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Week 3: Business Structures - Coggle Diagram
Week 3: Business Structures
Key Cases
Influencing factors when choosing business structure include
size of the business and ability to expand
establishment and operating costs involved
exposure to individual liability if the business fails
the ability to participate in management and the scope for managerial control
treatment of profits
concerns for taxation liabilities
need for, and scope of, financial privacy
Types of structures
sole trader
partnerships
limited partnerships
venture capital limited partnerships
joint ventures
unincorporated
incorporated
trusts
express trust
non-express trust
companies (proprietary and public)
public
listed
unlisted
proprietary
small
large
associations
unincorporated
incorporated
Sole Traders
the person carrying on the business as an independent individual
Owned and controlled by the sole trader who also enjoys profits and is directly liable for tax on income earned.
Simplest form of business structure and is common
Establishment
No formal establishment process and should the sole trader trade under their name no registration needed.
If trading under a any other name
Business Names Registration Act 2011
(Cth) requires registration of the business name
Those who may apply for a business name
An individual
an incorporated entity, including company
an unincorporated entity, trust, super fund, body, association
partnership or JV partnership
JV
To register, will need an ABN
Governance
No specific laws govern the sole trader. Must comply with laws applicable to the registration of that trade eg, solicitors, accountants
Control
Sole trader has absolute control. May employ others, they are only accountable to sole trader.
Liability
Sole trader personally liable for dents incurred and liability unlimited. Liability may be limited through insurance policies
The business, even though under a trading name, is not separately liable for any debts. Granting a business name does not create a business structure
Fundraising
Funds are limited to what the sole trader has in savings or loans, or business profit to finance growth
Continuity of existence
Perpetual succession not applicable. The business normally ends on death or bankruptcy of the individual
Privacy
Apart from Commissioner of Taxation, profits do not need to be disclosed, financial affairs kept private
Taxation
Sole trader is liable, according to tax rate applicable to individual taxpayers, for payment of tax on income earned
Advantage of simplicity, flexibility and control, use business losses to offset other taxable income
Significant disadvantages , being personally liable for business debt, limited financing options, taxation at individual tax rate rather than company tax rate
Partnerships
Structure that involves more than one person carrying on the business in common with a view to profit. Governed in QLD by
Partnership Act 1891
(Qld)
A partnership is NOT a legal entity. It does not offer limited liability.
Establishment
Creation based on an understanding between partners. Common to be established under contract, however, may be through actions or oral.
Essential elements
Partnership Act defines a partnership as:
the relation which exists between persons carrying on a business in common with a view to profit
There must be a valid agreement between the parties as required by the word 'relation'
There must be a business being carried on. Defined to include every trade, occupation and profession. Generally excludes domestic transactions and hobbies.
May be oiver time or a single event, see
Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd
(1974) 131 CLR 321
There must be two or more persons working in the business together ('in common')
Must be motivation to run the business so as to profit.
Liability
Each partner is both a principal and agent of the business as a result of the statutory agency relationship provided for by the Partnership Act.
Each partner may incur liabilities on behalf of the business, and each partner will be liable for debts and obligations incurred by other partners
Control
Each partner has ability to partake in management unless their agreement states otherwise.
Partners' relationship, rights and duties
Regulated by the law of fiduciary obligations, a partnership requires mutual trust and confidence.
Chan v Zacharia
(1984) 154 CLR 178
This means full disclosure of material information to partners and to act in good faith in the best interests of the partnership rather than own interests.
A number of remedies exist to resolve breaches including injunction (to stop partner working for competing business), or account of profits ( to claim back profits made by partner in breach of duty).
Fundraising
Unlike companies, partnerships cannot raise funds from the general public. The partnership relies on partners' savings and loans. However, a partnership can have up to 20 partners, greatly increasing the wealth pool.
Continuityof existence, termination
Unless an agreement exists to the contrary, any changes of the membership of the partnership terminate the business.
Partnership Act
This provision may be altered by the partnership agreement. Large partnerships may continue to operate even though dozens of partners change each year.
Privacy
Aside from basic tax requirements no obligation exists for partners to disclose financial information.
Tax
Each partner is responsible for their own tax affairs and payment.
Advantage of lack of formality and low cost to establish. Easily changed and good privacy for commercial dealings. Ability to pool capital and simple tax arrangements.
Disadvantages include unlimited liability, a limitation on numbers who can participate in the partnership, difficulty in disposing of the share in partnership and reduction in amount of individual control
Limited Partnerships
Relying on registration, statew legislation allows for one general partner with unlimited liability and one or more limited partners whose liability is capped at the amount of capital they have paid (or promised to pay).
Limited partners CANNOT take part in the management of the business of the partnership and cannot bind the firm. They may inspect books.
Creation of limited partnership changes tax arrangement to that of a company.
Joint Ventures
Common type of structure used in high-risk or high capital type activities. Defined in
Brian Pty Ltd v United Dominions Corporations Ltd
[19830 1 NSWLR 490 at 506
Establishment
No formal legal requirement establishing JVs. To avoid confusion later on it is common for lawyers to prepare written contracts governing the terms and conditions of the arrangement.
Governing law
No specific state or federal law deals with formation or operation of a JV
Business name formalities apply and the general law governs operations and otherm atters.
Control
JV will bring different benefits, such as skills, and control will usually be limited to the party's area of expertise.
Liability