Business Law week 3

Sole Trader

A sole trader is a business owned and controlled by one individual who keeps all profits as personal income. They have unlimited liability, meaning they are personally responsible for all debts, which creates high financial risk despite the simple setup.

Sole Trader – Legal Regulation

Sole traders are not governed by a specific business structure law but must still follow general laws such as tax, licensing, consumer, and employment laws. Compliance with these laws ensures the business operates legally even without formal regulation.

Trust

A trust is a structure where a trustee manages property or a business for beneficiaries who receive the benefits. It is commonly used for asset protection and tax advantages because trust assets are separate from personal assets.

Trust – Legal Duties

Trustees have a fiduciary duty to act in the best interests of beneficiaries and must follow the trust deed. Trusts are regulated by State and Territory legislation and equity law, which imposes strict obligations on trustees.

Franchise

A franchise is a business arrangement where a franchisee pays to operate under a franchisor’s brand and system. The franchisee must follow strict rules, allowing them to use an established business model while remaining legally separate.

Franchise – Legal Regulation

Franchises are governed by contract law and the Franchising Code of Conduct under the Competition and Consumer Act 2010 (Cth). These laws regulate disclosure, behaviour, and dispute resolution between franchisors and franchisees.

Partnership

A partnership is a business owned by two or more people who share profits, control, and resources. Partners have unlimited and mutual liability, meaning they are responsible for both their own actions and those of other partners.

Partnership – Legal Status

A partnership is not a separate legal entity, so partners are personally liable for business debts. The business may dissolve if a partner leaves or dies unless otherwise agreed.

Partnership – Authority and Duties

Each partner acts as an agent of the business and can bind the partnership through their actions. Partners also owe fiduciary duties, including acting in good faith, avoiding conflicts, and not competing with the business.

Forming a Partnership

A partnership can exist without formal registration or a written agreement if the legal definition is met. This means people can unintentionally form a partnership based on their conduct.

Definition of Partnership

A partnership is a relationship between two or more people carrying on a business together with the intention of making profit. It requires ongoing business activity, shared control, and a profit motive.

Company

A company is a separate legal entity created under the Corporations Act 2001 (Cth), meaning it exists independently from its owners. It can own property, enter contracts, and be sued in its own name.

Company – Limited Liability

Shareholders in a company have limited liability, meaning they are only responsible for unpaid amounts on their shares. This protects their personal assets from company debts.

Company – Regulation

Companies are regulated by the Corporations Act 2001 (Cth) and overseen by ASIC. They must meet legal requirements including reporting, governance, and director responsibilities.

Types of Companies – Liability

Companies can be classified by member liability, including limited by shares, limited by guarantee, no liability, and unlimited companies. The level of liability determines how much members are personally responsible for debts.

Types of Companies – Size

Companies are classified as small or large proprietary based on revenue, assets, and employee numbers. Large companies have greater reporting and disclosure obligations than small companies.

Types of Companies – Ownership

Proprietary companies are privately owned with restrictions on shareholders and fundraising. Public companies can raise money from the public and are subject to stricter regulations.

Separate Legal Entity – Case Law

Salomon v A Salomon & Co Ltd established that a company is separate from its owners. This means shareholders are not personally liable for company debts.

Corporate Governance

Corporate governance refers to how a company is directed and controlled, particularly the relationship between directors and shareholders. Directors manage the company, while shareholders have limited decision-making power.

Company Constitution

A company constitution sets out the rules for how a company operates and acts as a contract between the company, directors, and shareholders. It covers matters like meetings, director powers, and share rights.

Directors

Directors are responsible for managing or overseeing the company’s business. They may be involved in daily operations or focus on strategic decisions depending on the company structure.

Types of Directors

There are different types of directors including executive, non-executive, nominee, de facto, and shadow directors. Even those not formally appointed may still have legal responsibilities.

Directors’ Duties (Combined)

Directors have duties under common law and the Corporations Act 2001 (Cth) to act in the company’s best interests. These include acting with care and diligence, acting in good faith, using powers for a proper purpose, preventing insolvent trading, and disclosing conflicts of interest. They must stay informed, avoid personal gain, and ensure the company does not trade while insolvent. Breaches can result in penalties, disqualification, or criminal liability.

Business Judgment Rule

The business judgment rule protects directors from liability if decisions are made in good faith, for a proper purpose, without personal interest, and with adequate information. It recognises that directors can make decisions that result in loss without breaching their duty of care.

Law vs Ethics

Law refers to rules enforced by the legal system, while ethics are based on moral values of what is right or wrong. Something can be legal but unethical, or illegal but considered ethical.

Ethics – Enforcement

Ethical standards are not enforced by courts but through social pressure, reputation, and personal values. Businesses may also be influenced by consumer expectations and industry standards.

Ethical Theories

Different theories explain ethical decision-making, including deontology (rules-based), consequentialism (outcomes-based), relativism (context-based), and virtue ethics (character-based). Each provides a different way to judge what is right or wrong.

Law, Ethics and Morality Relationship

Law, ethics, and morality overlap but are not always aligned. Ethical behaviour often requires going beyond legal compliance, and businesses may face pressure to act ethically even when not legally required.