Business Structures and Business Laws - Case Study Example

Business Structures Name: Lecturer: Course: Date: Part 1 The central legal issue of concern is determining the type of business structure suitable for Mia and Jenny to use. The legal structures of a business Jenny and Mia can select depends on where the legal liabilities will lie, how to share profits, and how tax should be paid. They have three options to consider: sole trader, partnership, and company. A sole proprietorship is a businesses owned by one individual who entirely manages the business by himself. The sole trade arranges for all the capital requirements to start a business. All decisions are made by the sole trade. The, sole traders also bears the entire business risks solely. All profits and losses also belong to the sole trade1. Partnership business structure refers to a legal relationship between two or more individuals who start up a business with the view of making profits. Three types of partnerships exist: limited, general and limited liability partnership2. General partnership is made up of two or more people and does not need any formalities, or filing with the state. Unlimited liability is where a partnership decides not to be a separated taxable entity. In this case, only the partners are taxed. Partners also have unlimited liability for the business debts. Each partner is given equal rights to control the business. Limited partnership is where liabilities are restricted to the amount of their capital contribution to the business. A company is a business structure considered to be a separate legal entity. While the profits and losses are for the owners of the company, it has its own debts. It also allows outsiders to invest into the company by buying shares. Four levels of companies exist. Private company is where owners’ liability is restricted to the amount owing to the shares. Private company limited by guarantee is where the liability of members is restricted to the amount contributed to the assets of the company. Private unlimited company is where there is no limit to the liability of the members, and lastly Public limited company (PLC) is where the shares of the companies are offered for sale to public and where owners’ liability is restricted to the amount owing to shares they hold. To conclude, since they are only two people and since they have limit asset, Mia and Jenny should be advised to invest in a partnership form of business, as it offers them a better position to access more capital as well as to expand business. Since Mia fears liability, they should be advised to start limited partnership business. PART 2 The question is whether the relationship between Mia and Jenny in the circumstances of buying the fabric is that of partnership, and if so, whether a binding agreement exists that compels Mia to pay Jenny the $1000, the central legal issue would be whether a partnership exists between Mia and Jenny. While there is a statutory form for establishing a partnership does not exist, the parties who contemplate to follow a partnership business structure should state clearly the most important elements of their relationship in a written form, specifically if the provisions of the Partnership Act have to apply. However, there are no formal provisions for Mia and Jenny to create a partnership. This also means that there are no requirements that the partnership agreement be written Indeed, while Mia cannot be held liable for having rejected the decision to buy the fabric at $1,000, Jenny cannot be held liable for having failed to see the email Mia sent to her. The partnership may also have been formed by conduct or estoppels, where the conducts of parties to a partnership lead others to believe that a partnership exists3. In the case scenario, when Jenny suggests that they each put $500 each to 100 metres of fabric, Mia did not stop her. Her actions or inaction led Jenny to believe that a partnership agreement existed to buy the fabric. This is specified in the Partnership Act 1892 (NSW), which outlines the rules that govern the operation of partnerships. Since Mia and Jenny do not have a written agreement, the Partnership Act will apply. The Partnership Act 1892 (NSW) specifies particular assumptions to assist determine existence of a partnership4. Section 2 Partnership Act 1892 (NSW) specifies that partners are personally liable for the debts of the business as well as to share the profits. In this regards, Mia one of principals of the business and is therefore liable for the actions of the other partner, in this case Jenny. Hence, failure to stop Jenny from buying the fabric means they are both liable for the debt. Sections 9 to 13 of the Partnership Act 1892 (NSW) also outlines that partners are bound to share the losses or profits equally. In which case, Jenny would be liable for her $500 while Mia would only be liable for her $500. Sections 9 to 13 of the Partnership Act 1892 (NSW) further specifies that partners have a right to protect a business against incurring liabilities while they act in the course of the business and to share in the management of the business. In which case, Mia had the right to stop Jenny from buying the practice as she was aware she was financially fit to afford the fabric. Hence, despite having been silent, the decision is said to have been jointly made. Partnership is a mutual participation, as set out in the case of Green v Beesley [1835]5. The fabric would therefore be regarded as a partnership property, rather than Jenny’s property. Sections 20 - 21 Partnership Act 1892 (NSW) specify that a partnership property entails the items bought into the business, obtained on account of the business and in the course of a partnership business. Jenny bought the fabric in the course of partnership business with the view of making profits6. As demonstrated in the case of Smith v Anderson [1880]7, a business refers to any relationship between individuals who undertake any trade, profession, or occupation. Both Jenny and Mia are motivated by the desire to make profit. This qualifies the decision to buy the fabric as being part of the business. Such a situation was discussed in the case law of Evans v FCT [1989]8; Keith Spicer Ltd v Mansell [1970]9. To conclude, Mia should be advised that she will only need to pay Jenny $500, as her portion of the capital contribution to the fabric. References Checker Taxicab Co Ltd v Stone [1930] NZLR 169 Evans v FCT [1989] FCA 205 Green v Beesley (1835) 2 Bing N C 108 at 112 Keith Spicer Ltd v Mansell [1970] 1 All ER 462 Lecture Week 3. Business Structures - Part 1. Law101 Law, Business & Society Smith v Anderson (1880) 15 Ch D 247 Read More