Explain the nature, characteristics, and advantages and disadvantages of the partnerships, trusts, and companies available to Oliver and Emma.
Partnership is a business structure that involves at least two parties, who invests equally or otherwise with the common goal of profit making in mind. General and limited are the two forms of partnership business. They share the rights and he liabilities of the partnership firm jointly. They bears the burden of an unlimited liability. In the UK, the Partnership Act 1890 governs Partnership firms.
Characteristics and Nature
Partnership is a simple and inexpensive form of business, which is easy to set up and similarly easy to wind up as well. It takes two person at least to start a partnership firm, which can go up to 100. In a partnership firm, the partners have an unlimited liability. The partners are to be held individually as well as collectively liable for the firm’s debts and liabilities. They are liable to share the profits and losses that are incurred from the business, as per the contribution of the partners. The partners are the principal as well as the agent in a partnership firm. They are bound with each other, as long as they are partners running the firm. The partnership relation is established on a contract, either oral, implied or written. A partnership firm would come to an end in case the partners die, loses their sanity or becomes bankrupt. Registration is not mandatory for a partnership firm. However, the firm must register itself for filing GST for an annual turnover above $75000.
Advantages
Partnership firms are easy to establish and therefore it is easy to change its structure as well. It is easier to wind up and distribute the assets among the partners in a partnership set up. It bears better opportunity to borrow funds as the financers lend on the face value and financial condition of the partners, and generally not based on the condition of the firm. Often the highly productive and performing employees are added to the board of partners for their intense contribution to the firm. The affairs of the firm is easily kept secret for the number of deciding members are less, and therefore it involves lesser external control over the firm. Lesser owner involves less complexity to divide the profits and dividends.
Disadvantages
One of the biggest drawback of partnership firm is that the partner share unlimited liability of all the debts and other obligations of the firm. The firm’s debt may affect the personal properties and assets of the partners. The partners are held responsible for the wrongful activities of one another. Additionally, it is mandatory to divide the assets and fund of the firm every time a partner joins or leaves the firm, which becomes a problem.
A trust is a type of business structure that involves a person or a company (trustee) who looks after and takes good care of the trust property for the benefit of another (beneficiary). The trustee is under the obligation to give the benefits or income earned from the trust property to the beneficiary, for whom the trust was formed on the first place, as per the trust deed. Usually, a trust is created to support people of a large family who are incapable of maintain themselves of the time being.
Characteristics and Nature
A trust involves a handsome amount of money to set up. It is created by way of a trust deed that gives the overview of the objective and purpose of the trust. A trustee is appointed to look after the trust property for the benefit of the beneficiary or beneficiaries. He is officially to be held responsible for the working of the trust. The trustee cannot use the trust property or the income of the trust for his personal objective. A person or a company can be a trustee.
Advantages
A corporate trust bears limited liability and it is easier maintain privacy in a trust in comparison to company. The beneficiaries receives same or different share of returns from the trust property as per the trust deed. The beneficiaries are not required to pay a separate tax for the income from the trust property; it is included along with the usual income tax.
Disadvantages
Setting up a trust involves several complexities and consumes a huge amount of time a well. It is involves steep cost for establishing and maintaining a trust. It is even more difficult to borrow or to take a loan to make a trust. Additionally, the trust deed may impose restrictions on the trustees and the beneficiaries.
A company is another type of business set up which bears a separate legal entity, just like a person. It can sue and can be sued in its own name. A company can be private or public, as per the necessity of the parties forming it. Private companies are called ‘proprietary limited’ companies which are restricted from raising fund by issuing shares to the general public, while the ‘public’ companies can issue share to the public for raising capital and other funds if they need so. The Corporations Act 2001 regulates the various types of companies in Australia.
Characteristics and Nature
A company has its own legal identity, like a person. It has a common seal and has a perpetual existence. It can sue and can be sued in its own name. It has its own properties and assets, movable or immovable. A company has a limited liability, unlike partnership. The shareholders are not liable to pay the debt of the company from their personal earnings. It involves a heft cost to establish a company, for it is a complex business structure. The income of company stays with the company and does not belong to the directors or owners. In Australia, a company is registered under the Australian Securities and Investments Commission (ASIC) and it is follows the Corporations Act 2001 for all its regulations. The company requires mandatory registration for GST if the turnover exceeds $75000.
Advantages
Shareholders have a limited liability, which makes them free from taking the responsibility of the debts of the company. For a public company, it is easy to change ownership by way of transferring or selling the shares to another. Shareholders are appointed by the company for taking the responsibility of different important positions of the company, required for good governance. In Australia, a company that is registered under the ASIC can carry out its business anywhere within the country. A company has the opportunity to generate huge amount of funds, as it is open to collect money by offering its shares to the public. It has the scope to engage greater number of human resource for its bigger magnitude. Taxation system is easier for a company as it is responsible for paying its own taxes out of its own earnings; it does not involve the owners or the shareholders to pay for it.
