Lecture Fundamentals of business law (7/e): Chapter 4 - M.L Barron

Chapter 4 - Business organisations. At the end of this chapter you should understand: the essential characteristics of sole traders, partnerships, joint ventures, associations, companies, and trusts; the legal obligations imposed on each type of business entity; the liability of the parties involved in each type of business entity;...

This is the prescribed textbook for your course.

Business organisations

Chapter 4

• There are various ways that a

business can be carried on.

• Each business structure has

advantages and disadvantages that

need to be considered.

• Sole trader—business is owned and operated by one

person with all profits or losses attributed to the owner.

• Partnership—relationship between 2 to 20 persons

who carry on business in common with a view to profit.

• Joint venture—usually a one-off enterprise, with

participants receiving profits separately, based on

contractual agreement.

• Unincorporated association—body of two or more

persons, organised for a particular purpose, which may

or may not include the purpose of carrying on business with a view to a profit.

Definitions (cont.)

• Incorporated association—body of two or

more persons, organised for a particular

purpose, which may not include the purpose of

carrying on a business with a view to a profit

• Company—incorporated body created by a

process called 'incorporation', regarded by law

as a separate legal entity

• Trust—relationship recognised by the law of

equity, where a trustee holds property for a

beneficiary or beneficiaries

• Sole trader—simple; little documentation

• Partnership—partnership agreement advised; easy to

form

• Joint venture—normally involves a one-off enterprise

based on contractual agreement between two+ entities; relatively high establishment costs

• Unincorporated association—formed by persons with

similar interests; no separate legal existence

• Incorporated association—unincorporated associations

can incorporate, but not if they have a view to trading;

relatively high establishment costs

• Company—relatively high establishment/compliance

costs

• Sole trader—makes all the decisions

• Partnership—depends on partnership agreement If

no agreement, all partners are considered equal and

each partner is considered as agent of the partnership and every other partner for the purposes of

partnership business.

• Unincorporated association—control rests with

committee of associates

• Company—power is vested in the board of directors

to make decisions, unless power delegated to others

• Trust—trustee has power vested in him/her to make

decisions, subject to the terms of the trust deed and

the trustee legislation.

• Association—in hands of committee of association

• Company—undertaken by board of directors

• Trusts—undertaken by trustee

• Sole trader—nature of business can be altered

• Partnership—nature of business can be altered

with agreement of all partners

• Joint venture—depends on terms of joint venture

agreement

• Company—nature of business can be altered but

may have tax consequences

• Trusts—nature of business restricted by trust

instrument

• Sole trader—limited to one person’s knowledge,

unless additional personnel are hired

• Partnership—several areas of expertise available

from individual partners

• Joint venture—can draw on the skills of those

involved in the joint venture

• Association—can draw on the skills of the members.

• Company—can draw on the skills of all the directors.

• Trust—relies on the skills of the trustee.

• Sole trader—dependent on level of profits Large profits

mean high taxation, as income only attributable to one

person.

• Partnership—profits of partnership are shared as agreed

Taxed in the hands of the partners.

• Joint venture—income received separately.

• Company—special company tax rates Can be distributed

to access tax advantages.

• Trusts—income taxed in hands of individual beneficiaries

Can be distributed to access tax advantages

(Discretionary trusts allow changing distributions of income and capital between beneficiaries in different years.)

Liability

Liability (cont.)

• Sole trader—unlimited liability Personal

assets available for business debts.

• Partnership—unlimited liability

Personal assets of partners available for

business debts.

• Joint venture—unlimited liability for

individuals who may be sued collectively

or individually for the debts of the joint

venture No liability for actions of other

participants.

Liability (cont.)

• Unincorporated associations—limited to the

amount of a member’s subscription Liability for

agents and breach of warranty of authority may

fall on members of committee

• Incorporated—limited to payment of outstanding

fees of members

• Companies—limited by shares or guarantees.

• Trusts—limited, if trustee is a company, to the

assets of the company If not a company, trustee

personally liable for tortious and contractual

Limitations of business life

• Sole trader—for life of owner, without interruption.

• Partnership—death, bankruptcy or withdrawal of a

partner will end partnership

• Joint venture—subject to the terms of the joint

venture agreement; normally has limited business life

• Association—perpetual succession.

