Highland Credit ADI - Legal and Risk Management Requirements of Small Business - Case Study Example

Name: University: Course: Tutor’s Name: Date: Introduction This research is to be undertaken on Highland credit ADI a financial intermediary. This is a young financial institution lending to micro and small enterprises. The mission of the organization is lending to the unbanked middle level entrepreneurs who do not have ability to borrow from the mainstream banking instruction. The main business of Highland credit ADI is not only lending but also provides saving products to its clients. This business is in the financial services industry but actually as a very small actor as it deals with institutions with almost non-formal management structures. The financial industry is very competitive but also very profitable. Financial services industry constitutes banks, financial intermediaries, insurance companies and agencies. There are several players in this business. Customers of this business are mainly business proprietors in the micro enterprises sector. Most of them are sole proprietors but some are partnerships and limited liability companies. Other people mostly involved in the business are the regulatory authority representatives since authorized deposit taking institutions like Highland Credit ADI have some daily compliance ratios which have to be inspected by the central bank so that the client deposits are safeguarded. Auditors and tax inspectors are also stakeholders in the business just as employees of the company where each of them is looking for their interest. This research is much restricted since client information is subject to the privacy laws while the secrecy of the company’s’ strategic information is usually subject to limited access. Ownership structure This business entity is registered as a private limited liability company where ownership is units of shares. Owners of the limited liability company do have their liability in case of winding up only limited to their shareholding units and do not affect their other interests. Being a limited liability business enterprise the company’s liabilities are separate and independent from the shareholders (James, pp. 131). The business entity of this type can own property and enter into a legal contract with other parties just like any other. Rights and obligations of the owners Right to attend and participate in the annual general meeting where the audited accounts of the company are laid before members and the election of directors is undertaken. An obligation to meet the liabilities to the tune of the amount of shares s/he owns in the company. Right to vote during decision making and election of some office bearers. Right to dividends. Advantages Clear separation between business entity and the owner. Can have a sufficient capital base especially if made public limited liability company. Due to the limited liability aspect of the organization, the company can acquire debt financing without adding the shareholders individual risk. Benefits from division of labor and specialization since professionals will be employed to run the business. The easy transfer of ownership through sale and purchase of shares gives flexibility to investors in a limited liability company. Disadvantages Bureaucratic aspects especially as regards decision making can actually make business decision making very slow hence can be a challenge in a competitive business environment. The agency problem where the management not being the owners of the entity mismanage the organization leading to loss of shareholders wealth. Regulatory requirements This requirements deal with the registration of business and business names and further acquisition of relevant licenses. The business name is usually registered independently from the registration of business especially where companies are intending to do business under a different name. Highland credit ADI actually registered Highland credit as a business name owned by the Highland ltd a limited liability company. The use of word ADI requires approval from contacts officers. This has given highland credit the ability to add the word ADI to its business name consequently Highland credit ADI. This will ensure that consumers shall not be misguided by the nature of business the organization is engaged in. Highland credit ADI also needs a license from the Australian Financial services license which is an operational licence for dealing in lending and deposit taking services. This is a regulatory license which is meant to ensure consumers and clients of financial institutions are protected. Australian business number registration is a license for the business entrepreneurs who engage in supply of goods and services. This licence is not compulsory but necessary for ease of business with Australian Taxation office especially while registering for various tax schemes like goods and services, tax and pay as you earn-PAYG- tax. For the Highland credit ADI to be complaint with the regulations in the industry, participating in the industry update meetings is one way and having a compliance and regulatory systems manager is also another option relevant to any financial institution where non compliance with the regulation usually has a big risk. Sometimes non compliance with the Australian Financial services regulations can result is a warning or penalties which might result in cancellation of the license which is can be a big blow to the entire business process. Contract law Contract law regulates the interactions between business entity and other stakeholders especially regarding discharge of business deals and obligations. A contract is usually a security document in case of breach of responsibility defined in the contract by one of the parties to it (Dorfman, pp. 23). The other party can have a legal complain based on the contract. In the case of Highland credit ADI there are different contracts all for interest of the company and other stakeholders to the company. Employment contract is usually between the employees and the company. Service providers and the company also do make their agreements and responsibilities through a contract (Hutto, pp.20).. The other contract is for the leasehold premises and is between the company and the landlord where the terms of the lease are clearly defined. Loan contract defines the loan terms that creates relationship between the Highland credit ADI. The obligations of the Highland credit is to ensure that the loan amount is transferred to the clients account on the agreed date, to ensure that the client is given a loan amount that is relatively easier for them to repay and sending the client statement as and when needed. On the other hand Toyota Motor garage has the responsibility of abiding by the loan terms by making its monthly repayments on the due date, payment of penalty as required when there’s delay in payment. Lending Contract Highland Credit ADI Borrower: Toyota Motor Garage Borrower description: This is maintenance and repairs company that deal mainly with Toyota vehicles. It is a fairly stable company with a turnover of over $500,000. Principal amount $1 000,000 In words One million dollars only Interest rate 12% Per annum Interest calculation Reducing balance method Transfer date 1st April 2010 Repayment period 3 years Interest grace period 1 month Principal grace period 3 months Payment due date First of every month Late payment penalty 10% of the amount due Primary Source of Repayment: Revenue cash flow from operations Guarantors Company directors I do hereby bind myself to meeting my repayment obligation as agreed in this contract. Borrower representatives’ signature 1. 2. Credit manager signature Highland credit ADI Breach of contractual agreement is usually subject to a civil suit. Breach of contract is usually as a result of one party to the contract not fulfilling their obligations as put down in the contract or by just performing an obligation in a manner different as agreed. For our case nonpayment of monthly due amount by the borrower or late payment constitutes a breach of contract. Consumer law These are regulations designed to protect consumers of commercial products from harmful ingredients, substandard products, counterfeits and even low quality products due to production negligence (John, pp. 160). These laws are also used to enhance fair trading. In Australia trade practices Act (1974) and prices surveillance Act (1983) are legislation that supports consumer protection. The department of commerce also has a consumer protection unit that provides information to consumers concerning their rights and responsibilities. Consumer protection has been implemented by prosecuting unscrupulous traders who partake in unfair and unhealthy trade practices. Regulating and licensing of some businesses has been one of the oldest ways of protection. This is the most commonly used means in the financial sector where no player or firm just joins the market without proper legislation. The use of standardization has also helped in consumer protection by enhancing the product safety. Business premises Highland credit ADI has its office premises leased from a property development and management company. One of the critical considerations for the leasing option regarding premises was the need to stay focused in business. All the management effort of the Highland credit ADI have been directed towards the core business which is lending and deposit taking. Secondly, leasing costs compared to development of own premises cost is much lower and even highly likely to be higher in the long run. The cash flow position of the company cannot allow commitment of such capital intensive projects especially while the organization is still at the growth phase. The terms of the lease includes period of the lease, payment frequency, any additional costs to the lease, and exit clauses in case of termination of the lease (Margaret, PP 120). For our scenario, period of the lease is very important since our physical location is not only very important to our customers but also establishment of a premise to meet the standards of a ADI are costly and require substantial capital outlay, therefore short lease periods are unfavorable in this scenario. More so, what is of critical importance was the notice period in case of termination of this lease? This to us was well negotiated being two year notice or refund of two years lease amount with a six months notice. This has been incorporated so that the business activities of Highland Credit ADI cannot just be moved without proper information to stakeholders. Lastly the lease amount is equally very important term for negotiation since it has cost implications on the profitability of the organization. Intellectual property Intellectual property which is usually property related to creativity and originality needs much protection just like any other asset. Business name is a property which needs protection through registration. Business or trade secrets is another area that needs safeguard since they form core of the strategies necessary for survival of the business from their competitors. Trade secrets can only be protected by signing confidentiality agreements with the employees and other parties that might have knowledge of the secret. Trademark and signs should also be protected. Any symbol, sign, letter or group of letters which is unique and can only be associated with the products of the company can be safeguarded by being registered as a trademark (Neil, pp.118). For Highland credit to have its products symbols have protections under the trademark protection on meeting the basic requirements then it must be formally registered with office of the attorney general. Industrial law These are regulations that mainly traverse the whole commercial industry as they enhance better stakeholders’ relations and eliminate exploitative practices. These laws will always work towards curbing discrimination, enhancing freedoms, individual privacy protection and generally better working conditions and environment. According to the Fair work act (2009) the employer have been obligated to provide a fair work information statement which will state minimum information to ensure that the employees understand the working environment in the premises of the employer. This