Discuss about the Law and Economics of Agency and Partnership.
Hello, My name as Bob Smith and I have been working as system engineer for the IBM for 20 years. I have thought about an idea of carrying out business activity of my own.
That’s, Nice you have come to a right place for the advice. You must have thought of about an Idea which you want to carry out as a business. Please provided me with more details so that I can help you?
Yes of course I have made a plan for a business which I want to carry out in relation to my wish. This is actually going to be Gym as there is a significant shortage of good gyms in my locality. I want to start the business activity in a very planned and organized manner and I want my Gym to be a hit. I plan to include a healthy food restaurant as well along with the gym. In addition I would also want to have an adjacent store of body building supplements.
That is a great Idea, do u have any place in mind where you want to set up you business activity or you want a help in relation to this as well?
No actually I have a place in made just near my house and my wife is looking after the purchase matters in relation to it and so I would not be requiring help.
That is very good; however this business Idea of yours can require a significant amount of investment. Do you have access to such funds?
Yes, I know that the business which I am planning to set up require a significant amount of investment. The investment which would be required for the business according to my preliminary calculation would be that of around $2 million. This is the amount which would be required for purchasing the property I am taking about along with purchasing the necessary equipments for the restaurant, shop and Gym.
This is quite a good research which has been made by you, but do u have access to the funds which are required for the purpose of this business?
Actually I have saved up about $500,000 myself and there are two people I know who would be willing to invest in my business idea about a sum of $500000 more.
Well, yes there are two people who want to carry out the business I have planned along with me. One of them is Sara who has been my colleague for a period of five years. She has been interested in my business. However I am worried about the fact that she has been involved a couple of businesses in the past which have failed due to her management. She is willing to invest about $300000 in the business.
Another person who I know is willing to be a part of my business is Gary. I have known Gary for the last three months. He has promised me that he is going to invest about $200,000 in my business.
Actually I don’t think that Gary is a good idea and there have been management issues with Sara as well so I think I need to provide advice to you on management issues as well?
Yes of course I require advice relation to management issues of the organization as well. This is because this is my Idea and I do not want it to be spoilt by mismanagement of others. I want to retain most of the control in relation to the business in my own hands.
Ok sure we will take this into consideration while preparing and advice for you. If it is not confidential can you tell me what is your source of income and how much do you earn per annum
Yes sure I have been working as senior officers at IBM for about 20 years and I have an annual income of $200,000 excluding the incentives which I get.
This means that you are going to fall in the highest slab of income tax so do you need advice about Income Tax implications on the business as well?
Yes of course I do not want to pay more tax like any other person. I want advice in relation to a business structure which will minimize my tax liability
Ok we will surely keep it in mind while preparing advice for you tell me the assets which you own?
I have an ancestral house which is right now worth one million dollars and I have a car which I own along with my wife which I don’t think is of considerable value right now.
It is important for Bob to know that in order to operate a business in Australia there are three types of business structures which are available for the parties. These include a sole trading business, Partnership and a Company. Further a company can be subdivided into a public company, private company and a no liability company. A company under the meaning of the Corporation Act 2001 (Cth) can be limited by shares or limited by guarantees (Mann & Roberts, 2015).
The form of business structure which is easiest to form and simplest to carry out is known as a sole trader. This form of business is conducted by a single person. This does not means that the person has to do all activities in relation to the business on his own. The business owner in a sole trading business can have employees to carry out the work. At law the identity of such person and that of the business which is carried out by him is one and the same. The business name and the name of the person carrying out the business can be same. The primary advantage which this form of business structure brings to the business is that of it is very simple and easy to establish. The amount of investment which is required for initiating a sole trading business in terms of set up cost is the lowest compared to other structures. In addition to the simplicity the trader is provided with supreme control over the affairs of the company as they are not imposed with any managerial intervention. On the other hand the sole trader is not able to avail the benefits of limited liability and may also have restriction of funds to carry out the business. When a sole trading business is held for contract further it cannot be carried out by more than one person (Miller, 2015).
