TODAY’S TOPICS ARE:

TODAY’S TOPICS ARE:

1. Choosing An Organisational Type 2

2. Sole Trader 3

3. Partnership 5

Case Studies 11

4. Incorporated Companies 17

More Case Studies 25

INFLUENCING FACTORS IN CHOOSING AN ORGANISATIONAL TYPE

1. The purpose of the business.

2. Its duration.

3. Cost and method of formation, (simple or elaborate).

4. Availability of capital at initial and subsequent stages.

5. Sources of capital, (reliable for expansion etc.)

6. What types of assets will the venture acquire?

7. What capital should the venture initially have? What proportion loan/capital?

8. Start a business from scratch, or buy an established one?

9. What powers of control should be vested to participants?

10. Who should be the key personnel?

11. Can infant members be introduced?

12. Who should be entitled to participate in income distributions?

13. Provisions for variations of structure.

14. Tax advantages of the structure.

15. Should management be shared equally?

16. Should the venture be independent of the members, with a capacity to sue or be sued etc?

17. How does the structure provide for expansion?

18. What are the probable requirements for lending institutions?

SOLE TRADER

1. Nature of Structure

Usually a one person operation.

Relatively easy to establish.

Often a wholesale business. (Buy and sell for profit).

Problems:

* limited life

* limited access to finance

* unlimited liability

2. Governing Law

Must register a business name if business is carried on under a name other than the individual's.

Like all businesses must be aware of taxation laws, health and safety laws, public liability, environmental controls, worker's compensation, zoning restrictions, industrial law requirements.

3. Establishment

Involves no formalities apart from above mentioned Business Names Act.

4. Continuity of Existence

Business ceases when the Sole Trader dies.

5. Limitation of Liability

A Sole Trader is personally responsible for debts incurred by the business. Needs protection in the form of Public Liability and Professional Indemnity Insurances.

6. Control

There are no external influences which control a Sole Tradership.

7. Formalities

Licenses, permits etc. must be current.

8. Admission of a New Investor/Participator

This will automatically change the business into a Partnership.

The only restrictions on admission of a new participator could be enforced by professional associations who may prevent an unqualified person becoming a partner.

9. Ability to Sell Entire Interest

No legal restrictions.

10. Winding Up

Decision left to Sole Trader, although other involved parties may take an interest.

PARTNERSHIP

1. Nature of Structure

DEFINITION: "carrying on a business in common with a view to profit".

Can be of an informal structure.

In most dealings with the law a partnership is not treated as a single entity. (eg. a partnership does not pay tax although it does lodge a return on Form P).

In some circumstances, however the law does treat a partnership as a separate legal entity. It would be extremely difficult, if not impossible for litigation to be brought against, or on behalf, of a partnership unless the law stretched the definition.

Partnerships are very flexible. If all partners agree, the structure of the business may be changed at any time, and if a majority agree, the nature of the business may be changed.

Partnership is a relationship of the utmost good faith (UBERRIMAE FIDEI), and partners are not only obliged to disclose their dealings to their partners, but also to share profits made in any other business which is similar to that of the partnership.

2. Governing Law

The Partnerships Act 1958 states that "Persons who have entered into partnership are for the purposes of this Act care called collectively a FIRM, and the name under which their business is carried on is called the FIRM-NAME."

A partnership formed for making profit may not exceed 20 persons unless that profession has been declared by notice in the Gazette. Those that may exceed 20 persons include:

Accountants & Lawyers - may not exceed 400

Architects, pharmacists, vets - may not exceed 100

Actuaries, doctors, stockbrokers - may not exceed 50

A partnership contract lasting for more than one year must be made in writing.

Like a Sole Trader, if a Partnership wishes to carry on a business in a name other than their own, the name must be registered under the Business Names Act, at the Commission for Corporate Affairs.

3. Establishment

No formalities involved. Carrying on a business in common with a view to profit" is sufficient proof of partnership.

Partnerships must be aware of normal business requirements; tax, licensing etc.

4. Continuity of Existence

As long as there are partners to continue the firm there is limitless continuity, unless the number of partners exceed the legal limit. In this case the forming of an incorporated company is an option.

