a.Need to explain various business structure.
1- sole trade
2-partnership
3-company
4-joint vanture
5-trust
you have to explain the proper structure,advantage,disadvantage,tax liability and cases you have to choose one specific structure for the client.
b.Disucss the Directo duties List+discuss Note the legislation.
1.Elizabeth McQueen,
982, Sussex Building, King’s Street,
Sydney, NSW.
Re: Suitable business structure
John Smith,
6284, Park Avenue,
Sydney, NSW.
Date: 27th May, 2018
Dear John,
This is with reference to the advice sought on different business structures, which can be opted in Australia, for the purpose of a person running their business in the nation. There are majorly four different types of business structure in the nation and these include sole trader, partnership, trust and company. Even though there are other forms of business structure available, like joint venture; but these four are the predominant ones. For the purpose of this advice, the different aspects of these business structures have been detailed below.
Sole Trader
A sole trader or sole proprietor is the simplest form of business structure in any nation. This form allows a person to start their business alone and they are the whole sole in charge of such business. The Tax File Number of the individual running sole proprietorship is used for the purpose of filing tax returns of sole trader. Apart from this, the sole trader also has to get a registered ABN and often is required to get a GST registration as well. The advantages of it include ease of formation, full control over business operations, privacy, flexible decision making, and taking advantage of taxable losses and profits. However, this form has its fair share of disadvantages as well. These include limited capital, unlimited liability of the sole trader, huge risk profile, business life being equivalent or less than life of sole trader, and limited talent pool (Gibson & Fraser, 2014).
Partnership
When two or more individuals combine together to carry out a business with shared interest in a mutual manner, for the purpose of earning profits, a partnership is formed, as per Joyce v Morrissey [1998] TLR 707. As is the case with sole traders, forming partnership is not a work of hassle. This is particularly because the different partnership legislation in the nation does not make it an obligation to create a partnership deed. However, it is always suggested to draw a partnership deed so every aspect of partnership is clarified. The partnership form has its own Tax File Number, ABN, GST registration and is also required to file tax returns annually. Partners are free to decide on the sharing of interest and capital contributions. Even though the partnership is required to file a tax return, no income tax is required to be paid, since the profit or losses are distributed amongst partners based on their equity interest (Abbott, Pendlebury & Wardman, 2007).
The advantages of partnership include minimum setting up costs, shared obligations, higher financial contribution in comparison to sole traders, ease of operations, tax losses accessible to partners, flexibility, privacy, help in decision making, and more skill base. The disadvantages of it include unlimited liability, joint and several liabilities of partners, disagreements in partnership leading to dissolution of partnership, decision making conflicts, transferring or terminating partnership can be complicated, and limitations on number of partners based on jurisdiction in which the partnership is (Latimer, 2012).
Joint Venture
Joint venture denotes the relationship which takes place between two or more parties in order to take up a commercial activity for a commercial gain. As against partnership, the joint ventures exist for limited time period. As the joint venture is not an individual legal entity, it does not pay the taxes. However, the joint venture income is taxed based on the income received. There is a unique advantage of two entities collaborating their best resources and skills to reach a common objective, bringing in the best results. It comes with the advantages of increased financial capacity, ability of cost sharing, spreading risks, and getting specialized expertise for a specific project, access to high tech equipment, additional skills base and ease in getting a foothold in new area. The limitations of joint venture cover disagreements, improper agreement resulting in lack of clarity, unequal contributions to venture, financial limitations, incompatible management styles and culture, and government restrictions (Latimer, 2012).
Trust
A trust is defined as a structure in which the business is carried on by the trustee on behalf of the members of trust. The trustee has the legal liability for the debts of trust and can make use of the assets of such trust for meeting its debts. Where there is any shortfall, it becomes the responsibility of the trustee of brining in the difference. The trustee also has the responsibility of managing the tax affairs of trust, which includes registration of trust in tax system, paying tax liabilities and filing tax returns of trust. The share of net income of trust is included in beneficiaries’ incomes in their personal tax returns. Each of the type of trust, i.e. super funds, family trusts and deceased estates have special rules for them. In Knight v Knight (1840) 49 ER 58, a family trust had been created. The trust comes with the advantages of protection of assets, reduced liability particularly when it is a corporate trustee, and income distribution and flexibility of asset. The disadvantages of it include complexities in establishing and administering trust, expensive, difficultly in dismantling, dissolving and in brining changes, limitations on distribution of losses as only profits can be distributed, and the profits which are retained for purpose of being reinvested in business incur penalty tax rates (Gibson & Fraser, 2014).
Company
A company is a separate legal entity in eyes of law, as per Salomon v A Salomon and Co Ltd [1897] AC 22, which is run by different people, who are given different status from the company. It is basically a legal association where the purpose is to finance and operate the operations of business. Despite a company being a separate legal entity, the court have the right of piercing corporate veil, in sense of justice and fairness, and to hold the exact party liable, as was seen in CSR Ltd v Young [1998] Aust Tort Reports 81-468. The companies have to pay a corporate tax at flat rates. The advantages of company include higher capital base, capability of raising funds from public for public companies, perpetual succession, tax benefits, limited liability, ease of transferring shares, asset protection due to corporate veil, and proper governance system. The disadvantages of company includes limited tax concessions particularly when it comes to capital gain tax regarding real estate or assets, insolvent trading risk, breach of director duties, loss of control, high cost of formation and running, high regulations and compliances, and no privacy (Marson & Ferris, 2015).
Advice
Based on the comparison of different business structures available for the client, it is suggested for them to start a sole trader form of business, as the needs of the client are small business.
