Australian Regulatory Environment - Case Study Example

Australian Regulatory Environment Business Set-up Proposal I. Business Proposal-Background This proposal explores plans to set up a business designed to buy and sell used cars. It is proposed that the business will be owned and operated as a for profit company. In this regard, the business will be set up as a proprietary company with objectives calculated to purchase used cars, refurbish those cars and offer them for sale to the public. A number of legal issues will necessarily arise which will relate to consumer protection in relation to the sale of goods, warranties, shareholder/stakeholder interests, directors’ duties, fair labour standards, intellectual property protection, raising capital, accounting and tax obligations. Each of these issues will be defined and arranged within the legal framework of the proprietary company. II. Possible Business Structures Business structures typically help to delineate how a business trades and operates (Adams 2002, 2). In this regard, choosing a business structure is important for determining which structure is best suited to the particular needs of the business and those who own and operate the business. The most common business structures are sole traders, partnerships and companies although a business structure can be modified later on as needs and priorities change (Adams 2002, 2). In determining what business structure to use attention is given to who will make decisions, whether or not there are tax benefits or detriments, the ease with which the structure can be set up, the cost of setting up, profit sharing, allocation of liabilities, whether or not the business objectives can be expanded and the regulatory process relating to business licenses (Adams and Barker 2005, 2). a) Sole Trader A sole trader is simply an individual who sets up business alone and as such is entirely and singularly entitled to all profits. One of the pitfalls is that the sole trader alone is liable for any and all losses or other types of liabilities incurred in the course of the business operation. It is also difficult to separate the sole trader from the person behind the business so that the sole trade can also be personally liable for the business’ liabilities (Adams 2002, 2). Although the sole trader has great flexibility in terms of decision making, the sole trader’s business options are severely limited by capital investment for viable expansion, a shortfall in skill and more importantly a great exposure to liabilities (Adams 2002, 3). Moreover, although the sole trader is eligible for an Australian Business Number from the Australian Tax office, the sole trader will have to complete annual or quarterly payments on the basis of a Business Activity Statement (Adams, 2002, 3). b) Partnership A partnership is required to be set up with at least 2 persons but no more than 20 unless the business is comprised of professionals such as lawyers, doctors and accountants in which case the partnership can be up to 400 individuals (Adams 2002, 3). For the purposes of this discussion, the number of partners will not be able to exceed 20 since this business proposal is for a used car sales enterprise. Be that as it may, partnerships are regulated within the context of agency, trust and contract laws and are embodied in statutes such as the Partnership Act 1892 (NSW) (Partnership Act 1892, (NSW)). In 1991 the Partnership Act 1892 (NSW) was amended by virtue of the Partnership (Limited Partnership) Amendment Act 1991 (NSW) so as to limit liability by virtue of partnership (Partnership (Limited Partnership) Amendment Act 1991(NSW)). Even so, all partnerships with limited liability are required to be registered with State government and is required to encompass “at least one unlimited liability partner” (Adams and Barker 2005, 3). Once a limited liability partner involves himself in the day to day operations of the business however, limited liability is no longer applicable (Adams and Barker 2005, 3). In order to be accorded limited liability, partners are required to sit as silent partners and have no active role in managing or directing the business activities (Adams and Barker 2005, 3). One of the advantages of setting up a partnership is that it can be established relatively easy by merely creating and executing a contract (Adams and Barker 2005, 3). However difficulties arise in the context of determining and ascertaining joint and several liability. In other words, joint and several liability essentially dictates that each partner is required to share the debts of the partnership and in the event one partner cannot discharge his share of the debts, the remaining partners are required to discharge the debt severally (Adams and Barker 2005, 3). Ultimately a partnership creates a fiduciary relationship in that the partners are each accountable to one another to the extent that if one partner affirms an obligation the remaining partners are obliged to honor that obligation (Adams and Barker 2005, 3). Although partners can be characterized differently, for instance they may be active or inactive, they are all agents of the partnership with no separate legal identity (Goldverg v Jenkins [1889] 15 VLR 36). Moreover, as agents of the firm and of each other, third parties entering into an agreement or contract with a partner and are unaware of that partner’s actual authority will still have a claim against the partnership (Polkinghorne v Holland and Whittongton [1934] 51 CLR 143). c) Company Structures In general, the personal liability of business structures contained in partnerships and sole traders, possible instruments for starting up the proposed used car business is the primary disadvantage to using these business structures. Under Australian law the corporate personality is characterized by two appealing factors. First it is a separate legal entity and enjoys limited liability (Tomasic, Bottomley and McQueen 2002, 30). Obviously these two characteristics of the corporation distinguishes it from sole traders and partnerships who do not enjoy separate legal status and do not enjoy limited liability and makes the strongest case for opting for the corporative structure for setting up the used car business over a sole trader or partnership. There other factors