The Principal Fiduciary Duties of Boards of Directors - Assignment Example

? Picture Framing Business and Short Answer Questions Our Ref: 22 April 04-23 Client Client AddressBy Email Dear Client, YOUR PROPOSED STARTUP OF THE PICTURE FRAMING BUSINESS We would like to thank you for seeking our advice on the issue of starting up a business, specifically the Picture Framing business. Subsequent to our interview, we have had the opportunity to research and compile the following report on this issue. We also enclose our costs agreement which sets out our fees and anticipated costs as required under the Legal Profession Act 2004 (NSW). Introduction We seek to provide the best legal advice in any matter that we interact with and your matter is not different in any respect. We instituted legal research into this matter with a view of determining the suitability and legality of starting a Picture Framing business in Australia. We believe this goes towards the very crux of your matter. Further, we would like to state that our services can only be of a legal nature on this matter. It is your duty to seek out qualified professionals who will assess the proposed business venture while looking at its location and profitability in order to determine whether it will be a going concern. Due Diligence It would be remise of our duty as consultants if we did not advice you that it is your duty look into the financial and commercial aspects of this business venture. This is because a business wherever it is instituted needs to have a strong financial basis that will see its survival and development. This should be done so as to avoid a situation where you have overlooked the financial aspects of this venture. That would be catastrophic. You should undertake this research through professional help. Ownership Before starting on any business, you need to determine whether or not the company structure is right for the particular company, decide what name the company is to assume, its mode of operation, the legal obligations that are assumed by the company, getting the requisite consents and finally registering the company (Commission). As discussed with you a summary of the proposed corporate structure has been prepared. It should be reviewed carefully and approved by your accountant. Australian Law provides for the structuring of any business in four ways. 1. Sole trader: an individual trading on their own 2. Partnership: an association of people or entities carrying on a business together, but not as a company 3. Trust: an entity that holds property or income for the benefit of others 4. Company: a legal entity separate from its shareholders. Sole Trader Looking at the business of a sole trader, one realizes that the same is entered into by one owner. This owner gets the benefit of directly transacting with his clientele thereby creating a trust as between the business and the clientele. The tax obligations related to this business are subject to the personal rates of the business (Government). The only major disadvantage of this enterprise is that the owner is personally liable for the business liabilities of the company. This opens up the owner to lawsuits that are consequent from the company as the company is not a separate legal entity. A sole trader cannot also share the burden of management and costs with any other person (Lawyers). In relation to the Picture Framing business, you both want to be co-owners of the enterprise. This in effect renders this business structure nugatory as far as your proposed enterprise is concerned. Trust The other business enterprise that is provided for in Australia is in the nature of a Trust. A Trust is defined to be a business where the trustee conducts business for the benefit of certain beneficiaries. This in effect means that at all times the trustee can only conduct business that is in the interest of the beneficiaries. The advantages of Trusts are that it minimizes the tax that is levied on the business as the income from the business can be directed at the beneficiary with the lowest income thereby lessening the payable tax. It also provides asset protection because the trust assets of the business and the personal assets of the trustee and beneficiaries are maintained as separate and distinct. As per our conversation regarding the proposed business, we are of the view that a Trust will not be best suited for your purposes as you desire to have a business with joint ownership whereby the returns of the business go to you jointly (Group). Company The other business structure that is available in Australia is a Company. A company is a legal entity that is separate and distinct from its shareholders. It is capable of suing and being sued in its own name. Even though a company has a great access to capital as it can borrow funds in its own name, the biggest disadvantage of a company is its institution and maintenance. This is because the shareholders of a company have no conclusive say in the running of a company as on institution it assumes a life of its own being determined by its constitution. Its maintenance is a very expensive affair as it involves the payment of steep institution fees and the business name requires to be renewed periodically. It requires the filing of annual tax returns every year which involves the complete overhaul of the companies accounting records. This is a cumbersome procedure. A company is usually taxed at a flat rate from its first dollar as it does not enjoy any tax-free period. The tax rules that are in place are very stringent and provide hefty punishments for tax evasion (Incorporator.com.au). From our conversation, you would like a company that is easy to be instituted, run and maintained. You would also like the possibility of a tax exemption on the profits of the business. This renders a company redundant as a likely business structure for your intended business. Partnership From the interview we had, you propose to form an organization with yourselves, John and