Understanding Different Business Structures Considered In Court

The Various From Of Business Structures Which Are Considered In Courts

The Sole Trading business structure

The Sole Trading business structure is the most inexpensive business structure which can be set up by a person for continuing business activities. The business structure is also very simple to establish. As the name signifies this type of business structure is only carried out by one single person.  This person being the sole trader or the sole proprietor is to be held responsible for all portions of the business. The person is allowed to employ other people also in the business and all decision in relation to running and managing the business is taken by such person.  This business structure has its own set of advantage and disadvantages which are discussed as follows:

Advantages to a sole trader

• The sole trader will find it very simple to initiate and run the business
• The sole trader retains supreme control over the assets and decisions in relation to the business
• The sole trader has very few reporting requirements
• The loss incurred by a sole trader is eligible to be offset and deducted from his personal income tax assessment
• The sole trader can use his own Tax File Number to for lodging a Tax return
• The sole trader does not have to pay superannuation, payroll or workers compensation tax
• The sole trader can easily change the business structure if there are expansion requirements

Disadvantages to a sole trader

• The sole trader has an unlimited liability which signifies that the personal assets of the trader would be at risk in case where thing go wrong in the business
• There are very limited opportunities provided in relation to tax planning as business profit and losses cannot be divided into family members and the tax has to be paid on all the income earned by the business.

The partnership form of business structure

Brenda has defined partnership as the situation where two or more individuals conduct a business activity mutually and have a common purpose of making profit.  In this form of business all owners are legally entitled to act on each others’ behalf.  This form of business has no distinct existence from its owners.  This business structure has its own set of advantage and disadvantages which are discussed as follows:

Advantages of partnership business structure

• When compared to companies the setting up of partnerships is easy and less expensive
• The business may be carried out by the partners under a business trading name
• The resources and expertise of people are combined in partnership form of business and thus the business can function more efficiently as compared to a sole trader
• This form of business is also simple to administer. Any profit and loss are shared between the partners based in the agreement between them or their contributions to the business
• The profit in a partnership business is not required to be disclosed to the public unlike in that of companies
• A partnership can easily change the business structure if there are expansion requirements

Disadvantages of partnership business structure

• Personal differences may hamper business activities
• Personal tax rates are imposed on the business
• All partners can participate in the management which may create differences
• The partners are severally and jointly liable for the debts and liability incurred by the business through any other partner

The company form of business structure

A company is an entity of its own. This means that its existence is totally different to the existence of its owners. It is alive even where its owners have died. It is a citizen of the society and has to pay tax based on its own income. However as it is artificially formed it cannot take decision of physically operate itself. The responsibilities of its operation are provided by its owners to officers and directors.  A company can be further subdivided in a Public and a proprietary company. The former can raise public funds and is subjected to increased regulatory obligations as compared to the latter which cannot raise funds. This business structure has its own set of advantage and disadvantages which are discussed as follows:

Advantages of a company structure

• The form of business provides limited liability for all owners (shareholders)
• Ownership can be transferred through the sale of shares to any other person
• A company can employ its own shareholders as its employees
• The rate of taxation is more favorable
• The company is allowed to trade in any place within the country
• This form of business structure provides access to broad skill base and capital

Disadvantages of the company structure

• The setting up, maintenance and winding up of this form of business can be expensive and complex.
• There are complex reporting requirements in this business
• All financial affairs are made public under this business structure
• Where there is a failure in the part of the directors to meet the duty imposed on them by legal provisions they can in their personal capacity be held liable by the company or its creditors  
• Profits which are distributed to the shareholders are taxed

Each of the above discussed structures through which business activities are carried out is imposed with specific obligations by law which needs to be complied to avoid legal sanctions. The advantages and disadvantages of the structures have already been discussed and thus Harry, Meghan, William, and Kate would be recommended a business structure based on its feasibility to their business.

The Sole Trading business structure

Legal obligations in a sole trading business

As this form of business structure is managed by only one person and there is no difference between the person and the business there is no specific law which have been enacted to deal with this form of business structure. This form of business structure is subjected to general legal principles. These include legislation in relation to Employment which is the Fair Work Act 2009 (Cth) dealing specifically with employment issues such as unfair dismissal, sham contracting and National Employment Standards. The provisions of the Australian Consumer Law are also applicable on this form of business which implies that they must treat and consumers fairly and not indulge in deceptive and misleading activities. The type of business carried out by this structure will generally derive the law which is applicable in relation to it.