statement should be issued to new employees just before reporting for employment or immediately after employment. In order for a company to comply with the industrial regulations of occupational health and safe, insurance covers like workers compensation schemes which covers both the employer and employee as regards work related injury or disease is necessary (John L, pp. 123). Occupational health and safety Occupational health and safety entails measures to ensure that the working environment for the employee is safe and do not pose any health risk to him/her. This does not exclude visitors who are actually stakeholders to the institution but it is imperative that the premises of the company be safe for all the users. Highland Credit ADI just any other employer must ensure safety of all visitors to their premises by providing safe working environment, providing training or necessary instructional materials on how to have a safe working environment. In other cases especially in manufacturing concerns, arrangements for safe handling of machinery, equipment and chemical substances should always be in place and all employees of the institution are aware. Employers’ responsibility The employer’s greatest responsibility is a duty of care to the employee. He has to ensure the working environment is safe, does not expose employees to health complications and that the environment caters for the welfare of the employees. This same environment has to be extended to other stakeholders who might visit the premises. Employers also do have a noble responsibility with regard to engaging in risk management processes in the workplace. The employer must put in place a team of management to undertake identification of risks and hazards prevalent in the institution, assessment and finally draw a prevention mitigation plan which must be shared amongst all the stakeholders within the premises. In case of any incident, it is the responsibility of the employer to report the same to relevant authorities. The employer also has an obligation of developing occupational health and safety programs within the company. This program is one of the risk mitigation and prevention schemes that will ensure proper training of staff as regards occupational health and safety, safety rules, emergency procedures and drills, incident recording, reporting and escalation, workplace inspections and evaluations and finally standard working methods that will be safe and secure. Lastly the employee has the responsibility of establishing an occupational health and safety committee whose mandate will be to implement occupational health and safety policy. This committee comprises the employees and the management teams. Highland credit ADI can always keep updated as regard issues of occupational health and safety by establishing occupational health and safety committee whose responsibility will be to update the policy and even the risk management strategy. The organization should also assign one of the operational managers the responsibility in this line and therefore having a position where the back rest. It will be easy to get updated if the company also joins with other industry players so as to have industry standards concerning occupational safety and health discussed. This will be a forum where information will be shared consequently very informative to different firms especially where experts in the area facilitates the same. Taxation Taxation of business premises by governments is inevitable in every economy in the world. Taxes are used by the government to provide public goods and services which are very important for the effective operation of business. Taxation is a compulsory operation by authorities and mostly is safeguarded by tough legislations hence non compliance to tax laws can bring severe risk to the business. The business entity is expected to pay direct taxes which are as a result its own operations and sometimes the tax regulations requires that the company has to be an agent for tax collection where it is expected that it deducts taxes from employees and clients and remits the same to the taxing authority. Highland credit ADI needs to register for the goods and services tax as a requirement by the taxation regulation of Australia and since it meets its requirement of having a turnover of more than $75,000 per annum. Other tax schemes which highland credit ADI requires to register and comply with include PAYG tax and fringe benefit tax schemes. PAYG tax is a deduction out of employment emoluments including salaries and wages to employees. It is a legal requirement that every employer deducts PAYG tax out of every employer during every month of payment. Every employer must submit PAYG returns during every quarter of payment with all the details of staff, their deductions, benefits and even the ABN number of the employer. Failure to submit this return can attract a penalty which in most cases is punitive as described in the taxation administration Act (1953). Fringe benefit tax is a tax on low interest benefits usually given by the employer to the employee as part of the employment benefits. A fringe benefit tax will be charged where; The employee uses a company car for its private use. The employee has been given a loan by the employer whose loan interest rate is lower than the minimum statutory interest rate. The employer pays for the employee debt. The employer provides accommodation for the employees at a lower rent value or just mere free housing of employees. First the employer must register for this tax scheme especially in the conduct of its business it has any activity which can be subject to Fringe benefit tax. Conclusion For effective operations in business, an entity must be registered with relevant regulatory authority and compliance to the authorities’ norms or laws is mandatory for the effective business conduct. Relevant licenses and statutory requirements must also be fulfilled since government is an invaluable stakeholder for any business entity. Highlands credit ADI has had no option to avoid legal, statutory and even industrial regulations if it has to conduct its business in to unforeseeable future. Read More