Disadvantages
Establishing a company involves a good amount of monetary investment and therefore involves heavy costs to wind up its business as well. both establishment and winding up involves complexities. A public company’s financial affairs are open to public for they are to be registered with a stock exchange for regular buying and selling of its shares. This defeats the privacy factor of a public company, unlike a proprietary company. The directors and the shareholders are liable for the company affairs. The court may pierce the ‘corporate veil’ when necessary. Additionally, the profits earned by the shareholders are taxable separately.
Summarise the rights, duties, and liabilities associated with the various partnerships, trusts, and companies available to Oliver and Emma.
Rights
In a partnership firm, the partners bears the right to be involved in the business affairs. They have the right to take every kind of decisions for the benefit of the firm. They can assess the books of account to keep a check on the income and expense of the firm. They have the right to derive the profits earned by the firm, as per their contribution for establishing the firm or as agreed in the partnership agreement.
A partner has the right to reimburse the expenses that he has made for any purpose of the firm, whether in general or in emergency. A partner may make use of the partnership property or asset for business purpose. A partner may take emergency business decision alone, in the absence of other partners. A partner may choose to retire any time he wants, with prior notice. A partner who has joined the firm recently would not be held responsible for any obligation of liability that had arose before his joining. A partner may invest or participate in a similar or competitive business upon resignation, unless there are restrictions on his agreement with the firm.
Duties and Liability
One of the biggest liability of partnership firm is that the partner share unlimited liability of all the debts and other obligations of the firm. The firm’s debt may affect the personal properties and assets of the partners. The partners are held responsible for the wrongful activities of one another. It is mandatory to divide the assets and fund of the firm every time a partner joins or leaves the firm. A firm is required to file a TFN or Tax File Number and it requires an Australian Business Number (ABN) to operate as a business house. The partners are supposed to pay income tax on their own earnings as well. The partners needs to set up their own retirement fund for they are not the employees of the firm.
Rights of the Trustees and the Beneficiaries
The trustee must be compensated for the costs and expenses they make for the trust property and for the welfare of the beneficiary. A trust has the right to personally approach the beneficiary to reimburse his expenses made for the trust property and assets. A trust may seek the legal help and may move the court in case any dispute arises between him and the beneficiaries pertaining to the trust property or otherwise. In case of breach of trust, a trustee may seek for legal relief or may opt for alternative dispute resolution, as included in the trust agreement. Breach of trust involves loss of either party and therefore a trustee may claim compensation if the trust is breached by the beneficiary.
On the other hand, the beneficiary bears the right to receive the incomes and the benefits coming from the trust property. He has the right to information regarding any changes to the trust property, be it any addition, alteration, upgradation or modification. He has the right to ask for a report pertaining to the income and expenditure of the trust, including any distribution of the fund of the trust. The beneficiaries have the right to appeal to the court for the removal or change of the trustees or one of them. They might also file a petition to the court for dismissing trustee.
Duties and Liabilities of the Trustees and the Beneficiaries
A trustee shall not jumble up the trust property with his own. He is liable to maintain proper books of account that has all the details of the income and expenditure incurred for the firm. He must not use the trust property for his personal purpose. A trustee is under the obligation to treat the beneficiaries equally, unless the trust deed specifies otherwise. The trustee must take utmost care of the trust property and make investments to make the property grow and flourish. He must maintain details of the expenditure, tax returns and other documents pertaining to the trust. Overall, he is in charge for taking good care of the trust and give the beneficiary his share of the benefits incurred from the trust from time to time.
The beneficiaries would be held liable for reimbursing the trustee for the expenses they make for the trust property. Beneficiaries must have the knowledge about the trust and the way things work pertaining to the trust property. They must keep a tab on the trustee and make note of the functioning of the trust so that they can review the activities of the trust when necessary. They are under the obligation to restrict the trustee whenever any disputes or malpractices are detected. Beneficiaries must understand the management system of the trust and therefore must have the knowledge about the accounts of the trust property. They must be aware of the administrative system of the trust as well.
Rights of the shareholders and the directors
A director bears the right to enforce statutory regulations for carrying out the course of business as per the requirement. They have the right to enforce the company constitution for non-compliance. He has the right to lay down his opinion of the benefit of the company in the board meetings. He has the right to retire, with prior notice. He has the right to be in this position and carry out his duties laid down under the Corporations Act until removed or until his term as a director exhaust. The director has the right to draw remuneration from the company as per the agreed terms of the contract.
A shareholder bears the right to be a part of the company meetings. He should receive the annual report of the company, which would provide him the overview of the condition of the company, including its turnover, expenditure and debts. He has the right to receive dividends. He can go through the company’s books of account. He has the right to sue the company in case a dispute arises that requires legal intervention.