5. Limitation of Liability

Liabilities facing a partnership are significant. As in a Sole Tradership the partners are personally liable for all debts.

An incoming partner is not liable for the pre-existing debts incurred by the firm.

A retiring partner is liable even after his retirement for contracts made during his period of activity UNLESS the retiring partner can prove NOVATION.

NOVATION is the substitution of a new contractual agreement in consideration of release from an old one. The new contract is signed by the retiree, continuing partners and major creditors. In some instances creditors may refuse novation.

6. Control

Unless there is a written agreement between partners stating otherwise, the following nine rules apply to partnerships:

1. All partners are entitled to share equally in the capital and profits of the business and must contribute equally to the losses whether of capital or otherwise sustained by the firm.

2. The firm must indemnify every partner in respect of payments made and personal liabilities incurred:

· in the ordinary and proper conduct of the business or firm.

· in or about anything necessarily done for the preservation of the business or the property of the firm.

3. A partner making for the purpose of the partnership any actual payment or advance beyond the amount of capital which he has agreed to subscribe is entitled to interest at the rate of 7% per annum from the date of payment.

4. A partner is not entitled before the ascertainment of profits to interest on the capital.

5. Every partner may take part in the management of the partnership business.

6. No partner shall be entitled to remuneration for acting in the partnership business.

7. No person may be introduced as a partner without the consent of all existing partners.

8. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority, but no change to the structure of the partnership may be made without unanimous consent.

9. The partnership books are to be kept at the place of business of the partnership (or the principal place if more than one), and every partner may, when he thinks fit, have access to inspect and copy.

7. Formalities

The same adherence to licensing which apply to the sole trader also apply to partnership.

8. Admission of a New Partner

A partner can only be admitted with the unanimous consent of the existing partners.

Some professional associations will not allow a partnership to be formed between qualified and unqualified persons.

Although a partner may assign his share in the firm, the recipient does not become a partner as a result.

9. Ability to Sell Entire Interest

Partnerships are generally not sold as an entire business.

10. Winding Up

Without a Court Order a partnership may be dissolved:

1. By retirement of a partner when the firm is of no fixed duration.

2. By the giving of notice or by natural expiration.

3. By the completion of the agreed period or venture.

4. By death or bankruptcy.

5. By illegality of partnership.

With a Court Order

1. When a partner is suffering from a mental disorder or becomes permanently incapable.

2. Where a partner is guilty of conduct prejudicial to the firm.

3. Where a partner breaches the partnership agreement.

4. When the business can only be carried on at a loss.

5. When circumstances arise that it is fair that the firm be dissolved.

ADVANTAGES OF PARTNERSHIP

Informality and inexpensiveness of setting up.

Flexibility.

Secrecy.

Partnerships do not pay tax.

Automatic checks and balances.

DISADVANTAGES OF PARTNERSHIP

Liability.

Transfer of interests.

Numbers are limited.

Persons who can be partners are limited.

Unanimous decisions are required.

Partners are each others agents.

CASE STUDIES

Do the following relationships qualify as partnerships?

1. A husband and wife run and operate a retail grocery store and share equally in the profits and losses of the business.

2. Grace and her brother each receive rent on flats bequeathed to them in a will.

3. Simon and Jenny both work on a wheat farm they lease from a farmer, and share the proceeds from wheat sales equally.

4. Wai Adup is an electrician. Her husband is employed to answer the phone and do the book-keeping.

5. Dr. Death and his 16 year old son Jekyll operate a medical clinic in the name of Death and Jekyll, Medical Practitioners.

6. Slim owned a licensed hotel and agreed to lease it to Bill. They entered into an agreement that the rent would be one-half of the profits of the business.

7. Alf and Bill agreed to work in partnership together for three years. After one year, Alf wishes to end the arrangement because he believes the business is no longer profitable.

Advise Alf what action he should take.

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8. Colin and Andrew verbally agreed that they would work together as house painters for a period of two years, sharing profits and losses equally. Profits were satisfactory over the first twelve months until Andrew ordered paint to the value of $50,000. All equipment is leased and their business assets, a joint bank account of $2,500 and a van (valued at $2,000) are inadequate to pay the balance of the debt. Colin states that Andrew will have to pay the balance of the debt himself and that he is only going to work by himself in future as the arrangement is not going to be profitable. Advise Andrew, giving reasons:

a) whether Colin is liable to pay any of the debt.

b) Whether Colin is entitled to end their agreement.

