In the present case, it has been decided by the clients that there is start a new business. However the clients are not certain that the business structure will be more suitable for their new venture. Some of the business structures that are commonly used in Australia are sole trader, partnership, corporation and a joint venture. Therefore in the present case, in order to decide the most appropriate business structure, certain questions have been asked from the client and on the basis of these answers, recommendations can be made regarding the business structure that will be most suitable for the clients.
Part I: Series of Questions
1: The new business will be joined by how many persons?
The new business will be joined by 3/4 persons. But it is worth mentioning that it is expected that very soon, some other persons may also join it afterwards. Therefore, it is very important that the business structure adopted by us allows these other persons to join the business later on.
2: what is the nature of new business?
In this case, we have decided to start the car valet service in the university.
3: To which sector of the industry, the new business belongs?
The new business that we are going to start comes under the service sector.
4: Do you know that different types of benefits are available in case of different types of business structures?
No, we don’t know that each business structure has different advantages and disadvantages.
5: Do you want limited liability regarding the debts of the new business?
Yes, we are looking for limited liability. We want that our liability in the new business should be limited to the sum that we have invested. Due to this reason, we don’t want that our personal assets should also be liable for the debts of the new business.
6: How will you arrange funds for the new business. Similarly in case you want to expand the business later on, how will you manage the funds?
To start a new business, some of the funds required for this purpose will be arranged from our personal resources but at the same time, they are also looking to raise funds from other sources like a loan from the bank.
7: Do you want any particular benefit from the business structure that is adopted by you?
Answer: yes in this case, it is very important that whatever business structure the select for starting our new business, we should not be held personally liable for its debts and liabilities. Therefore the particular benefit that they are looking for, from the business structure adopted by us is that our personal assets remain safe from the debts of the business.
What Strategies have been adopted by you?
We have adopted the strategy of adopting consumer centric approach. We will strive to provide best services to the consumers.
After going through the answers that have been given by the clients regarding their requirements from the business structure that they should adopt for the new business, it appears that in this case, the most suitable business structure will be of the incorporation of the company.
Liabilities of the business
As compared to the creation of a partnership, the incorporation of a company will provide a number of benefits, particularly the benefits like the limited liability of the clients and also the ease of raising capital for the new business.[1] It is very significant that the business structure adopted by the clients is the most suitable business structure for them. At the same time, if the clients fail to adopt the most suitable business structure for starting the new business, it will become difficult for them to manage the business successfully.[2]
In this part of the assignment, the relevant law has been researched so that the most suitable business structure can be decided.
i) It is advisable that the clients should choose the incorporation of a company in order to start a new business.
ii) The other option is to create a partnership. As the persons who were going to start the business, are more than two, it is not possible for them to run it as a sole trader. Hence, in case of the sole trader, only one person is considered as the owner of the business. But in the present case, all these persons will be the owners of the new business.
i) Therefore if the parties are not interested in the creation of a company, they can form a partnership as in this case, all the persons will be considered as the joint owners of the business.[3] However as mentioned above, the most suitable business structure will be that of a company. There are certain advantages that are associated with the formation of a company. For example, a fictitious legal entity is created in the eyes of law after the incorporation of a company. Similarly, after the company is created, according to the law, the company has a distinct identity, that is separate from the identity of the shareholders and the directors of the company. The reason is that the law provides that company is a fictitious legal person and has its own identity in the eyes of the law.
ii) Due to this legal fiction, the law provides that a corporation can sue and be sued under its own name. As mentioned above, in the present case the parties have the option to incorporated company or to form a partnership.[4] Hence, in order to decide which will be the most appropriate business sector of the platoon, it is required that the law related with the formation of a company and also that of a partnership needs to be discussed. Such legal research can aid in finding suitable business structure.
iii) On the comparison of the business structure of a company and a partnership, it can be said that the registration of a corporation has certain benefits that are not available in case of a partnership. The major advance the available in case of registration of a company is that of the limited liability of the parties. In this case, the company is considered to have its own legal identity. In view of this position under the law, a company can enter into contracts in its own name. Similarly, a company can also buy and sell property.[5]
iv) Consequently, the company enjoys its own rights and liabilities. This provides a major advantage as in case of the failure of the business, the investors are not held personally liable regarding these debts.
v) The result is that the investors have a major benefit available in case they decide to register a company. Consequently when a company has been formed by the investors, their personal assets are not at risk, even if the business of the company fails. In the same way, the investors also have another benefit available on the registration of a company and this benefit is related with the tax payable by the parties.[6] Therefore, in case of a corporation, corporate tax has to be paid. On the other hand, the individuals like sole traders and partners are required to pay income tax. There is a difference present between the rates of these two types of taxes. Therefore, corporate tax is charged at a lower rate as against income tax. Similarly, while the profit generated by the company is considered as the income of the corporation but in case of a partnership, the profit earned by the trade is treated as a personal income of the parties.
