Available Choices for Commencing a New Venture - Assignment Example

CORPORATION LAW I DRAFT LETTER OF ADVICE From: xxxxx, Attorneys of Law Level 2, 404 Lygon Street, Carlton Victoria 5558 Australia. May 3, 2015. To: Messrs. Kailey and Imad 2nd Floor, Ribald House, 416, Ringers Lane, Melbourne 30000 Australia. Dear Mr. Kailey, You had contacted our office in connection with the available choices for commencing a new venture. In this context, the following information is provided for your kind perusal. 1I Task ONE The different types of business structures available for commencing a new business have been discussed in the sequel. A Various Business Structures Business structures admit of the following categorises, namely, sole trader, partnership, company, and trusts.1 These have been described below. 1 Sole Trader A sole trader concern is a business conducted by single person, who manages the entire business. He can regulate the business affairs and control the business assets. Moreover, he takes the management decisions. This is the simplest business structure. 2 Partnership A partnership, in general entails two or more individuals, with a maximum of 20 persons, conducting business together with the intention of making a profit. In the majority of the instances, a partnership is required to register a business name with the Australian Securities and Investments Commission (ASIC). The exception allowed is when the partnership employs the surnames of all the partners concerned. Strictly speaking, a partnership constitutes a relationship and not a distinct legal entity. Each and every partner is the joint owner of the entire assets and liabilities of the business.2 As such, it is critically important for all the partners to be cognisant of their obligations, responsibilities, and rights. A very effective business structure is that of a partnership. It has the following benefits. First, the skill and experience available will be greater, due to the presence of more than one partner. Second, it is not difficult to establish it, and it involves low start-up costs. Third, a greater amount of capital can be allotted to the business. Fourth, the borrowing capacity of the concern will be greater. Fifth, it is possible to make highly competent employees as partners. Sixth, it is possible to engage in income splitting, which provides tax savings. Seventh, the business affairs of the partners remain confidential. Eighth, external regulation of the business venture will be limited. Lastly, the legal structure of the business concern can be altered with comparative ease. Moreover, a limited partnership provides the following benefits; there is asset protection, limited liability, flexibility in distribution, capacity to accumulate income and such income will be subject to the company tax rate, the business will not be subject to Division 7A, and finally, the business will be eligible for CGT concessions. 3 Company A company exists as a distinct legal entity that is separate from its shareholders and directors. As a consequence, the directors and shareholders of a company, are in general, not liable for the debts of the company. The Corporations Act 2001 provides certain exceptions, relating to insolvent trading, with respect to the principle that directors cannot be held personally liable for the debts of the company. Insolvent trading, per se, pertains to the incurring of debt when it is reasonable to believe that the company cannot repay its debts, as and when they arise.3 In Australia, the ASIC is the regulatory body that administers the Corporations Act 2001. The aims of ASIC, include, first, providing protection for consumers and businesses, regarding their transactions with companies. Second, to ensure that the operations of a company are compliant with the law. Third, to ensure that companies operate in a legal manner. Fourth, to compel companies to furnish periodic reports regarding their activities. Fifth, to ensure that companies maintain accurate and comprehensive records of their activities.4 In addition, ASIC is vested with the responsibility of having in place an information database that consists of the details of all the companies in Australia. The majority of the companies can be categorised as, first, companies that are limited by shares. This structure restricts the liability of shareholders to the value of their shares. Trading enterprises or businesses find this form to be appropriate. Such companies can belong to the public or private sector. Second, companies limited by guarantee.5 This form is the preferred choice of the non-trading organisations, including sporting clubs, and charitable organisations. Since it is your intention to commence a gelato bar in punch bowl, a company limited by shares is the ideal structure for your business. 4 Trust A trust, unlike a company, does not constitute a distinct legal entity. In general, trusts are utilised in the context of conducting a business for the benefit of others. In a trust, a trustee, who can be an individual or a company, conducts the business on behalf of the beneficiaries of the trust. It is commonplace for family businesses to be constituted as trusts. This makes it possible for each member of the family to be rendered a beneficiary, without being involved in the conduct of the business.6 II Task TWO A Type of Company A company constitutes a separate legal entity that has the capability to hold assets in its name. In addition, a company can conduct business in its own right. Moreover, a company can be sued and it can sue. A company is owned by its shareholders, and a company is run by its directors. In several instances, the company directors are also shareholders. An entity is regarded as a company, only when it is incorporated under the provisions of the Corporations Act 2001, and registered with the ASIC.7 The liability of the shareholders of a company that is limited by shares, is restricted to the value of their shareholding. This system is suitable for the majority of trading businesses. On the other hand, non-trading organisations, such as sporting clubs, prefer a company limited by guarantee. The legal status of a company is indicated by the words Proprietary or Pty. Moreover, the term Limited or Ltd has to be incorporated into the name of the company, when it is a limited liability company.8 Incorporated companies constitute separate legal entities, and these are regulated by the ASIC. A company is an intricate business entity that incurs considerable administrative and formation expenditure. Albeit, a company provides a measure of asset