The Main Types of Businesses in Australia: the Advantages and Disadvantages of Being a Sole Trader - Research Paper Example

Part A – Read the New South Wales Supreme Court decision of Robert Mark Walker v Rodney Derane Melham [2007] NSWSC 264 (9 March 2007) and answer thefollowing questions: 1. When did the Plaintiff argue that the partnership had dissolved? (1 mark) Counsel for the Plaintiff submits the partnership to have ended in December 2003. This was when they learned that the defendant, Mr. Melham, had converted a balance of the plaintiff’s partnership capital account into a charge the defendant owed him. 2. When did the Defendant argue that the partnership had dissolved? (1 mark) The Defendant argued that the partnership had dissolved in May 1994 when the plaintiff and defendant had an argument and went their separate ways. 3. What were the issues to be determined in this case? (3 marks) The issues to be resolved in this case were: a. When the partnership was dissolved. The plaintiff says it ended in 2003 while the defendant says it was dissolved in May 1994 or when the plaintiff abandoned the partnership. b. If the Land is a Partnership Asset. Initially, the plaintiff said it was not an asset while the defendant said it was. However, eventually, both parties decided to concede and change their answers. b. Accounting if the land were a Partnership Asset. The plaintiff contends that he is to be paid for all profits of the partnership and for all benefits received by defendant from using partnership property, business name & such share pursuant Section 42 of the Partnership Act 1893 (NSW) that Court deems fit for him to have. d. Abandonment of Right to an Account for Share of Post-Dissolution Profits. It is claimed that the plaintiff, Mr. Walker, also abandoned his rights to share with the profits earned after the partnership was dissolved. e. Laches - Was the defendant prohibited by his delay in claiming his share of the profits? Laches was not used as a defence to Mr. Melham’s or Mr. Walker’s claims. f. Orders - A date of dissolution must be chosen and whether or not Mr. Walker is entitled to his claim of the partnership assets should be decided. 4. How did Justice White describe the nature of the partnership between Mr. Walker and Mr. Melham? (2 marks) Justice White describes the partnership as a partnership at will. It didn’t have a term. It also wasn’t made for a single adventure or activity. It could be dissolved by a notice from either partner of his intent to dissolve the partnership. 5. Did the Court find that Mr Walker abandoned the partnership? Does abandonment amount to termination of the partnership according to the Court? (4 marks) Yes, the court found that Mr. Walker abandoned the partnership. Mr. Walker and Mr. Melham had agreed to contribute their time, labor & finances equally in running the ski lodge. This was the basis of the partnership. Mr. Walker declared that their working partnership must end. The Court, citing the views of Higgins & Fletcher from The Law of Partnership in Australia & New Zealand, said that behavior tantamount to abandonment of a working partnership serves as a notice of intent to dissolve the partnership. 6. Why did Mr. Walker and Mr. Melham change their positions as to whether or not the land was a partnership asset? (2 marks) Mr. Walker and Mr. Melham changed their positions as to whether or not the land was a partnership asset because of the eventual repercussions that Mr. Walker’s mortgage on his interest in the land to QBE Insurance Ltd. in 2004 would bring forth. Initially, Mr. Walker said the land wasn’t a partnership asset. Otherwise, he would be in breach of his fiduciary duty as a partner since he used the land for his personal gain. However, if he had yes as he eventually did, his net share of the partnership assets would include the land value. Also, he would be entitled to profits or interest gotten from the use of his share in the land until November 2004. On the other hand, Mr. Melham said the land was a partnership asset. If so, then he & Mr. Walker would have legal estate as tenants in common to occupy the land. If he wanted an account for the improvements he made on the land, Mr. Melham would need to pay rent to Mr. Walker. Thus, he conceded to say the land wasn’t a partnership asset. 7. Did the Court find that Mr. Walker was entitled to an account of profits in relation to any partnership asset? Explain your answer (2 marks) The Court found that partnership was dissolved on 31st May 1994. Because the parties admit to contributing equally up to that point, Mr. Walker will be entitled to fifty percent of net assets as of and until 31st May 1994. The Court found that while Mr. Walker abandoned the reason the partnership was based on, he didn’t abandon his interest in the assets or the profits earned from his share of the assets. However, because he had mortgaged his share of the land, he is entitled to, in accordance with Section 42 (1) of the Partnership Act, six per cent per year of his share of the partnership assets that will be determined until 31st May 1994, the day the partnership was dissolved. Part B – Find the following provisions of either the Partnership Act 1892 (NSW) and the Corporations Act 2001 (Cth): 1. Find section 32(c) and section 42(1) of the Partnership Act 1892 (NSW). (1 mark) Section 32 (c) of the Partnership Act 1892 (NSW) states: “If entered into for an undefined time, by any partner giving notice to the other or others of the partner’s intention to dissolve the partnership.” (Partnership Act 1892) Section 42 (1) of the same act states: “Where any member of a firm has died, or otherwise ceased to be a partner, and the surviving and continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner, or the partner’s estate is entitled, at the option of the partner or the partner’s representatives, to such share of the profits made since the dissolution as the Court may find to be attributable to the use of the partner’s share of the partnership assets, or to interest at the rate of six per centum per annum on the amount of the partner’s share of the partnership assets.” 