Lecture Fundamentals of business law (4th): Chapter 4 - Margaret L. Barron, Richard J.A. Fletcher

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;...

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Business organisations

Chapter 4

• Sole trader - The business is owned and operated by

one person with all profits or losses attributed to the owner.

• Partnership - A relationship between two to twenty

persons who carry on business in common with a

view to a profit.

• Joint venture - Usually a one-off enterprise with

participants receiving profits separately, based on

contractual agreement.

• Unincorporated association - A body of two or

more persons who are organised for a particular

purpose, which may or may not include the purpose of

carrying on a business with a view to a profit.

• Incorporated association – A body of two or more

persons who are organised for a particular purpose,

which may not include the purpose of carrying on a

business with a view to a profit.

• Company – An incorporated body created by a

process called “incorporation”, regarded by law as a separate legal entity.

• Trust – A relationship recognised by the law of equity,

where a trustee holds property for a beneficiary or

beneficiaries

• Sole trader - Simple, with little

documentation

• Partnership - Partnership agreement

recommended; easy to form

• Company - Relatively high

establishment and compliance costs

• Trusts - Relatively high establishment

costs

Management

• Sole trader - In hands of individual;

difficult to achieve absences from

business

• Partnership - Leave other partner in

charge when absences required

• Association - In hands of committee of

• Sole trader - Nature of business can

be altered

• Partnership - Nature of business can

be altered with agreement of all

partners

• Company - Nature of business can

be altered but may have tax

consequences

• Trusts - Nature of business is

• Sole trader – Limited to one person’s

knowledge, unless hire additional

personnel

• Partnership – Several areas of

expertise available from individual

partners

• Sole Trader - Dependent on level of profits Large

profits will result in 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

limit no limit

to the liability of the owners

for the business debts

• 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.

• 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 of guarantees.

• Trusts - Limited, if trustee is a company, to the assets of the

company If not a company, trustee personally liable for

Limitations of business life

• Sole trader - For life of owner, without

interruption

• Partnership - Death, bankruptcy or withdrawal

of a partner will end partnership.

• Association - Perpetual succession.

• Company - Separate entity from owners;

perpetual succession.

• Trust - Terminate if trust property rests in

person ultimately entitled to it If trust property has been transferred to beneficiaries,

continued administration of trust would be

• Sole trader - Limited to ability of one

person to gain finance.

• Partnership - Limited to ability of

partners to individually gain finance.

• Private company - Limited to ability

of directors to gain finance.

• Public company - Capital raised by

way of a share of debenture issue.

Types of companies

• Companies limited by shares

- Public companies

- Proprietory companies (1-50 members)

(Shareholders will be liable for unpaid

amount on their shares.)

• Companies limited by guarantee

• Unlimited liability companies

• No liability companies (mining companies)

•Small

•Large

• Elected by shareholders

• Natural person

• Over eighteen years of age

• Power to manage company assets

• Upper age limit of 72yrs 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

Liability of directors

Personal liability for:

making false and misleading statements

or omissions in prospectus

• failure to appoint a company secretary

• incurring debts when the company

had little prospect of repaying the

debts.

Rights of shareholders

• Notice of meetings

• Attend meetings

• Entitled to dividends

• Entitled to financial information

• Sue on behalf of the company

Criminal offences for directors in

breach of their duties

• Dishonestly using company information, either intentionally or recklessly, to gain an advantage.

Five elements constituting a

• Trust property - Property that is the

subject of the trust

• Trust instrument - Document that details

Winding up a company

Reasons:

• The company is no longer carrying on a

business.

• The company fails to commence business

within one year of incorporation.

• The company has outstanding debts of at

least $2 000.

• Members have passed a special resolution to wind the company up.

• Membership of the company falls below a

certain number (initiated by a director, a

member, or a liquidator of a company).

Express (Direct or declared trusts)

Intentional act of a settlor, created by words, written or spoken

• identifying the trust property

• indicating the nature and purpose of trust

• identifying beneficiaries (can be discretionary where trustee will choose the amount to be distributed to beneficiary in

Discretionary Trust)

Non-Express

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 - Results from the operation of law (of

• Trading - The property of the trust is

used in the running of a business.

• Unit - The beneficiaries own units of

the trust.

Duties of trustee

• Maintain fiduciary relationship

• Familiarising themselves with the trust property

• Obeying instructions

• Not delegating duties

• Not deriving profit from their position

• Keeping proper accounts

• Maintaining impartiality

• Exercising reasonable skill and care

• Paying and transferring property only to those

Rights of trustee

• Reimbursement for all 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

Business names legislation

Business name must be registered unless all names of operators or traders included in

business name, i.e.

• the full names of the operators or

• the surname together with:

– the Christian name or names

– the initial(s) of Christian name or names

– a combination of Christian name and initials – the Christian name or names (or initials) by

which individuals are commonly known.

Purpose of registering business name

• Public knows who they are dealing with

(Public Registry)

• Impose restrictions on names registered if:

- identical to or closely resemble name