relevant to the structure and the framework of a company, however, limited liability and separate legal status are the most important. Object clauses can be framed in such a way as to expand business ventures in the future. For example if the business, operating as a company decides to venture into car repairs and car rentals, the object clauses can be framed in such as way as to make room for these expansions. The High Court of Australia ruled that the object clauses of the company can be framed so as to grant the directors the authority to expand the company’s business (H.A. Stephenson & Son Ltd. v Gillanders Arbuthnot & Co. [1931] 45 CLR 476). One way of achieving this end is for the object clauses which are included in the company’s incorporation or implementing documents is to provide that the business is formed to carry on business ventures that are incidental to the main business of the company (Sealy and Worthington 2008, 109). III. Management Structures and Their Relevant Duties The primary legal framework for companies under Australian law is found in the Corporations Act 2001 (Cth) and the Australian Securities and Investment Act 2001 (Cth). These legislative provisions essentially define the company and its various relationships between members of the company, directors and creditors (Sealy and Worthington 2008, 1). Company legislation as a whole typically provides for how companies are incorporated, how they relate to outsiders, how they are sued and can sue, how directors are selected and how they are limited or empowered to conduct company business, how companies deal with creditors and how internal disputes are resolved. Legislative provisions also determine how companies cease to exist (Sealy and Worthington 2008, 2). The primary actors in any company are directors and members who are typically the company’s shareholders. Directors are charged with the responsibility of managing the company’s business although how this management is carried out is a matter for the members of the company who obviously have “ultimate control over the company” (Sealy and Worthington 2008, 2). Directors typically conduct the company business in a collective manner through the auspices of board of directors (Sealy and Worthington 2008, 2). In general directors who manage the day to day business of corporations are said to have a fiduciary relationship with that company (Tomasic, Bottomley and McQueen 2002, 317). Encapsulated in this fiduciary relationship is a duty to act in good faith, fair dealing, honestly and in the best interest of the company and its members (Tomasic, Bottomley and McQueen 2002, 317). The duty also requires that directors refrain from using his or her position for altruistic purposes and must avoid a conflict of interest (Tomasic, Bottomley and McQueen 2002, 318). IV. Registering the Company The process for creating a company is relatively simply and is provided for under the Corporations Act and the Australian Securities and Investment Act. First and foremost the company name must be reserved and must include either “Limited,” “Proprietary” or “No liability” to complete the reserved name (Tomasic, Bottomley and McQueen 2002, 207). Upon registration the company registration the company receives an Australian Company Number which must be cited together with the company’s name upon registration (Corporations Act 2001, s. 148(1)). The Australian Company Number must also be cited and displayed on all subsequent public documentations and instruments indorsed or issued by the company (Corporations Act 2001, s. 153). The company may also prepare its own management constitution or adopt the rules contained in the Corporations Act 2001. If the company drafts its own constitution it is required to be signed by all members of the company at the time of registration and consensus must be evidenced in writing (Corporations Act 2001, s. 136(1)). Each person designated as officers and directors of the company must likewise provide consent to act in those respective offices at the time of registration (Corporations Act 2001, s. 120). Other information required at registration are the type of company, the names and addresses of consenting members, names and addresses and date of birth of all consenting directors and officers, shared capital as well as the number of issued shares and where a company is limited by guarantee, the guaranteed amount assigned to each member upon agreement (Tomasic, Bottomley and McQueen 2002, 207). Once registration is complete the company receives a certificate of registration and an Australian Company number included the date of registration, notification that the company is registered under the Corporations Act 2001, the territory in which the company is attached. The certificate of registration is also deemed to reflect that the company has adhered to the formal requirements of registration (Corporations Act 2001 S. 1274(7A)). Once the company is registered an application will have to be made for a Motor Vehicle Dealer and Wholesaler License (Business License Information Service). In order to qualify for the license the company will have to prove that it is suitable for the business venture, has ample material and funds to conduct the business, complete the relevant application forms and submit the fees associated with the license application (Business License Information Service). The application must be supported by an ACT Planning and Land Authority certificate with respect to the place where the business is intended to be operated from. As a corporation that is less than a year old, the application must also be supported by copies of its accounts dating from the time it was incorporated up to one month prior to the date the application is submitted (Business License Information Service). The relevant forms include a Motor Vehicle Dealers License Application and a Motor Vehicle Wholesalers License Application as well as a National Police Check Application Form (Business License Information Service). These requirements are mandated by the Sale of Motor Vehicles Act 1977 and the Sale of Motor Vehicles Regulation 1977. V. Intellectual Property Protection Business names and special markings, signs and symbols associated with the business may be registered under the Trade Marks Act 1995 (Cth). A trademark generally identifies the business and the quality of its goods and services and as such is a valuable marketing tool. To prevent passing off and unauthorized use of trademarks, trade names and domain names these names and markings should be registered with Intellectual Property Australia State Offices. Applications may be obtained on online or at the various state offices (Australian Government: IP Australia). Trademarks can usually be registered if they are unique in character and not common names or signs that other businesses might be compelled to use in the ordinary course of business (Trade Marks Act 1995). This will preclude the registration of every day common words and words that descriptive in nature. Once a trade name or trade mark is registered any unauthorized use of it constitutes infringement and the company may sue for trade mark infringement and any damages arising out of the unauthorized use of the trade mark or trade name as well as the domain name (Trade Marks Act 1995). VI. Consumers, Contractors, Employment and Workplace Relations There are a number of regulatory guides dictating how the business may conduct its business for the protection of consumer interests. The Prices Surveillance Act 1983 and the Trade Practices Act 1974 are the main legislative provisions dictating that prices are fair and do not operate to distort the market and to ensure that consumers obtain value for money paid. The Trade Practices Act 1974 ensures that the businesses do not engage in deceptive and unconscionable business practices such as false advertising. To this end, the business will be accountable to the Australian Competition and Consumer Commission, a statutory body created to ensure compliance with the Prices Surveillance Act 1983 and the Trade Practices Act 1974. In dealing with contractors the company will be bound by the common law and all other laws dealing with contracts and fair dealing. Since contract law is very complex and deals with regulating commitments and obligations binding the company, all contracting should be submitted to legal advisors prior to binding the company. As for employment and workplace relations, these relations are primarily regulated by the Workplace Relations Act 1996 and most employment or work place disputes are submitted to the Australian Industrial Relations Commission for resolution (Workplace Relations Act 1996). Ultimately employers must be treated equally and fairly in the workplace and any action taken against an employee must be preceded by procedural fairness (Workplace Relations Act 1996). VII. Occupational Health and Safety Requirements In general all Australian employers are required to provide for occupation health and safety. To this end the company will be required to ensure that the premises are safe and that all material and machines are operated safely and responsibly. It is also necessary to ensure that a safe system of work is established and followed and this will necessarily require supervision, training, information and instruction. Failure to comply with these requirements will make the company liable to prosecution and fines (Workplace Safety Standards Act 2005). VIII. Insurance Whether or not insurance is compulsory or not is no real consequence for any business wishing to minimize damages associated with theft, fire, natural disasters and other unforeseen circumstances. It is also advisable to obtain workers compensation insurance as a means of providing for compensation for employees who are injured in the workplace and might be disabled indefinitely. In this regard, the company can claim insurance benefits for the employer and circumvent responsibility for compensating the injured and disabled employee. IX. Tax Requirements Current tax rates for Australian companies are at 30 percent (Department of State and Regional Development). In addition, any company with a business turnover in excess of $50,000 is required to register for Goods and Services Tax and most complete monthly Quarterly Business Activity Statement. In this regard, goods and services taxes are assessed at 10 percent (Accounting in Australia). In addition capital gains taxes are applicable to property so that property owned for more than twelve months is only taxable up to 50 percent of the applicable tax requirement. If the property is owned for less than a year all of the applicable tax is required to be paid (Accounting in Australia). Moreover, payroll taxes are required in respect of wages earned by employees under the Payroll Tax Act 1987. Wages have a broad meaning and include “remuneration, salary, commission, bonuses, allowances or other benefits paid or payable whether in cash or in kind” (Payroll Tax Act 1987 S. 2(2)(e)). Bibliography Accounting in Australia. (n.d.) http://www.docstoc.com/docs/5274871/ACCOUNTING-IN-AUSTRALIA-Accounting-Bodies-An-Australian-Public-Practicing (Retrieved October 13, 2009). Adams, M. (2002) Essential Corporate Law. Routledge. Adams, M. and Barker, D. (2005) Australian Essential Corporate Law. Routledge, 2nd Edition. Australian Securities and Investment Act 2001 (Cth). Australian Government: IP Australia. (n.d.) http://www.ipaustralia.gov.au/resources/contacts.shtml#state (Retrieved October 13, 2009). Business License Information Service (n.d.) http://www.blis.act.gov.au/BLIS/prod/licence?licence=503 (Retrieved October 13, 2009). Corporations Act 2001 (Cth). Department of State and Regional Development (NSW) (n.d.). http://www.business.nsw.gov.au/aboutnsw/climate/A14_corp_tax_rates.htm (Retrieved October 13, 2009). Goldverg v Jenkins [1889] 15 VLR 36. H.A. Stephenson & Son Ltd. v Gillanders Arbuthnot & Co. [1931] 45 CLR 476. Partnership Act 1892 (NSW). Partnership (Limited Partnership) Amendment Act 1991(NSW). Payroll Tax Act 1987. Polkinghorne v Holland and Whittongton [1934] 51 CLR 143. Prices Surveillance Act 1983. Sale of Motor Vehicles Act 1977. Sale of Motor Vehicles Regulation 1977. Sealy, L. S. and Worthington, S. (2008) Cases and Materials in Company Law. Oxford University Press. Tomasic, R.; Bottomley, S. and McQueen, R. (2002) Corporations Law in Australia. Federation Press, 2nd Edition. Trade Marks Act 1995 (Cth). Trade Practices Act 1974. Workplace Relations Act 1996. 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