2. In which section of the Corporations Act is ‘accounting standard’ defined? What is the definition? (1 mark) ‘Accounting Standard’ is defined in Section 9 of the Corporations Act 2001 (Cth). The term means: a) an instrument in force under section 334; or b) a provision of such an instrument as it so has effect. 3. Find the sections of the Corporations Act that govern: (i) selection and use of a company name and (ii) changing of a company name. Write out the entire sections. (1 mark) (i) Section 119, 147 – 161 ACN and name When a company is registered, ASIC allocates to it a unique 9-digit number called the Australian Company Number (ACN). In practice, a new company must have a name that is different from the name of a company that is already registered. A proprietary company limited by shares must have the words “Proprietary Limited” as part of its name. Those words can be abbreviated to “Pty Ltd”. A propriety company may adopt its ACN as its name. If it does so, its name must also contain the words “Australian Company Number” (which can be abbreviated to “ACN”). For example, the company’s name might be “CAN 124 456 789 Pty Ltd”. (ii) Sections 123, 144, 147 – 156, ASIC Practice Note 47) Use of company name and ACN The name of a company must be shown at all the company’s business premises (including its registered office) that are open to the public. The company’s name and its ACN or ABN (if the last 9 digits are the same, and in the same order, as the last 9 digits of its ACN) must appear: * on some of its public documents; and * on its cheques and negotiable instruments; and * on all documents lodged with ASIC; and * if it has one, on its common seal 4. Find the section in the Corporations Act 2001 that gives ASIC the power to make class orders (1 mark) Section 196 ASIC power to make declarations and class orders 3) ASIC may make an order in writing that enables directors who have a material personal interest in a matter to be presented while the matter is being considered at a director’s meeting, vote on that mater, or both be present and vote. The order may be made in respect of a specified class of public companies, directors, resolutions or interests. 4) The order may be expressed to be subject to conditions. 5) Notice of the making, revocation and suspension of the order must be published in the Gazette. 5. Which section of the Corporations Act deals with members obtaining information about directors’ remuneration? (1 mark) Section 202B Members may obtain information about directors’ remuneration. (1) A company must disclose the remuneration paid to each director of the company or a subsidiary (if any) by the company or by an entity controlled by the company if the company is directed to disclose the information by: a. Members with at least 5% of the votes that may be cast at a general meeting of the company; or b. At least 100 members who are entitled to vote at a general Meeting of the company. The company must disclose all remuneration paid to the director, regardless of whether it is paid to the director in relation to their capacity as director or another capacity. Part C - In the form of an essay, describe how an individual can choose to operate a business as a sole proprietor or as a company. Compare and contrast the two business structures, examining specifically the procedures for establishing these different structures and their governing legislation and regulatory bodies, the advantages and disadvantages of each structure with reference to legislation and case law, and the liability of those entrusted with the management of the entity. There are 4 main types of businesses in Australia; namely, sole trader/sole proprietorship, partnership, trust or company. (For the purpose of this assignment the author will just focus on two types: sole trader/sole proprietorship and company. Both serve to provide their market/s with outstanding products or services. Both must also be run efficiently and responsibly. Of course, both bring in income. However, in spite of their similarities, each has its own disadvantages, too. A sole trader is an individual who runs the business without partners or a company structure. The sole trader has full control of the business including ownership of all profits and responsibility for all debts and liabilities. (Business Structure n.d.) Unless the business name is just the person’s name, then it must be registered. Every business name must be registered. However, if the entrepreneur wants to change his name or add something different to it, then it would need to be it registered. This registration is valid for 3 years. It can be done over the counter of Department of Fair Trading Centres. One can also register via this website at www.fairtrading.nsw.gov.au A business name is very important. It needs to reflect the kind of business you are planning to open. The business name must be original, meaning not being used. It must also be catchy, not offensive, not to be confused with another business name. It is also mandatory for all businesses to register for an Australian Business Number or ABN. This is a special number which allows you to hold business with other entrepreneurs or with government offices. Registration is available at www.business.gov.au For those who want