Form the analysis in the previous part it is clear that the business structure of sole trading would not be applicable on the business activity planned by Harry, Meghan, William, and Kate as they are four individuals and this business is applicable only on one individual.

Legal obligations in a partnership

Unlike a sole trader partnership in Australia are governed by their own specific legislation which at the federal level is the Partnership Act 1963(Cth). In addition to the federal legislation each state in Australia has been provided with a specific partnership legislation which governs partnership business structures in the particular state. The definition of who is a partner is provided through section 6 of the legislation. There are various rules for analyzing whether a person is a partner or not such as joint ownership, participation in gross returns, intention of operating for profit, sharing of profit and losses and exercise of partners’ rights. It has been provided through the provisions of section 9 of the legislation that the scope of liability of a partners is potentially very large. Every partner is an agent as well as the principal of the partnership business. In the case of Lang v James Morrison & Co Ltd (1911) 13 CLR 1  the court had provided a ruling that where authority provided to a partner has been exceeded by him or her, the act will still bind the business if the person who was dealing with the parties had no knowledge that the authority prohibits a partner form entering into the transaction. In addition other general rules such as the Fair Work Act 2009 and the Competition and Consumer Act 2010 (Cth) are still applicable on the partnership business. In the given situation it has been provided by the facts that Harry, Meghan, William, and Kate want to carry out a party planning business. In addition Harry and Meghan do not want to participate in the business and minimize their legal liabilities. It has been provided that partnership has unlimited liability. Thus this form of business structure is not suitable for them.

Advantages to a sole trader

Legal obligations for a company  

A company is a form of business structure which is subjected to the maximum legal obligations. The main legislation which encompasses the functioning of a registered organization is the Corporation Act 2001 (Cth). All companies who are operating in the country are dealt with by the Legislation irrespective of state or federal jurisdiction. The legislation incorporates the common law principles provided by the case of Salomon v A Salomon & Co Ltd [1896] UKHL 1 that the company has a separate identity from the owners. For a company to be formed it has to be registered with the ASIC (Australian Securities and Investment Commission). Companies can be limited by shares and by guarantees. The ASX (Australian Securities Exchange) sets out corporate governance principles which have to be complied with by the organizations on a “if not why not” basis. The powers of the company are set out though its constitution. However as per the principles of the section 124 of the Act an act which is not within the limits of the constitution cannot be stated as void just because they are not in compliance with the constitution. Further the directors and officers of the company are the agents of the company as per section 125. The constitution of the company has the effect of a contract between the members and the company and the members themselves. The company can execute documents through a director and secretary or two directors under section 127 of the Act.

In the given situation Harry, Meghan, William, and Kate are advised to carry out their business activity in form of a proprietary company. The reasons for this recommendation are as follows. Firstly it has been provided in the given situation that Harry, Meghan, William, and Kate want to carry out a party panning business. As this is a large scale operate there are significant legal risks involved in it such as negligence by employees. In the given situation the risk of Harry, Meghan, William, and Kate would not include the risk of being liable for negligence unless that act in personal capacity as a company is a separate legal entity. It has been further provided that William and Kate do not want to have active participation in the business activity. Where a proprietary company is selected they can only be the shareholders of the company and leave the management to Harry and Meghan. Further they also want their liability to be limited in relation to the business and this can be done through this business structure as a company has limited liability for their member which is only to the extent of contribution made by them. Further it has been provided that Harry and Meghan having an ethical nature wish to donate their earnings. This wish would be difficult to fulfill in case of a public company as the shareholders will demand more profit for themselves and the company. Thus it can be provided evidently that a proprietary company is the best suitable business structure for Harry, Meghan, William and Kate based on their requirements and circumstances.

Disadvantages to a sole trader

The Obligations Of Harry, Meghan, William, And Kate In a Proprietary Company

The main legislation which governs the obligations of those who are in charge of a Proprietary company in Australia is the Corporation Act 2001.