• Company—separate entity from owners; perpetual

succession

• Trust—terminates if trust property vests in person

ultimately entitled to it If trust property has been

transferred to beneficiaries, continued administration

of trust would be illegal

Raising capital

• Sole trader—limited to ability of one person to

gain finance

• Partnership—limited to ability of partners to

individually gain finance

• Joint venture—limited to the ability of the joint

venture participants to gain finance

• Private company—limited to ability of directors

to gain finance

• Public company—capital raised by way of

either share capital by issue of prospectus or by

Types of companies

•Companies limited by shares:

Shareholders liable for unpaid amount on their shares

– Public companies

– Proprietary companies (1 to 50 members):

 small

 large

•Companies limited by guarantee

•Unlimited liability companies

Incorporating a company

• For a company to become a separate

legal entity, it must go through a

process called ‘incorporation’.

• Under the Corporations Act 2001, ‘to

register a company, a person must

lodge an application with ASIC’.

• Must nominate:

– shareholder(s)

• A director is a manager or ‘mind’ of a company

• Depending on the size and the nature of the

company, is simply appointed or elected by

shareholders

• Natural person

• Over 18 years of age

• Power to manage company assets

• Upper age limit of 72 years for public companies

Duties of directors

• Act in good faith for the interests of the

company

• Exercise powers for a proper purpose

• Use discretions properly

• Avoid a conflict of interest

• Act honestly

• Not to misuse company information

• Not to obtain a gain by using their position

• Use care and diligence

Personal liability of directors

Directors may face personal liability for:

• making false and misleading statements or omissions in prospectus

• failing to appoint a company secretary

• incurring debts when the company had little prospect of repaying the debts.

Criminal offences for directors

in breach of their duties

These include:

• recklessly or intentionally failing to act in good faith

to protect the interests of the company

• dishonestly using the position of director within the company, either intentionally or recklessly, to gain

an advantage

• dishonestly using company information, either

intentionally or recklessly, to gain an advantage

Winding up a company

Reasons

• No longer carrying on a business

• Fails to commence business within 1 year of

incorporation

• Outstanding debts of at least $2000

• Members have passed a special resolution to

wind the company up

• Membership falls below a certain number

Can be initiated by a director, a member or a

• Five elements constituting a trust

– Settlor—person responsible for creating trust

– Trustee—person to whom trust property is given – Beneficiary—person to benefit from the trust

– Trust property—property that is the subject of

the trust

– Trust instrument—document detailing terms of

the trust

Express (direct or declared) trusts

Intentional act of a settlor, created by

words (written or spoken):

• Identifying the trust property

• Indicating nature and purpose of trust

• Identifying beneficiaries

• Can be discretionary, where trustee will

choose the amount to be distributed to

beneficiaries

Non-express trusts

No intentional action by the settlor:

• Implied trusts (presumptive trusts)—law

draws inference from the circumstances that

a trust was intended

• Resulting trusts—where property returns to

the creator of the trust

• Constructive trusts—result from the

operation of law (of equity)

• Trading—the property of the trust is used in

the running of a business

• Unit—the beneficiaries own units of the

trust

Duties of trustees

• Maintain fiduciary relationship

• Familiarise themselves with the trust property

• Obey instructions

• Not delegate duties

• Not derive profit from their position

• Keep proper accounts

• Maintain impartiality

• Exercise reasonable skill and care

• Pay and transfer property only to those entitled

Rights of trustees

• Reimbursement for expenses incurred

• Indemnification against all costs

• Seek contribution for losses

• On completion of administration of

trust, entitled to receive a discharge

Liability of trustee

• Personally liable for tortious and

contractual liabilities

• A court or the beneficiaries have the

power to relieve a trustee from

liability.

Business names legislation

• Business name must be registered

unless all names of operators or traders

are included in business name, i.e the

full names of the operators or the

surname, plus:

– the first name or names

– the initial(s) of first name or names

– a combination of first name and initials

National Business Names

Register

• Previously, business names were registered on a

state and territory basis

• From April 2011 business names are registered

nationally for between one and three years

• The system is managed by ASIC and registration

can occur online and a joint application can be made for a business name and ABN

• Business names previously registered in the states and territories will automatically be transferred to the National Business Names Register

Purpose of registering

business name

• Public knows who they are dealing with—public can

search online at www.asic.gov.au

• To protect the goodwill of the business.

• Restrictions on names registered:

– identical to or closely resemble a name already