Fred, being the joint owners. On examination of the details provided, we are of the view that the most appropriate business structure that would be available to you is that of the nature of a Partnership. Further to this, this analysis will now dwell on the complexity, flexibility, aspects of liability and suitability for financing purposes for a partnership vis a vis the other business structures as elucidated by Australian Law (Corporation). The (Partnership Act 1891, 2012) defines a Partnership to be the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership. It goes on to provide that the property of the business enterprise shall be held in common and the profits shared by the partners but provides that this will not apply for a partnership that possesses incorporated liability status. This was also held to be the position by Bryson J. in the decided case of (Hitchins v Hitchins and Another, 1998). Section 5 (1) which defines a Partnership terms it to be of a contractual relation goes on to state that the same must be of a nature that carries on business. Business in this sense is any activity undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis?. The Partnership entered into has to satisfy these provisions. McPherson J in the decided case of (Mackie, 1989) defined a Partnership to be “as s.5 of the Partnership Act expresses it, the subsistence of a ‘relation’ between persons carrying on business for profit. The essence of that relation is as James LJ recognized in Baird’s Case, one of ‘mutual trust and confidence’ of each partner in the skill, knowledge, and integrity of every other partner. Once a relation of that kind is found to subsist between persons carrying on such a business, a partnership exists between them.” The Courts in Australia have always been of the view that they will only determine issues of Partnership based on the intention of the Parties while entering the Partnership Agreement. These intentions can either be express or implied based on the Court of Appeal decision in (Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd, 1959). The express intentions of the parties to the agreement, in this case yourselves, would be determined by looking at the terms of the agreement as contained while the implied intentions would be arrived at by looking at what the common practice is in the nature of such agreements while analyzing the surrounding circumstances that existed at the time of entering in to the agreement (Re Beard & Co; Ex parte The Trustee (1915), 1915). Rights Duties and Obligations As the joint owners of the business enterprise, you will both possess certain rights, duties and obligations towards each other as a consequence of the business. The rights include the right to: participate in management, share in profits and assets, decide about the composition of the partnership, indemnity from partnership assets, interest on capital contributions in certain circumstances, retire at will, and assign a partnership share. The obligations include bearing losses equally; rendering accounts; keeping the books at the place of partnership; using partnership property only for partnership purposes; and fiduciary obligations owed from one partner to another (Egert, 2007). Tax Liabilities The tax liabilities of a Partnership are only so far the specific tax rates of the respective partners go. This is because a Partnership is not a taxable entity in itself. It only serves to act as a conduit through which its income, gains, losses, deductions, and credits pass directly to its partners. This ensures that the partners can successfully manoeuvre to offset the partner’s tax losses against their income. In computing the amount and timing of the income or loss passed through to its partners, a partnership is considered an entity that is separate and distinct from its members. Further, in the reporting and paying of tax liabilities, a partnership is treated as an aggregate of individuals who provide capital and services to a joint enterprise, rather than as a separate entity. This was settled in the decided case of (U.S. v. Basye, 1973). There are minimal reporting requirements of the Partnership’s tax returns and it also has easy access to capital. Business Name As far its business name goes, this needs to be registered and you should advice us on how to proceed with the same. Registration of the business name safeguards the company as it ensures the exclusive rights to the use of the name by the company. Finance As you indicated, you intend to finance this enterprise through the bank by way of a loan application. We would like to state that before applying for the loan, you should seek advice from the bank on the viability of the business enterprise as they are professionally qualified to provide this advice as it directly impact on your ability to repay the loan. You also need to inquire on the interest rates of the bank so that you are not encumbered during its repayment. Stamp Duty If you borrow funds to finance this business you may be liable for stamp duty. Your financial institution can provide further details in this regard. Town Planning (Zoning) We also highly recommend undertaking the following searches with regard to the viability of Surry Hills as the location of the enterprise. This can be done via qualified professional help through an organization that is competent to conduct the same. a) Section 149 Zoning Certificate; b) Outstanding charges or notices under relevant Council notices; c) Search on the Landlord to determine solvency status and any outstanding charges or liabilities; d) Search of all individual directors of the Landlord (if Landlord is a company) to determine solvency status and any outstanding charges or liabilities; e) Causes, writs and order search; f) Building and Pest inspections; and g) Additional searches deemed necessary to ensure that no Authority has an interest in the land which could affect the business. Dissolution of Partnerships A Partnership can be dissolved