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9. Mia and Penny are students who have been earning money in their spare time by selling their typing skills to businesses requiring temporary assistance.

Mia decides that they should have a PC so that they can also do off-premises word processing for the general public. She buys a $10,000 computer and has it delivered to her home. Penny doesn't want to pay half the cost.

Penny would like her friends Kate and Jackie to become part of the business because they own a photocopier. Kate and Jackie accept Penny's invitation, and have their photocopier delivered to Mia's home. Mia is not impressed because she's very greedy and doesn't want her share of the profits to decrease.

As a result of a tragic accident with an electric stapler, Mia is killed. Her husband wants to continue Mia's role in the business. The remaining partners don't want him.

Discuss the situations which arise in this situation.

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10. Con and Carmen, both Swinburne students, decided to make some money to pay for their August ski-ing trip. They signed a lease on a shop On Glenferrie road to set up a shoe repair business. Because they were such good friends they didn't believe a formal agreement was necessary.

Carmen was not aware that Con already operated a similar business at Doncaster Shopping Town with his cousin Sandy and therefore had lots of good ideas and material to use when setting up the business.

One of the customers, Ann, asked Con if he would do a special discount job for her in return for 1 week of free accommodation at Ann's ski lodge at Mt. Buller. Con agreed but did not tell Carmen.

Carmen who is 22, believes that because Con is only 18, she should have greater control of the business and a greater share of the profits because she has contributed more capital to the business. She has also lent the partnership $5,000 to have promotional pamphlets printed and delivered by Angila's Delivery Service. Carmen is demanding that Con pay her back at 12.5%.

Con employed builders to install stools at the shop counter so that customer could sit down while waiting for their shoes to be repaired. Carmen refuses to pay the builders bill because she feels that she should have been consulted about such a decision.

Con is angry and wants to leave the business. Carmen says he cannot leave because the business owes over $10,000 to third parties, and if he leaves of his own accord that he will be personally liable for the whole amount.

Discuss the legal situations which arise in the above case.

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INCORPORATED COMPANIES

1. Nature of Structure

DEFINITION: AN ASSOCIATION OF PEOPLE FOR SOME COMMON OBJECT.

A company is a legal person distinct from its members, with power to make contracts and own property.

The act of becoming a company is called INCORPORATION.

A company has perpetual succession.

Upon incorporation has an authorised capital of a specific amount which is divided into shares of a fixed amount each.

There are 2 types of company at which we will be looking. They are:

a) Proprietary Companies (large and small)

b) Public Companies

Proprietary Companies are divided into two categories of large and small. The distinction between the two arose as a result of the First Corporate Law Simplification Act 1995, and allows for the ‘One Director Company’ which is subject to less rigorous disclosure rules than large proprietary and public companies. A large proprietary company is one who satisfies two of the following three tests:

· consolidated annual gross operating revenue of at least $10 million.

· end of financial year consolidated gross assets of at least $5 million.

· 50 or more full time employees (or their part-time equivalent) at the end of the financial year.

Public Companies are those which are, in part, owned by the public. They may be listed on the Stock Exchange or not, and may advertise to the public for investment. The disclosure rules are extremely strict.

2. Governing Law (Corporations Law)

In May 1988 a broad range of national legislation was introduced into federal Parliament. The legislation consisted of approx. 2,000 new sections and Schedules contained in the Corporations Act 1989 (Cth), Corporations Fees Act 1989 (Cth), Securities Exchanges (Application for Membership) Fidelity Funds Contribution Act 1989 (Cth), Securities Exchanges Levy Act 1989 (Cth), Australian Securities Commission Act 1989 (Cth) et al.

The Corporations Law is administered by a single Commonwealth authority, the Australian Securities Commission, which serves as a public educator as well as a policing body. The ASC has Business Centres in each capital city, and many regional centres. It maintains a national database which is accessible to the general public, providing information about all aspects of companies.

The ASC’s policing powers (investigation, inspection, examination) are in the areas of investor protection, securities supervision, takeovers, and company disclosures.