vi) But the result of the relevant law reveals that there are certain disadvantages present in case of the incorporation of company. The first disadvantages that the process of registration of a company is more complex as compared to the creation of a partnership. Likewise, it is also costlier to register the company than the formation of a partnership.
vii) A large number of obligations have been imposed on the corporations.[7] These obligations have been imposed by the Corporations Act, 2001. At the same time, a number of obligations have also been imposed by the ASIC that have to be followed by the listed companies. For instance, obligations have been imposed on the corporations in Australia regarding the maintenance of records. Similarly, there are certain disclosure obligations to various authorities that have to be followed by the corporations in Australia. The Corporations Act also describes a number of duties for the directors. The reason behind the intervention of these duties is to ensure good corporate governance and also to provide safety to the investors.
viii) In order to achieve this purpose, civil and criminal penalties have been imposed by the Act on the directors if there is a breach of duty by the directors. Therefore in case of a serious breach of duty, the Act provides that even criminal penalties can also be imposed. On the other hand, the legislation governing a partnership is the Partnership Act. This Act provides that a partnership is formed when two or more persons start a business jointly and with a view to earn profit. It has also been provided by this legislation that the number of partners can go up to 20 persons even if there are certain exceptions to this rule.[8] Usually a partnership is created by using the written agreement but the law provides that a partnership can be created orally also. The partnership agreement provides the rights and duties of the partners. Therefore, it is easier to decide the rights of the partners if a patent agreement is concluded between the parties.
But a partnership does not enjoy the benefit of separate legal identity and the limited liability of its owners. In the same way, or the partners are considered as being jointly and severally liable for the debts of the partnership business. Therefore, if the partnership business fails, even the personal assets of the partners are liable.
i) On the basis of the situation of the clients, certain recommendations have been made to the clients regarding the most appropriate business structure that fulfills their needs.
ii) These recommendations have been made after analyzing the answers given by the clients to the questions asked about and also on the basis of the research conducted regarding the laws that deal with corporations and partnerships. The reason is that these are the two business structures that can be adopted by the clients.
iii) In the present case, the recommendation that can be made to the clients is that the most appropriate business structure, that can fulfill their needs will be that of a company. Therefore, the clients should opt for the registration of a company in order to establish the new business.
iv) On the other hand, the parties cannot go for sole trader business structure because there are 3 to 4 persons who want to start the new business and all these persons want an equal share in the management of the business. Therefore the other option available to them is the formation of a partnership.
v) But as in this case, the clients want that they should get the benefit of limited liability regarding the debts and liabilities of the business and their personal assets should not be liable for the debts of the business. At the same time, the answers given by the clients also revealed that they are also looking for tax benefits, to be provided by the new business structure adopted by them.[9]
vi) Consequently if the clients decide to register a company for starting their new business, they will have to pay tax at the rate of corporate tax. On the other hand, they will have to face income tax on the profit made by them. As corporate tax is charged at a lesser rate as compared to the income tax, a significant tax benefit will be available to the clients in case they decide to incorporate a company.
vii) Another requirement of the clients is that they want to adopt such a flexible business structure in which other persons can also join easily. In this case also, the business section of a corporation will be more suitable. Many persons can join the company easily. Apart from these benefits, the business structure of a registered company will also provide a benefit in the form of raising capital for the business.
viii) It is easier for the company to raise funds as compared to an individual or a partnership. The business structure of a corporation also shows the seriousness of the owners of the business in managing the affairs of the business.[10]
ix) Another benefit that is available in case of a corporation is that of perpetual succession. According to the law, a company continues to exist even after the members of the company had decided to quit the business. As a company has its own separate existence, it is not affected by the death or retirement of the members. But this is not the case with the partnership. A partnership comes to an end when any one member of the partnership decides to leave the business.
x) It is also worth mentioning that although a complex process is involved in the registration of a company and at the same time, as compared to a partnership, the cost of the registration of the company is also highe and the cost of compliance is also hiring case of a company but all these costs can be considered as future investment of business. Therefore if a company has been registered, a number of benefits will be available, which will not be available in case of the other business structures. As mentioned above, these benefits include the benefit of limited liability, due to which the clients will not be concerned regarding the safety of their personal assets as their liability will be confined to the investment made by them in the company.
Austin, RP & Ramsay, IM 2013, Ford’s principles of corporations law, 15th edn, LexisNexis Butterworths, Chatswood, New South Wales
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