1.Business Structures along with their pros and cons
In order to undertake a business activity it is significantly important for the person to select an appropriate business structure which would be best suited for the business activity in context. Each of the business structures which are available at law for parties planning to carry out a business activity have their own distinct features along with the advantages and disadvantages. Thus parties have to select the structure they want to carry out the business activity within the light of the balance between the advantages and disadvantages of such structures. This part of the assignment seeks to set out the types of business structures along with their merits and demerits to Harry, Meghan, William, and Kate with respect to the business activity they seek to carry out.
It has been provided by Hanrahan, Ramsay and Stapledon that when a person is planning to initiate a business in Australia he or she must have knowledge about the fact that there are three forms of business structures which exists. Each of the three structures is different from each other in the terms of their features. The most common and simple form of business structure which is best suited for small businesses is a proprietorship or a sole trading structure. The second business structure is a partnership which requires two or more people to exist. The third structure of business is the most complicated and the most used structure because of its distinct features and is known as a company.
It has been argued by Latimer that a sole trading business is the best suitable business for a person who has the intention of carrying out a small business activity. Where a person is a sole trader he can alone control all the affairs of his business which is subjected to minimum legal supervision. A person who is low on budget can use this structure as it requires negligible money in relation to the cost of setting it up. There are no legal and formal procedures which have to be complied with while forming this business structure and it can be formed all long as it do not carry out an illegal activity. However it has been stated by Graw that this form of business structure subjects the owner to significant risk. This is because there is no material difference between the owner and the business. Any liability which has been incurred by the business is the personal liability of owner. There is no way in which this business can raise additional funding from the public.
Partnership form of a business can only be established if it has two or more owners. The owners of a partnership business are limited to 10 or 20 based on the business type. These owners at law are known by the term of “partners”. This form of business includes the management of the business by the partners in the same way like it is done by a single person in relation to proprietorship. This form of business works under the principles of agency law. All partners are held to be agents of each other and the business. A mistake done by one partner subjects another partner to liability. The structure provides support to the owners in terms of funding and management as more people are involved. However the structure is subjected to unlimited liability.
A company in reference to the law is a separate legal individual and also a legal entity. A Company is divided into two sections private and public. The following paragraphs discusses about the advantages and disadvantages and also the differences. There are several advantages which is provided through this structure. The most important advantage which an individual has when he decides to work a business through a company structure is limited liability. It means that no member of the company will be liable if the company suffers debts. The members are only liable to the sum of inspection which was done by them for the shares. Through the use of the company formation, a well known structured is provided which is accepted commercially. Multiple owners with special motives can serve the company easily, as compared to partnership. A company needs to work as a different unit, which can get into a contract and become a party to the legal proceedings itself and can own property itself, and therefore no misuse of power would take place. On the other hand the structure is subjected to a few disadvantages also. Administrative requirements regarding the company are fairly difficult, things like maintaining the director’s certificates or the share registers. The directors have the control over the working of the company not the owners. Strict actions are taken against the directors of the company by the jurisdiction and they can be subjected to civil or criminal proceedings if they violate such duties. The compliance cost including all regulatory necessities in companies is much higher than any other business structure.
There are a few differences which Megan, Harry, Kate and William must known in relation to Public and private company. The public companies in Australia can have unlimited number of members in their company meanwhile in private companies only 50 members are allowed. Therefore, the load of obedience is much higher in public companies in that of private companies. The Public company has the right to take money from the public itself and issues shares and raise the fund but no such features are available in case of private company. The compliance cost including all the necessary requirements is much higher in the case of public company to that of the private company. However, the directors of the private companies are seen to have more control over the company then that of the directors of the public company.
2.Business Structures and their respecive legal requirments
The section discusses about the law which is appropriate for the business structures discussed above, and can provide the right suggestion to Megan, Harry, Kate and William regarding the well suited business structure, according to their requirements and planned business activities.
Law in Australia regarding partnership is governed by precise legislations besides the common law. The Partnership Act of 1963 is the legislation which administers the partnership at Federal level. As evaluated to the federal legislation each state has its own act regarding Partnerships, which comparatively are the same. Meanwhile, In Australia Partnership is done when there is a legitimate agreement among two parties for doing business activities with the intention of making profit.
The liability that a partner has in a partnership business is the most important part of the law regarding partnerships. These liabilities are of a considerably large nature. Any individual who want to become a partner of the business specified needs to be both the agent and principal of that business. Thus, any partner can bind the other one that is the business in total in regards to the act done by him. In the case of John Grimes Partnership Ltd v Gubbins, all the partners who are taking part in the partnership business are legally and financially responsible for the actions of the other partner’s behavior in the course of business. Thus, when it is seen that any one partner in the business acts in a negligent manner therefore all other partners will automatically be liable under the negligent act. Even though the partner is seen to be holding only 10% of the shares in the company even then any liability acquired by him, in the way of business will result in the binding of the business as hole. In certain situations it is seen that the partner has acted ahead of the power that was given to him by the agreement of partnership, and no other party had an idea that such action were done and the right had been exceeded, the partner then might bind the business.
The Section 6 of the Partnership Act analyzes whether or not the individual is a partner. For him to be a partner he needs to have an involvement among the gross returns in the business and also sharing profits or losses and also being able to use the rights of partner in joint ownership.