in a variety of manners determining on what is contained in the Partnership Agreement. If it is entered into for a fixed period of time, it is dissolved at the expiration of this period of time; if entered into to conduct a particular venture, it is dissolved on the realization of that venture; if entered into for an undefined time, it is dissolved if one of the partners gives the other partner notice of their intended dissolution taking effect on the date aforementioned; insolvency; death; charge of one partner’s properties to settle the others debts; illegality of the partnership and dissolution by the courts. These different instances are provided for in the (Partnership Act 1891, 2012). This analysis has been provided to you because you came to us with the intention of opening up a business and sought our help on the same. We hope that you will find the same informative if not important towards the realization of your cause. If there is any issue that you would like to discuss, please do not hesitate to contact us. Yours faithfully, Name Encls Short Answer Questions 1. Corporate Governance is the mechanisms of control regulating a corporation taking into consideration its internal and external corporate structures. It monitors the activities of the mismanagement thereby avoiding risk that may be brought about by the mismanagement of its officers. Its officers include its executives, board of directors, shareholders, suppliers and customers. It is important as it seeks to control the business by overlooking its activities as relates to its functioning with a view to mitigating its misdeeds, adding value, improving efficiency and cultivating integrity thereby providing accountability within the business to its officers and to its clientele (Exchange, 2007). 2. There is a distinct difference between Executive Directors and Non-Executive Directors brought about by their diverse roles and functions. The Executive Director has the overall leadership role in the organization. They are mandated to conduct business on behalf of the organization, which business binds the organization if conducted by the Executive Director in their official capacity as the Executive Director of the Organization. The office older is required to have extensive knowledge in the functioning of the organization as they seek to act in the best interest of the company. They are tasked with overseeing the delivery of products and services, recommending the company’s annual budget, ensuring the compliance of the staff members with current company rules and representing the company to the public. On the other hand, the Non-Executive Director is less hands-on with the company. This is because they are not involved in the daily activities of the company. They have the role of advisors as they seek to regulate the affairs of the company primarily in view of its conduct and discipline as seen by the public. They do not need to possess intensive knowledge in the affairs of the company as they mainly regulate good company practices and discipline. 3. Fiduciary duty refers to the duty of care owed by the officers of a company to always act in the best interests of the company. This arises as a consequence of the position they hold in respect of the company. With regard to the management of the company, fiduciary duty is exercised by the Board of Directors. They have a duty to duty of loyalty to the company as they are not expected to be involved in transactions where they compromise the integrity of the company (Black, 2000). They also possess a duty of care to make decisions that are seen to serve the best interests of the company and a duty of disclosure in instances where they possess a conflict of interest with the company’s interests (Black P. B., 2001). Reference List Black, P. B. (2001). The Principal Fiduciary Duties of Boards of Directors. Presentation at Third Asian Roundtable on Corporate Governance. Singapore: Stanford Law School. Black, S. B. (2000). Board Independence and Long-Term Performance. Retrieved April 22, 2013, from http://papers.ssrn.com/paper.taf?abstract_id=133808 Commission, A. S. (n.d.). Starting a Company. Retrieved 22 April, 2013, from Australian Securities and Investments Commission: http://www.asic.gov.au/asic/asic.nsf/byheadline/Starting+a+company+or+busi ness?openDocument Corporation, S. B. (n.d.). Partnership. Retrieved April 22, 2013, from Small Business Development Corporation: http://www.smallbusiness.wa.gov.au/partnership/ Egert, G. (2007). Defining a Partnership: The Traditional Approach Versus An Innovative Departure - Do Queensland Appeal Court Decisions Point to the Need for a Review of the Traditional Approach to Interpretation Adopted by Australian Courts? Bond Law Review . Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd, 69 SR (NSW) 165,168 (Court of Appeal 1959). Exchange, l. S. (2007). Corporate Governance Principles and Recommendations with 2010 Amendments. ASX Corporate Governance Counci. Government, N. (n.d.). Business Structures. Retrieved April 22, 2013, from NSW Government: http://www.fairtrading.nsw.gov.au/Businesses/Business_structures.html Group, O. I. (n.d.). Operating Your Business as Trust. Retrieved April 22, 2013, from One Investment Group: https://oneinvestment.com.au/operating-your-business-as-a-trust/ Hitchins v Hitchins and Another, NSW Lexis 2382; 47 NSWLR 35 (The Supreme Court of New South Wales 1998). Incorporator.com.au. (n.d.). Register Company? - Some pros and cons of registering a company in Australia & some considerations regarding the appropriateness of registering an Australian company. Retrieved April 22, 2013, from Incorporator.com.au: http://www.incorporator.com.au/pros-cons-company.asp Lawyers, M. C. (n.d.). Legal Business Structures. Business Solutions Built on Trust . Mackie, 2 Qd R 87 (Supreme Court 1989). Partnership Act 1891. (2012, May 28). South Australia. Re Beard & Co; Ex parte The Trustee (1915), 1HBR 191,194 (1915). U.S. v. Basye, 410 U.S. 441 (1973). Read More