protection, its directors can be held legally liable for their actions, and under certain circumstances, even for the debts of the company. It is necessary to be conversant with the principal features of a company business structure. Such information provides prospective businessmen with information regarding the best business structure that suits their specific requirements.9 In your situation, the most appropriate, type of company to be formed is the limited liability company. This is formed by its shareholders, and its directors have specific obligations, which are enumerated in the sequel. B Obligations of Directors The laws pertaining to the duties and responsibilities of directors are derived from the common law, statute law, under the Corporations Act 2001, and the constitution of a company. The directors of a company govern it on behalf of its shareholders. The Corporations Act 2001 declares that “The business of a company is to be managed by or under the direction of the directors.”10 Certain legal duties and responsibilities have been imposed upon directors by the Corporations Act 2001. These apply to a variety of organisational structures, including proprietary companies and public companies. The Corporations Act 2001 defines a director as follows; first, a person who has been validly appointed as a director or an alternate director. Second, a person who despite not having been validly appointed as a director, acts as a director. Such directors are described as de facto directors. Third, a person who has not been validly appointed as a director, but whose instructions are adhered to by the directors of that company. Such persons are termed shadow directors.11 In addition, it is the fundamental responsibility of the directors of a company to determine its strategic objectives and policies; monitor the progress made in this regard; appoint the company’s senior management; and being answerable to shareholders and other relevant entities, regarding the activities of the company. The chief executive or managing director is responsible for the company’s performance, as determined by the overall strategy of its board of directors. The executive or managing director reports to the board of directors or the chairman.12 Moreover, the Corporations Act 2001, imposes several general duties upon the directors and officers of companies.13 One of these general duties is to exercise powers and duties with the diligence and care expected of a reasonable person. This includes the adoption of measures to ensure that adequate and reliable information regarding the financial status of the company is acquired. In addition, the necessary steps have to be taken to prevent insolvent trading by the company.14 This Act makes it necessary for directors and officers of the company to exercise their powers and duties in good faith, in the best interests of the company, and for a proper purpose.15 Furthermore, directors and officers should not misuse their position to procure an advantage for themselves or some other person, or cause a detriment to the company. In addition, the directors and officers of a company are prohibited from making improper use of information gleaned via their position, in order to gain an advantage for some other person or themselves, or to cause a detriment to the company.16 In addition, it is imperative for the director of a company to prevent insolvent trading by it. A company is deemed to be insolvent, when it cannot pay its debts when they fall due. Thus, at the time of raising a new debt, the concerned director has to assess whether there are reasonable grounds to conclude that the company is insolvent or will become insolvent due to this new debt. It is not acceptable to merely affix one’s signature to the annual financial statements. The director of a company has to continuously monitor the financial status of the company.17 Moreover, every company is required to maintain accurate and sufficient financial records that precisely record and explain the transactions undertaken by the company. Moreover, these records have to depict the exact financial status and performance of the company. The Corporations Act 2001 is breached, whenever a director fails to ensure that the company fulfils this all important requirements. With regard to an action of insolvent trading against a director, the following will be presumed. The court will assume that the company had been insolvent for the entire period for which the company had not maintained adequate financial records.18 C Can Kylie and Imad be Employees of the Company? In Anderson v James Sutherland,19 the court held that the director is, in general, not an employee of the company. However, a managing director holds the distinct offices of manager and director, simultaneously. Hence, Kylie and Imad can be made employees of the company, only if they hold the office of a managing director. In accordance with the statement provided to us, Kylie was working as an accountant, whilst Imad had been working as a taxi driver. Kylie, with his knowledge of accounting, is best suited for managing the accounts and financial features of the proposed business venture. Consequently, Kylie can be made the managing director with overall responsibility of the company. Imad can be made a partner, where his liability will be limited to his share in the business. We hope that this information, pertaining to the various types of business ventures and the related laws has been presented in a clear manner to you. I am certain that this clarifies your query. For further details or with regard to any doubts, please feel free to call upon us. We are always happy to make further assistance to you, if you want help in any further issues in the matter. Yours sincerely, (xxxxxxxxx) Partner, xxxxx, Attorneys of Law. BIBLIOGRAPHY A Cases Anderson v James Sutherland (Peterhead) Ltd [1941] SC 203 B Legislation Australian Corporations Act 2001 (Cth) C Other Company (2015) Small Business Development Corporation Company (26 August 2014) State Government of Victoria Directors’ duties and responsibilities (27 March 2015) Institute of Directors Insolvency for directors (2 February 2015) Australian Securities & Investments Commission Overview of Business Structures The Quinn Group Australia Pty Ltd Partnership (2015) Small Business Development Corporation Schweizer, Norbert, and Michael Kobras, Business Structures in Australia (July 2010) Starting and running your small business (5 February 2015) Australian Government: Australian Taxation Office Trust (2015) Small Business Development Corporation Read More