative opportunity and any delays in setting up may result in someone else setting up a café which would result in loss of opportunity.

Are you aware of the potential liabilities associated with the business and willing to assume the same?

Answer: Yes, we are aware of the typical liabilities associated with any food and beverage business but since one of us would be present all the time, hence we assume that there should not be any lapses and hence at the moment assuming any liability is not an issue. However, time is of essence as this is a lucrative opportunity which might be cashed in by someone else.

What are your future plans and vision for the business?

Answer: Well, we intend to extend operations to different campuses of various universities located in Sydney.  However, this is atleast one year down the line if not more as the current concern is to serve our own campus.

Relevant Laws

How about your incremental financial needs and the potential sources for the same?

Answer: Well, currently we already have 6 months of working capital and hence for the current café, we assume that any incremental financial needs should be minimal. We expect business to really pick up in couple of months but still have kept ample buffer in case of any adversity. For, further expansion funding may be required but a call on the same would be essentially taken later.

What about an exit option in case one of you wants to discontinue in the business?

Answer: We have known each other since quite long and are really committed to launch this business irrespective of the outcome. Besides, we have sound understanding between us which makes us confident that there should not be any dispute or misunderstanding which would lead to any of us exiting the business. As for contingency need of any cash, we can always approach either our family or friends to bail us out. Hence, we are not really concerned about an exit option.

Based on the above answers obtained from the client, it is apparent that sole trader business model would not be possible considering the fact that there are multiple shareholders in the business venture. As a result, the two business structures which deserve in-depth description are the partnership and the company as the clients would be recommended one of the two structures based on the relative merits and demerits.

Partnership is essentially a business structure which is characterised by the presence of two or more partners which tend to have stakes in the business. For forming a partnership, s.1 Partnership Acts 1892 (NSW) suggests the following three conditions to be met (Fletcher, 2007).

• Profit Motive – It is imperative that the activity for which the partnership must have been formed should be driven by the motive of earning profit. Any non for profit organization cannot be termed as a partnership.
• Business being carried on– As indicated in the Smith v. Anderson [1880] 15 Ch D 247, it is imperative that the business should be continuous and ongoing and must not comprise of certain isolated activities which would not be recognized as partnership.
• Carrying on of business in common – While it is not essential for every partner to be actively involved, but it is essential that the decision making is taken on behalf of all the partners of the firm and essentially is binding on them collectively as they are joint owners of the business. 

An additional parameter highlighted in the Smith v. Anderson [1880] 15 Ch D 247 case was the fact that a partnership firm is not a separate legal entity unlike company. The existence of the partnership firm is contingent on the existence of the various partners and it is these partners which actually are the legal existence of the firm. Besides, s. 27 enumerates the various duties and responsibilities of partners. One of the most crucial in this regard is the fiduciary duty that each partner owes to the other in the capacity of both as an agent and also a partner (Gibson & Fraser, 2014).  As a result, the partners are bound by the decisions made by other partners even though these may be made in bad faith. Besides, the resultant profit and loss made by the business in accordance with s. 27(1) are to be shared amongst the various partners as per the partnership agreement that forms the basis of the partnership and is invaluable towards defining the role and rewards for the various partners (Davenport & Parker, 2014). 

Partnership

It is imperative to note that since the partnership is not a legal entity, hence in case of any business liability, it essentially lies on the business partners and would automatically be transferred to them. Besides, the partnership business usually has unlimited liability which extends to the personal assets of the partners as well. This is unlike a company where only the business assets are covered within the ambit of any potential business liability and excludes the assets of the owners or shareholders. Further, with regards to partnership dissolution, s.35 and s.36 provide guidance with one of the common reasons being leaving of a partner or the death of the same (Harvey, 2009). 

The various advantages of a partnership business structure for the given business are highlighted below (Lindgren, 2011). 

• The partnership firm could be put into place by the execution of a simple partnership agreement which may or may not be registered. As a result, there are minimal formalities involved resulting in lower time consumption which is critical for the current business venture.
• With the presence of various partners, it is possible in the current business that the responsibilities could be divided amongst the partners which essentially is helpful for the business and is unlike the sole trader model where a single owner is responsible for the various aspects of the business. 

The various disadvantages of a partnership business structure for the given business are highlighted below (Latimer, 2015). 

• Considering that the business is essentially food and beverage based, hence in case of any potential harm to customer due to contamination or negligence on the premises could potentially lead to a personal liability for the partners without any upper limit. This could potentially lead to bankruptcy not only for the business but also for the clients in their personal capacity.
• Further, in accordance with the fiduciary duties, the partners tend to be bound by the contract executed or the decision made by another partner even though the partner may not be authorized to indulge in the same (Lang v James Morrison & Co Ltd. [1911] 13 CLR 1 at 11). This may have adverse complications for the business and also for the personal wealth of the partners.
• Additionally, in a partnership firm, there are difficulties with regards to making an exit for a particular partner as the stake cannot be sold to another individual without the prior permission of the other partners. Further, in the event of a particular partner leaving the partnership, the firm would be dissolved and a new partnership agreement would have to be worked out amongst the new partners. 