The individuals who are the mangers of a company are known as its directors under the meaning of s 9 of the CA.  As discussed above a company is an artificial legal person which means that its operations have to be managed by natural persons. In addition as a proprietary company may have up to 50 members it would not be feasible to involve all of them in the management. Thus those who manage such organizations have to ensure that they work in favor of the interest of the other shareholders as well. In order to ensure that such principles as followed the CA incorporates general duties for directors. These duties are set out via section 180-183 of the Act and also include section 191. The directors of the company are further imposed with a duty not to trade while the company has become insolvent under section 588G of the CA.

The duty under section180 entails the responsibility of an officer or a directors to perform obligations which due diligence and care. However the interpretation of due diligence and care can be very wide and therefore to address the issue the section entails a specific test. The test is applied to analyze compliance with this section. Under the test the situation is analyzed through a process of comparison where the actions of the directors are compared with a reasonable director. This duty is owed by the directors to the company. Further it the case of ASIC v Cassimatis (No. 8) [2016] FCA 1023 it had been ruled by the court that the duty under this section is also violated when the company incurs the loss of a reputation. Further in the case of  Shafron v Australian Securities and Investments Commission [2012] HCA 18 the court made it clear that the duty under this section can be contravened where the directors have contravened any other provision the legislation as a director is expected to know the law and no reasonable director would violate legal provisions in any given situation. Thus Harry, Meghan, William, and Kate would have to keep in mind that they act with care and diligence. In addition it was stated in the case of ASIC v Healey (2011) FCA 717 at [166] that the duties are also applicable in non-executive directors and where William, and Kate do not want to be a part of the management and be executive directors they can be held liable for contravention of the duties.

The partnership form of business structure

The provisions of Section 181 of the legislation further provide a duty to Harry, Meghan, William, and Kate to act in “good faith and proper purpose”. Their actions should be form the interest of the company and not for their own interest. They have a fiduciary obligation to the company and should act within the limits of their powers. They should known that when they have inevitable fallen into a situation where there is a contradiction between their own personal interest with the interest of the company, the interest of the company has to be given priority.  The provisions had been discussed by the court in the case of Asic v Adler and 4 Ors [2002] NSWSC 171. Further under the rules provided in section 182 and 183 of the CA Harry, Meghan, William, and Kate cannot use to the detriment of the company their position or any confidential information of the company. It has been provided under the rules of section 191 that any sort of personal interest in relation to a transaction which is to be entered upon by the company has to be disclosed by a director to the board or else this would lead to the contravention of this section.  Where it has been found that the directors have violated these duties recklessly and intentionally criminal sanction under The Criminal Code is imposed on them by section 184.

Further implications will be imposed on Harry, Meghan, William, and Kate in relation to insolvent trading under section 588G. They are not allowed to enter into a transaction when a company is insolvent or when they have a reasonable belief that the company may become insolvent if it enters into the transaction. The directors may be liable in personal capacity under section 588G when they do not obey the rules of this section. However under section 588H of the Act where the director had made reasonable reliance on advice provided by others that the company is solvent they may be avoid liability for insolvent trading.

When the directors fail to comply with the civil penalty provisions under section 1317E they can barred for managing any organization for a certain period as per 206C and pecuniary penalties of up to $200000 to be paid to the commonwealth under section 1317S.

ASIC v Cassimatis (No. 8) [2016] FCA 1023

ASIC v Healey (2011) FCA 717 at [166]

Australian Competition and Consumer Act 2010 (Cth)  

Corporation Act 2001 (Cth)

Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and cases in the legal environment. (Wolters Kluwer Law & Business, 2015).

Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and cases in the legal environment. (Wolters Kluwer Law & Business, 2015).

Fair Work Act 2009 (Cth)

Hannigan, Brenda. Company law. (Oxford University Press, USA, 2015.)

Hannigan, Brenda. Company law. (Oxford University Press, USA, 2015.)

Lang v James Morrison & Co Ltd (1911) 13 CLR 1  

Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. (Nelson Education, 2015.)

Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. (Nelson Education, 2015.)

Partnership Act 1963 (Cth)

Richard Baumfield, Richard P. Copp, Robert Cunningham, Paul Harpur, Alex Wong, Company Law: An Interactive Approach. (John Wiley & Sons Australia, 2016)

Richard Baumfield, Richard P. Copp, Robert Cunningham, Paul Harpur, Alex Wong, Company Law: An Interactive Approach. (John Wiley & Sons Australia, 2016)

Salomon v A Salomon & Co Ltd [1896] UKHL 1

Shafron v Australian Securities and Investments Commission [2012] HCA 18