3. Establishment

There is an amazing variance in the establishment procedures, depending on the type of company.

eg. To set up a ready made 'shelf company', all you need is 2 minutes and around $750.

To start a company from scratch requires drafting an M & A of Association, Australian Securities Commission must approve of directors, and a certificate of incorporation must be issued. Companies cannot act (as a ‘Company’) until the certificate has been issued, (although contracts may be entered into and ratified upon incorporation.)

To form a company, certain documents must be lodged at the Australian Securities Commission. They are:

a) Application for registration. Information must include type of company and location of registered office.

b) Memorandum of Association includes:

- name of company

- share capital

- limitation of liability

- objects of Company (optional)

- information about prospective shareholders (subscribers). This information is only necessary for public companies.

c) Articles of Association are like a rule book for the company. Any tailoring, amendments, omissions or clarifications to Corporations Law are included here.

d) A written list of people consenting to be Directors.

e) Written consent of people who are to be Directors.

4. Continuity of Existence

Perpetual succession, ie. even if all directors and/or shareholders die, the company continues.

5. Limitation of Liability

Shareholder's liability is limited to amounts outstanding on unpaid shares.

eg. If you purchase 500 shares @ $2 paid up to $1, you can only be called upon to pay the outstanding amount.

This means that generally shareholder will not be PERSONALLY liable for debts incurred by the company, BUT THERE ARE EXCEPTIONS!!!

· Section 186. If a company carries on a business with less than the statutory minimum of members for more that six months, members that are aware of this will be liable for the company’s debts.

· Section 219. Failure to show the company’s correct name and registration number on business letters will result in the company and the officer responsible being guilty of an offence, and will lead to personal liability in the case of cheques.

· Section 588G. A director will be personally liable in the event of insolvent trading.

6. Control

Private companies are managed by the Directors. Public companies are managed by a Board of Directors. Duties of Directors are based on both common law and statute, they must:

1. Act in good faith.

2. Not make improper use of information.

3. Discharge their duties with care and skill.

4. Disclose any interests in contracts.

5. Not make improper use of position.

6. ensure proper accounting records are kept.

Shareholders have rights and duties as follows:

1. The right to receive dividends.

2. The right to vote at company meetings.

3. The right to elect directors.

4. The right to appoint an auditor, receive annual accounts, and pass special resolutions.

5. Shareholders must not interfere with a course of action decided on by the Directors

7. Formalities

1) A company must maintain a registered office.

2) Must maintain a register of:

· Members

· Directors and Officers

· Shareholders

3) Must lodge a Tax return.

4) Must have a common seal.

8 Admission of a New Participator/Investor

Investors in companies are called shareholders. There are two types of shares:

1) Ordinary shares generally comprise the bulk of the company's capital.

2) Preference shares entitle the holder to be paid a dividend before the ordinary shareholders.

Companies can also obtain further finance from loans, debentures, or by raising the share issue.

9. Ability to Sell Entire Interest

There is virtually no restriction on the transfer of shares in a public company, but an entire public company can’t realistically be sold. A company in its entirety must be wound up.... which brings us to...

10. Winding up

Should a company default payment to a major creditor, a receiver may be appointed. The appointment is made either by the creditor or by the court. The receiver assesses the company’s ability to trade back into business, but if it is too late for this a liquidator is appointed. A liquidator realises the company’s assets into cash and then pays out the creditors. Where all debts can’t be met, the creditors are paid in accordance with the Companies Code, starting with the Taxation Department, then major creditors etc, and finishing off with unimportant stuff like employees salaries.