Another alternative that needs to be considered with regards to business structure is company. Unlike the partnership firm, the company is a legal entity which has an independent existence free from the owners. This implies that any business liability is directed towards the company and not the owners (Gibson & Fraser, 2014). As a result, the personal wealth of the owners is demarcated from the assets of the company which limits the scope of liability. However, in case of any wrongdoing by the director or owner, personal liability of the act cannot be escaped. The owners or the shareholders of the firm could freely exit by selling the shareholding in the company without necessarily taking permission or even informing the other shareholders or owners (Harvey, 2009). 

The companies in Australia are governed by the Corporations Act 2001. As a result, there are a plethora of obligations with regards to inception, operations and reporting which needs to be adhered to by the company. In this regard, there are two options available namely proprietary company and public company. Section 45A(1) is concerned with the proprietary company and such companies typically have no intention to list themselves and have no more than 50 members (Davenport & Parker, 2014). . On the other hand, a public company is comparatively bigger in size and scope and needs to conduct an AGM or Annual General Meeting on an annual basis coupled with disclosure of financial results and reports. The essential difference between the two structures is with regards to amount of regulation which essentially is governed by the category that the business wishes to choose. Normally, smaller businesses with limited expansion plans are set up as proprietary companies (Harvey, 2009). 

The various advantages of a company business structure for the given business are highlighted below (Latimer, 2015). 

• For the given business, one of the gains of setting a company would be that the personal liability of the clients would become almost nil unless there is evidence of some wrongdoing by the owners and hence breach of any applicable legal clause. However, the normal liabilities due to negligence of employees or otherwise would be directed against the company. This is in line with the verdict of the Salomon v Salomon & Co Ltd [1897] AC 22
• The company structure provides readily available and convenient exit options for any of the shareholders as it quite possible to sell the stakes to another willing investor without liquidation of the underlying company and hence does not adversely affect business.
• Besides, the company structure through dilution of equity either on stock exchanges or to private investors presents a lucrative opportunity for raising incremental capital that may be required for business expansion by setting up cafes at other university campuses. This is not readily possible in case of partnership firm. 

The various disadvantages of a company business structure for the given business are highlighted below (Pendleton & Vickery, 2005). 

• There are a host of formalities involved in the inception of the company (whether proprietary or public). This essentially requires quite a lot of time, legal knowledge and cost especially for a lawyer. This may be potentially disastrous in the given case as the opportunity may be cashed in by someone else and hence the business may not takeoff.
• Besides, there are incremental compliance and reporting costs that are associated with the company structure which is not the case for a partnership firm. For the given case, this may not serve any incremental benefit atleast in the short run. 

The various merits and demerits of the two potential business structures have been discussed above. It is apparent that both these choices have their own relative merits and demerits. However, taking into consideration the needs and preferences of the client, it seems that the partnership business structure is the preferred choice because of the following reasons.

• The primary reason for choosing the partnership firm is the nominal time in which it can be setup as the only requirement is a partnership agreement which also does not necessarily have to be registered. This ensures that the clients could set up their business in a jiffy.
• Besides, it also ensures that the business does not have to incur any additional costs of inception and also reporting and compliance costs. As a result, all the resources could be utilized for conducting the business (Latimer, 2015).
• Additionally, considering that the clients already have made arrangements for the set up cost along with six months of working capital, hence it appears highly unlikely that any incremental capital would be required for running the current café contemplated at the campus (Lindgren, 2011).
• Since, there is no debt for the clients and considering that they do not expect any other liability to arise on the basis of any negligence in the business, the liability concerns are also diminished. Further, considering the comfort level that the clients have as partners and also in terms of their financial background, it seems likely that none of the clients would actually require any exit options (Harvey, 2009).

However, even though for the current café partnership business structure may be the preferred choice, but it is highly recommended that if in the future the clients wish to expand their business to multiple locations, a company business structure is highly recommended for ensuring easy availability of incremental finance for growth coupled with limited personal liability (Gibson and Fraser, 2014).

References 

Davenport, S. & Parker, D. (2014), Business and Law in Australia, Sydney: LexisNexis Publications

Fletcher, K.L. (2007), The law of partnership in Australia, NSW: Lawbook Co, Pyrmont 

Gibson, A. & Fraser, D. (2014), Business Law, Sydney: Pearson Publications

Harvey, C. (2009), Foundations of Australian law. Victoria: Tilde University Press

Latimer, P. (2015), Australian business law, Sydney: CCH Australia Ltd.

Lindgren, K.E. (2011), Vermeesch and Lindgren’s Business Law of Australia, Sydney: LexisNexis Publications,

Pendleton, W. & Vickery, N. (2005), Australian business law:  principles and applications, Sydney: Pearson Publication