Duties and Liabilities of the shareholders and the directors
Directors can be held liable for the debts of the company when the ‘corporate veil’ is pierced by the court in case of disputes. The liability of the directors continue even after the company has wound up its business or has deregistered. They can be made liable to pay for the debts for reasons like, loss incurred due to breach of director’s duty, insolvency, debts incurred by the company in the capacity of a trustee to a trust property of a beneficiary, illegal activities, or by way of other actions effected by the director or directors.
Whereas, the shareholders are not liable to pay the debts of the company even where the corporate veil is pierced by the court however they are obliged to pay the price of the unpaid shares.
TO: Oliver and Emma
FROM: Beanstalk business consultancy firm
SUBJECT: Legal Advice
DATE: 15 December 2018
Issue
To advice Oliver and Emma regarding the best available business structure for their purpose, along with reasons.
Application
By analysing the nature, characteristics, advantages, disadvantages, rights and liabilities of partnership, trust and company, it can be deduced that the business structure of a company would suit Oliver and Emma the best. A company being a separate legal entity is just like a person. It can sue and can be sued in its own name. A company can be private or public, as per the necessity of the parties forming it. Private companies are called ‘proprietary limited’ companies which are restricted from raising fund by issuing shares to the general public, while the ‘public’ companies can issue share to the public for raising capital and other funds if they need so. The Corporations Act 2001 regulates the various types of companies in Australia. Oliver and Emma can take up the role and responsibility of director who would be solely responsible for running the business, taking all the major decisions for the benefit of the company.
Additionally, Oliver and Emma should make the company a trustee for their dependants to be the beneficiaries of the trust. The trust company would be like a successor trustee for the dependants of Oliver and Emma who would be the beneficiaries of the trust. The trust company would act as a financial assurance to Oliver’s old mother and disabled child, and Emma’s adult son who needs financial support. A trust involves a person or a company (trustee) to look after and take good care of the trust property for the benefit of another (beneficiary). The trustee is under the obligation to give the benefits or income earned from the trust property to the beneficiary, for whom the trust was formed on the first place, as per the trust deed.
Oliver and Emma could invest in a proprietary company which would bear the properties and merits of a private company as stated under the Corporations Act 2001. Emma could be the Director for she plans to devote her majority time in the business while Oliver being the passive investor for he plans to invest only. Oliver’s disabled child and aged mother, and Emma’s son who requires financial assistance for higher studies would be held as the beneficiaries of the trust company who would be able to reap the benefits of the company even in the absence of Oliver and Emma. They would be eligible to carry out the rights and liabilities of beneficiaries as discussed above.
Conclusion
Therefore, to deduce the conclusion, it would be best to say that the set up of a company would be the best business structure for Oliver and Emma where the former could be an investor while the latter can be a director of the company, who would be actually running it. In addition, Oliver and Emma could assign the company to be a trustee of their dependants who would be able to enjoy the revenue generated from the company being the beneficiaries.
Books/ Journals
Burns, Paul. Entrepreneurship and small business. (Palgrave Macmillan Limited, 2016)
Cohen, Elaine. CSR for HR: A necessary partnership for advancing responsible business practices. (Routledge, 2017)
Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. “Commercial applications of company law.” (2013)
Nyombi, Chrispas. “Lifting the veil of incorporation under common law and statute.” (2014) International Journal of Law and Management56.1: 66-81.
Pozen, Robert C., et al. “trusts&trustees.” (2012) Trusts & Trustees 18.3
Todeva, Emanuela. Business networks: strategy and structure. (Routledge, 2006)
Tomasic, Roman, Stephen Bottomley, and Rob McQueen. Corporations law in Australia. (Federation Press, 2002)
Ytterberg, Alan V., and James P. Weller. “Managing Family Wealth Through a Private Trust Company.” (2010) ACTEC LJ 36: 623.
Legislations
Corporations Act 2001
Partnership Act 1890
Websites
Company – Advantages And Disadvantages – Business Tasmania (2018) Business.tas.gov.au <https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/proprietary-company-advantages-and-disadvantages>
Company (2018) Business.gov.au <https://www.business.gov.au/Planning/Business-structures-and-types/Business-structures/Company>
Partnership – Advantages And Disadvantages – Business Tasmania (2018) Business.tas.gov.au https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/partnership-advantages-and-disadvantages
Partnership (2018) Business.gov.au <https://www.business.gov.au/Planning/Business-structures-and-types/Business-structures/Partnership>
Partnership (2018) Business.vic.gov.au <https://www.business.vic.gov.au/setting-up-a-business/business-structure/partnership>
Trust – Advantages And Disadvantages – Business Tasmania (2018) Business.tas.gov.au <https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/trust-advantages-and-disadvantages>
Trust (2018) Business.gov.au <https://www.business.gov.au/Planning/Business-structures-and-types/Business-structures/Trust>
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