to operate as a company, it’s a little more complex. Where a sole proprietorship just needs one person to make a business happen, it’s usually more than one for companies. Public companies must have a minimum of three directors, at least two of whom are Australian residents. Proprietary companies may have only one director, who would need to be Australian based to meet a requirement that there be at least one resident director. Most have two or more directors. A public company must have at least one secretary who is an Australian resident. A proprietary company isn’t required to have a secretary. (HLB International 2007)) In Australia companies can be classified based on liability. The grouping depends on the type of liability imposable on the owners. There are companies limited by shares or guarantee which limit the shareholders’ liability to the value of their shares or the amount they guarantee in case the bank folds up; and, there are companies limited by guarantee which are not into trading. A public company with limited shareholder liability needs to add “Limited” or “Ltd.” after its name. For a propriety companies, they should add “Proprietary Limited” or “Pty Ltd”. Companies must register a name with the Australian Securities and Investment Commission (ASIC). The companies are regulated by the ASIC who also administers the Corporations Act. One can also find information sheets on the requirements needed to submit & the documents containing the directors’ obligation with the ASIC. Like with the sole trader, companies must also apply for an Australian Business Number (ABN) with the Tax Authority. This can be done online, free of charge. There are two groups of important people in the company – the members in general meeting and the board of directors. The Replaceable Rules, s. 198A give the directors power, except those of the members in general meeting, to manage the business. Their duties vary with the size of the company. The members in a general meeting were given powers of decision-making. What are the advantages and disadvantages of being a sole trader? The sole trader of course has free reign over the business. He can create or re-structure it as he sees fit. No need to get votes or draw up proposals for the board. Since the law doesn’t consider the sole trader as another person, separate from the owner, the business will cease on the death of the owner. One good thing about being a sole trader is one can put in his personal touch in the everyday transactions. There is much opportunity to meet customers and interact with them. However, being a sole trader, unless one acquires a loan or business has been really good, limits chances for expansion & targeting other markets. There can also be much pressure from competitors who are better funded and can afford price changes, growth, increase in production & better machinery. There is a risk of bankruptcy, too, if the sole trader is not careful with managing his finances, both business and personal. There a many advantages to being a sole trader, there are disadvantages too that need to be thought over carefully before entering the entrepreneur’s world. One should remember that being a sole trader means one has liability for everything, especially business debts, which puts all assets at risk, too. As for companies, one big difference between them and sole traders is that they exist as a separate legal person from the shareholders. So, the shareholder’s personal finances cannot be used to pay off the company’s debts. In properties though, shareholders can own properties under the name of the company. There are ways to minimize tax that are available to the company. It is also easier to get investors because of the limited liability. If there are advantages, of course there are disadvantages. Companies are expensive to maintain. They are also very tedious to establish. There are documentations that need to be submitted to ASIC. Before that, one has to find shareholders & appoint board of directors. One should also stop and consider his assets or finances if they will be enough to pay for employees, pay for production until the company is off the ground. There are a lot of reports the company must do which would require expenses in just the preparation stage. Consequently, there are a lot of record keeping needed. Also, there are more regulations governing companies under the Corporations Act and the Australian Securities and Investment Commission. Sometimes, companies are also exposed to personal liabilities of their employees. With the existence of shareholders, a decision may not be reached right away as opposed to a sole trader. Before anyone should decide on what type of business to start, one should review carefully the good and bad of each type. One should also consider what type is better for the services or product to be offered and research on the requirements so documentation and filing would go smoothly. References Business Structure. Department of State and Regional Development. Accessed 25 2009. http://www.easternsuburbsbec.com.au/templates/images/Pdfs/7_Business_Structures.pdf Corporations Act 2001. April 10 2006. Accessed 26 March 2009. http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1.nsf/0/A2C132A844D8FF9DCA25756D007AA1E0/$file/Corps2001Vol01_1282_WD02.pdf HLB International. Doing Business in Australia. (HLB Mann Judd, 2007) Partnership Act 1892 – SECT 32. New South Wales Consolidated Acts. Accessed 23 March 2009. http://www.austlii.edu.au/au/legis/nsw/consol_act/pa1892154/s32.html Partnership Act 1892 – SECT 42. New South Wales Consolidated Acts. Accessed 23 March 2009. http://www.austlii.edu.au/au/legis/nsw/consol_act/pa1892154/s42.html Read More