Yours Sincerely,
Elizabeth McQueen
2.Directors are the individuals who run the business operations of the company on behalf of the shareholders. Due to the magnitude of work given to them, they are imposed with certain duties. These duties are covered under both common law and statutory law. The crux of both these laws, in terms of the imposed duties is similar and this discussion is focused on the director duties as have been covered under the statutory law of the nation (Cassidy, 2006). The Corporations Act, 2001 (Cth) is the legislation which applies on all the companies in Australia. This legislation, through its Part 2D.1 specifically covers director duties, and some other duties of directors are also covered under different segments (Plessis & Koker, 2017). Some of these duties have been covered below.
Section 180: This section imposes a civil obligation on the directors of undertaking their work in a careful and diligent manner. This section provides that a director has to use their powers and discharge their duties as a reasonable person would do, had such a reasonable person been the director of the company, had same responsibilities as the director and was faced with the same situations as the director of this company, as had been proved through Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405.
Section 181: This section imposes a civil obligation on the directors regarding undertaking their work for proper purpose, in good faith and in best interest of the company. This has to be done while the director uses their powers and discharges their duties. The leading example of this section being breached is Asic v Adler and 4 Ors [2002] NSWSC 171.
Section 182: This section imposes a civil obligation on the directors regarding not making an improper use of their position while the director uses their powers and discharges their duties. The leading example of this section being breached is R v Byrnes (1995) 130 ALR 529.
Section 183: This section imposes a civil obligation on the directors regarding not making an improper use of the company information while the director uses their powers and discharges their duties. This section played a prominent role in Amcor Ltd & Ors v Barnes & Ors (Ruling No 2) [2018] VSC 137 and in Asic v Adler and 4 Ors.
Section 184: This section imposes a criminal obligation on the directors where a director recklessly or intentionally acts in a dishonest manner, while the director uses their powers and discharges their duties. This particularly becomes an offence when such a conduct is undertaken to benefit self or someone else, or results in company being caused detriment. In R v Emini & Blumberg [2011] VSC 336, the two directors were sentenced as they admitted to breach of this section.
Section 588G: This section makes the directors liable where they indulge in insolvent trading. The directors are thus restricted from incurring any debts on the company when they believe that the company is insolvent or have reasons to believe so, or do know that undertaking such debt would result in the company becoming insolvent (Baxt, 2007). Where such a debt is undertaken, the welfare of stakeholders is ignored by the directors, thus making them liable, as had been held under Woodgate v Davis (2002) 55 NSWLR 222.
Section 191-195: These sections impose the obligation on directors to disclose the material personal interest in the matters which relate to the affairs of the company. There is an extensive list of interests which are not required to be disclosed, under the act.
Section 208-210: These sections relate to the financial benefits to the related parties in case of public companies. These sections require shareholder approval in such cases where a financial interest is given to a related company by a public company. This is based on the need for proper safeguards and independence to be deployed in cases of relevant transactions, as was seen in Granby Pty Ltd v FCT (1995) 129 ALR 503; 30 ATR 400 and in Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 11 ALD 52; 75 ALR 287.
Section 285-318: These sections cover the fiduciary duties in context of financial reporting.
Others: There is also a need to take care of sections 189, 190 and 198D as these can result in possible breach of director duties (Paolini, 2014).
The reason for emphasizing on director duties so much stems from the crucial role played by directors in every company. They are the ones who conduct the operations of business for the company on behalf of the shareholders. This makes it obligatory for them to do this work without any malice or unjustness. The adherence to these duties is magnified in context of recent failures in ASIC v Hobbs [2012] NSWSC 1276, ASIC vs Cassimatis [2013] FCA 641, ASIC v Flugge & Geary [2016] VSC 779, ASIC v Stephen William Vizard [2005] FCA 1037, and ASIC v Whitlam [2002] NSWSC 591. These are literally just five cases out of the plethora of corporate governance failure. In the light of such failures, the adherence to the director duties laid down above becomes even more significant.
References
Abbott, K., Pendlebury, N., & Wardman, K. (2007). Business law (8th ed.). London: Thompson Learning.
Amcor Ltd & Ors v Barnes & Ors (Ruling No 2) [2018] VSC 137
Asic v Adler and 4 Ors [2002] NSWSC 171
ASIC v Hobbs [2012] NSWSC 1276
ASIC v Stephen William Vizard [2005] FCA 1037
ASIC v Whitlam [2002] NSWSC 591
ASIC vs Cassimatis [2013] FCA 641
Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 11 ALD 52; 75 ALR 287
Baxt, R. (2007). Duties and Responsibilities of Directors and Officers (19th ed.). Sydney, New South Wales, Australia: The Australian Institute of Company Directors.
Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.
Corporations Act, 2001 (Cth)
Gibson, A., & Fraser, D. (2014). Business Law 2014 (8th ed.). Melbourne, Pearson Education Australia.
Granby Pty Ltd v FCT (1995) 129 ALR 503 ; 30 ATR 400
Joyce v Morrissey [1998] TLR 707
Knight v Knight (1840) 49 ER 58
Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.
Marson, J., & Ferris, K. (2015). Business Law (4th ed.). Oxford: Oxford University Press.
Paolini, A. (2014). Research Handbook on Directors Duties. Northampton, Massachusetts, United States: Edward Elgar.
Plessis, J.J.D., & Koker, J.N.D. (2017). Disqualification of Company Directors: A Comparative Analysis of the Law in the UK, Australia, South Africa, the US and Germany. Oxon: Routledge.
R v Byrnes (1995) 130 ALR 529
R v Emini & Blumberg [2011] VSC 336
Salomon v A Salomon and Co Ltd [1897] AC 22
SR Ltd v Young [1998] Aust Tort Reports 81-468
Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405
Woodgate v Davis (2002) 55 NSWLR 222
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