PRIVATE COMPANIES

PUBLIC COMPANIES

Restrict the right to transfer shares

No restriction on share transfer

Membership numbers 1 - 50

Membership numbers 5 upwards

Require minimum 1 director

Require minimum 3 directors

Prohibit invitation to the public

May issue a prospectus and be listed on the Stock Exchange

No upper age limit for directors

As a general rule persons over 72 cannot be directors

Are numerically significant

Are economically significant

Managed by director/s

Managed by a Board of Directors

Doesn’t need an inaugural meeting

Meeting must be held after first share issue

Are often formed for tax advantages

Are generally formed for profit

BUSINESS ORGANISATIONS
POINTS OF COMPARISON	SOLE TRADER	PARTNERSHIP	COMPANY
NATURE OF STRUCTURE	Simple	Carrying on a business in common with a view to profit.	· Separate legal entity · Pty. Ltd. = Private company · Ltd. = Public company
GOVERNING LAW	Business Names Act where applicable.	Partnerships Act 1958 Business Names Act if applicable. · Act in utmost good faith · Share profits, losses and management. · Change to structure needs unanimous consent, change to nature requires majority agreement · 7% interest on loans made by partners · Partners don’t receive salary	Corporations Law which comprises many individual statues.
ESTABLISHMENT	Simple	· Merely acting as partners can confer partnership. · An agreement may be drawn up to tailor the Act if required. If tailoring is to last more than one year, this agreement must be in writing.	Must lodge with ASC: · application for registration · M & A of Association · Written list of directors and their consent to act.
CONTINUITY OF EXISTENCE	Ceases when the sole trader dies.	If two person p/ship and one partner dies, the p/ship ends. If larger p/ship the business continues as long as there are 2 partners.	Perpetual succession
LIMITATION OF LIABILITY	Unlimited	· Partners are personally liable for losses. · Partners are liable for ordinary purchases made by other partners in the firm. (agency) · Incoming partners are not liable for pre-existing debts. · Outgoing partners should get a NOVATION agreement in order to avoid future liability, · Partners are also liable for each other in tort.	· Shareholder are only liable for amounts outstanding on their shares. · Directors can be personally liable in the event of negligent or insolvent trading.
CONTROL		Relationship of the utmost good faith (ubberimae fidae)	Directors must act in the best interest of the shareholder. Shareholders can: · receive dividends · appoint an auditor · pass special resolutions
FORMALITIES		Must lodge a tax return on Form P	Must maintain a registered office. Must lodge a tax return
ADMISSION OF NEW INVESTORS	Becomes a partnership	must be professionally qualified need unanimous consent from partners	Pty. Ltd. · restricts share transfer · cannot have prospectus or ASX listing Ltd. · no transfer restriction · can issue prospectus and have ASX listing
ABILITY TO SELL ENTIRE BUSINESS	No restriction	Is generally not appropriate	Possible for private company.
WINDING UP	Simple	With or without court order	Realise assets, pay creditors, go home

More Business Organisations Case Studies

1. Moya holds 20% of Dubious Enterprises Pty. Ltd., Margaret and Catherine 35% each, Damian and Brian 5% each. Moya is the Managing Director and Catherine and Margaret are the other Directors. Recently, Damian and Brian have become aware of the following disturbing information.

The directors have refused to attend Board meetings despite the fact that it has been brought to their attention that certain staff members were not acting honestly. Brian and Damian also have reason to believe that the directors are receiving secret payments from company clients.

Apparently, Catherine has also sold 20% of her shares to her husband without consulting with any of the other shareholders.

Both Damian and Brian want to have the books audited, and also want to have the company listed on the Stock exchange so that more finance can be raised.

Dubious Enterprises Pty. Ltd. eventually fails to be profitable and falls into liquidation owing $200,000 to creditors. Damian and Brian are worried about their personal liability. Advise them as to the situations outlined above.

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2. Pierre and several of his associates plan to launch a new business venture which involves taking over existing businesses, closing them down and selling their assets to competing businesses for a quick profit. To raise sufficient funds to begin the planned takeovers Pierre and his associates propose to advertise, seeking members of the public willing to invest in the venture. They anticipate that the venture will attract thousands of small investors.

Pierre seeks your advice in relation to the following matters:

a) What type of business organisation should he form to carry on the new venture? Give two reasons.

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b) Who is responsible for the management of the type of business you advised him to form, and what are their duties?

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c) What is the term used to describe investors in this type of business organisation? (Clue: not thieving bastards)

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d) The proposed venture is a highly risky one. If the business fails, what liability do the investors face?

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3. Joanne and Sharon have been running a business together selling leather goods. When they began trading they verbally agreed to share profits and losses equally, but did not bother to make a formal agreement. They now wish to expand their business to include imported knitwear. To do this they plan to allow other people to invest money in the business.