No exact regulations are been passed in regards to governing the business activities of the individual traders. Meanwhile, general business law is valid in such a way that a business activity can be done by an individual proprietor. An individual proprietor requires to have an Australian Business Number for further carrying out business in Australia. The trader also needs to register for the tax system that is the Goods and Services Tax if his annual income is exceeding $75,000. In such cases where the individual trader employs other persons in his business, then they will also have to comply with the regulations of employment as mentioned in Fair Work Act 2009. No such separate duties are forced on the trader itself regarding the methods to run the business. As any natural individual is subjected to the law, sole proprietorship is subjected in the same way.
The Corporation Act 2001 in Australia governs the law related to the companies. It mainly deals with the business entities at federal as well as inter-state level. The legislation states that a company has its individual which is unlike the one from their owners and is given by the legislation legally. A company can only be established when it is registered with the Australian security and investment commission. Companies having share capital are most commonly found. It means that the companies are very limited by it shares. The company positively needs to include the business governance principles given by the Australian Securities Exchange, and failing to do so they must notify the ASX for the reasons of the failure. It is necessary for any company to have a foundation which would set out the powers in the company. The director or the office holder is needed to be at least 18 years of age and also a ordinary person. Such individuals are been given numerous legal duties by the common law and the legislation, which they need to obey while releasing the power. This is done to make sure that all the shareholders are not broken by the directors. Many other regulations are also forced in a business, which are auditing requirements and disclosure obligations. The load of obedience stays with the public company more than the private company.
In this scenario, Kate and William no longer want to be an active member and therefore want to edge their liability. In this situation, the private company suits best to them according to the requirements they have discussed above. It was mentioned that Megan and Harry wanted 50% profit of the company for helping homeless Australians. But, it needs to be pointed out that any organization can only be register as a non profitable organization if it has no intentions of making a profit. If 50% of the company’s profits will be going towards helping the homeless Australians then it is probable that public funding will not be given to the company. Thus, in this situation the best option for Meghan and Harry is to move on their company activities to a private limited company by the shares. However, this type of companies William and Kate need not contribute in the administration as they only method by which they can do it is performing as shareholders or as non administrative directors of the company and also can limit the liabilities they have towards the sum of the asset which was made by them. However, both Harry and Meghan needed total control by which they can get 50% profit of the company, for the purpose of charity without much interference by private company.
3.The Rights and Obligations of the Parties running a Private Company
The section particularly sets out the responsibilities, liabilities and the rights which Meghan, Kate William and Harry have regarding the private company. The following liabilities and right are based on the requirements of the common law. The directors in Australia have both equitable and statutory duties in regards to the company itself. The section 180 to 184 of the Act states the constitutional duties of the directors. These duties are also reliable to the ones which are set out by the principles of equity and the common law. The main motive or duty of any director is to make sure of the fact that they are working with a proper purpose under good faith towards looking for the best significance for the company. Such duties are forced on the directors by the section 181 as well as common law. The act specifies that while disclosing their functions regarding the company the directors of the company needs to make sure that their act is in good faith and make sure that it serves the purpose and case bring out the best of the company.
It is the responsibility of the board of directors to carry out an Annual General Meeting regarding the company’s directors, who are also having the responsibility of making sure of all the financial documentation if they are up to date which is in relation to the company.
The directors must also be aware about the rules relating to insolvent trading. The rules have been specifically embedded in section 588G of the Act. where the directors have contravened the rule they may also be liable in personal capacity for the loss which has been borne by the company or the creditors of the company.
The section 182 and the section 183 and other reasonable duties enforce specific duties on all of the directors in the company who are not misusing the position they are having, for any particular information which they have attained by their command in the company for individual interest. According to the common law it is the responsibility of the director of the company in case of a situation of disagreement of interest to make sure that the main concern is given at the instance to the company than individual interest as they are in fiduciary connection with the company. Thus, Meghan, Kate, Harry and William needs to make sure that they need to give their interest towards the company always and not focus on their personal interest at any instance while fulfilling the duties. Such duties are not just appropriate on administrative directors, but it provides with the case of ASIC v Healey to the non executive directors as well. Thus, if Kate and William themselves do not want to take part in the running of the business as non administrative directors, then the responsibilities will still remain to bind on both of them.
The next responsibility which would be forced on Meghan, William, Kate and Harry is the duty of diligence and care. This duty particularly sets out the requirements of the section 180. A particular test is given by the section which is then functional by the judges to study obedience of the directors with a particular duty. The test also applies all the values of the aimed test as common law. Thus, when in an purposed test the violation of the duty is recognized by the comparing the actions to a sensible person, but in this situation the violation of the duty is recognized by evaluation of actions to a sensible director in a similar spot.
The directors can receive suitable payments for all the hard work they provided regarding managing all the dealings in the company. Therefore, they can take any decision they want if according to them it is for the betterment of the company. In section 180 (2) of the Corporation Act, the right of creating the judgment is subjected to the company judgment rule. According to this, if no sensible director will take same decision then the directors will be legally responsible for the violation of the duty.
The directors must also know that if they have contravened the above mentioned structures then they may be punished under the Act. The specific punishments for the directors form making such contravention is provided in section 1317E of the CA. under this section where a declaration of contravention is made the directors can be suspended from managing obligations in the future and also have to pay monetary fines and penalties
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