The next business structure which Bob must know about is a partnership. A partnership is a type of business structure which allows the business to be carried out by more than one person. There are certain features of a partnership which makes it different from other form of business structures. The partnership business also does not have the features of limited liability like a sole trading business. In addition the people who carry out the business and are known as partners are liable jointly and severally for the action of the other business partners (Cohen, 2017). This means that when a partner does an act it would be binding on the partnership business as a while. The primary advantage which parties may have in relation to carrying out their chosen business activities in form of partnership is that people having various expertise can contribute towards the business and also provided the finding required. It is also easy and cheap to form and does not require a registration. However a partnership agreement can be registered. The business has significant disadvantages as well such as the partners being jointly and severely liable for the actions of other partners. The partners can be personally liable and limited liability does not apply (Clarkson, Miller & Cross, 2014).
A joint venture is also a partnership having the same rules but it comes to an end after the work for which it has been initiated has been completed.
The final business structure which the Bob may have in relation to a particular business activity is that of a company. A company as discussed above can be public and private. This is the most unique form of business as compared to the above discussed structures. A company has “separate legal identity” which signifies that it is a person of its own and is different from those who own and operate it. As a result it has a perpetual existence and comes to an end by winding up process of law. A company being a separate person has the right to make contracts and bring or be party to legal proceedings. It also has the unique feature of limited liability (Davidson, Forsythe & Knowles, 2015). The feature signifies that the owners of the company can only be held liable to contributions made by them in the company which may be in form of shares or guarantees. The management of the organization is carried out by persons appointed by the owners known as directors. In a public company the owners are subjected to less legal scrutiny but they cannot raise public finding. In case of a public company fund raising can be done. The structure can also be used to minimize tax liabilities as well (O’kelley & Thompson, 2017).
In order to select the best possible structure which Bob may have in relation to carrying out his business activities we need to analyze the requirement of Bob in the light of advantages and disadvantages which such business activities have
In relation to the research which I have carried out it is quite obvious that Bob cannot select the business structure of a sole trader. This is because he wants to carry out a business along with his two partners and in business of a sole trader it is not possible to carry out a business which is operated by more than one person. In addition where such business structure is selected the tax liabilities of Bob will significantly increase as the business income and his own income would be the same. He would also not be able to protect the assets which he personal owns in case any problems which occurs to the business due to the lack of limited liability provisions and also he would not be able to gain the additional finding required.
As Bob wants to carry out business along with two other partners he can choose the business structure of a partnership. However Bob has provided that the partners with whom he wants to carry out the business have a bad history of Management. In this situation there are significant chances that Bob may be jointly and severally liable to the activities carried out by the other partners and relation to the business. In addition his tax liabilities would be the same like that of sole trading and he would have the same situation to his personal assets in case anything goes wrong to the business.
It is also clear from the Research which I have conducted above that Bob cannot carry out of joint venture business in relation to the selected business activity. This is because the activity is not a single business transaction and cannot be done through the help of joint venture. Further the same rules of partnership will be applicable on joint venture as well.
From the research which I have conducted I can evidently say that the best business structure which Bob can select in the given situation is that of a private company. Through the use of this business structure he may retain control over the management of the company as he has more amount of investment which compared to the other partners. In addition his tax liabilities would also be reduced as the income of the company and his personal income would be different. Further through the feature of limited liability would be able to protect his personal assets from being claimed with respect to anything which goes wrong in the business. Bob can also rise funding so sources like crowd funding with the help of this business structure.
References
Clarkson, K., Miller, R., & Cross, F. (2014). Business Law: Texts and Cases. Nelson Education.
Cohen, G. M. (2017). Law and Economics of Agency and Partnership. The Oxford Handbook of Law and Economics: Volume 2: Private and Commercial Law, 399.
Davidson, D. V., Forsythe, L. M., & Knowles, B. E. (2015). Business law: Principles and cases in the legal environment. Wolters Kluwer Law & Business.
Mann, R. A., & Roberts, B. S. (2015). Business law and the regulation of business. Nelson Education.
Miller, R. L. (2015). Business Law Today, Standard: Text & Summarized Cases. Nelson Education.
O’kelley, C. R., & Thompson, R. B. (2017). Corporations and other business associations: cases and materials. Wolters Kluwer Law & Business.
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