Joanne and Sharon have decided to limit the number of new investors to forty, and they insist that they must keep control over who can become an investor in their business in future.

Joanne and Sharon seek your advice on the following matters:

a) What type of business are they running at present? Give 2 reasons.

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b) What type of business organisations should they form? Give reasons.

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4. Sid and Nancy have decided to buy the lease of a 30 unit motel. They are in their mid 40’s, own their home worth $200,000, have $80,000 invested variously, and have never been in business before. They are about to pay $400,000 for a 7 year lease.

Advise the Johnsons on their choice of business structure.

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5. Fern, a retired bookkeeper, has received a superannuation payout of $150,000 and now wants to establish a plant nursery. She is unsure as to what type of business organisation she should establish. Advise her as to what advantages and disadvantages there would be in a sole tradership, a partnership, as well as private and public companies.

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6. Bob and Jane are both landscape gardeners. They have no partnership agreement but have been working together for about 8 months. Their relationship started out as one of convenience so that they could share equipment.

Jane contributed $5,000 cash and Bob $2,000 when they commenced working together, and Jane also made a $3,000 cash loan so that they could buy some more equipment. At the end of 6 months of working together the business made a $50,000 profit. Bob believed he was entitled to 60% of it because he worked on weekends and started work earlier than Jane every morning. Jane thought this unreasonable as she had contributed more capital and also made a cash loan which, in her opinion, should have earned her at least 18% interest. Jane also bought some expensive cologne for her boyfriend and charged it to the business.

Bob wishes to introduce two new partners into the business in order to raise capital , Jane doesn’t wish this to happen as she believes 2 partners is adequate. As well as this, he would like to expand the business to include the construction of timber verandahs. Jane is also in partnership with her boyfriend and in the evenings they draw landscape designs and sell these to new home owners. Bob believes this is a conflict of interests, and that Jane must share her profits from this sideline with him.

Jane decided to leave the business. She did not tell anyone, she just went. After she had left, Bob ran up large debts which the business is unable to pay. Bob eventually contacted Jane, and now they have come to see you.

Advice please??

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7. Agro and Humphrey were friends operating a roadside ice-cream business. They each contributed $1,000 towards the purchase of the equipment and spent their time operating the roadside stand. They had no formal agreement.

Agro was sick for a week and during his absence Humphrey employed an extra helper, Fat Cat, at a salary of $500 per week, but when he returned to work, Agro refused to pay Fat Cat’s wages. During the time Agro was away Humphrey was obliged to work extremely long hours to fulfil the contractual obligations of the business, and therefore felt that he was entitled to more remuneration than Agro for this period.

Agro, anticipating the delivery of a new ice-cream machine, borrowed $1,000 from a bank in the name of the business, using their equipment as collateral. Humphrey was furious and said that Agro had no right to do this.

Agro accepted a cheque for $250 from the Bedlam Primary School for a number of ice-cream cakes delivered to the school for a fete. The cheque proved to be worthless and Humphrey demanded that Agro personally reimburse the business for the loss.

Humphrey thought they needed to buy a new van but Agro disagreed. One day during Agro’s absence, Humphrey placed an order for the van in the name of the business and when it arrived Agro refused delivery.

Explain each party’s obligations and/or rights in relation to the situations outlined above.

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8. Adam has a busy hairdressing business and he has decided to make Steve, who he employs, his partner. Before doing so, however, he consults you for information and advice about various aspects of partnership. The particular matters concerning Adam on which he seeks your advice are:

a) He wishes to trade under the name of Curl Up and Dye, and wants to know what the legal requirements are.

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b) He is thinking of retiring if Steve does well. What action should he take, upon retirement to avoid future liability for the business?

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c) Would Adam be wise to take on Steve if he was 17 years old? Explain.

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9. Quick and Witty are teachers at Swinburne and wish to make some extra money. They decide to start a business in which they will hire out skis and other recreational snow equipment in the Victorian snowfields. Several factors concern them, especially the nature of Victoria’s erratic weather, and the wear and tear on the equipment requiring frequent replacement.

They come to you for advice.

a) Explain which form of business ownership would be the most appropriate for their purpose?

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b) In the event of the business failing to be successful , what would their personal positions be in relation to any debt?

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