BSB250 – Business Citizenship Session 10 – Business Structure Basics

Overview

• The aim is to understand and explain the main legal structures used in the business environment:
  • Sole Trader
  • Partnership
  • Trust
  • Company
  • Other forms of corporation
• Analyze a fact situation to articulate the major advantages and disadvantages of a structure and draw a conclusion on personal preferences.

Introduction

• The Rule of Law is critical for an efficient business environment.
  • Protects rights of individuals involved in business dealings.
• Business often involves multiple parties with differing interests (e.g., suppliers, customers, employees, managers, shareholders, government, community, etc.).
• The choice of business structure impacts:
  • Ability to raise capital
  • Sharing of profits
  • Obligations to disclose information
  • Responsibilities and rights
• Important to consider if individuals act on their own behalf or on behalf of others.

Key Types of Business Structures

• Five primary types encountered in the business environment:
  • Sole Trader
  • Partnership
  • Trust
  • Company
  • Private Company
  • Public Company
  • Other Corporations
  • Government-owned Corporations
  • Statutory Authorities
• Additional categories may exist (e.g. Incorporated Association, Unincorporated Association, Corporation Sole) but are typically focused on non-profit contexts.

Selecting a Business Structure

• The choice of business structure has significant consequences:
  • Ease and cost of setting up the business
  • Legal and financial liability implications
  • Taxation implications
  • Ability to raise finance
  • Ongoing regulatory obligations

Sole Trader

• Definition: A sole trader directly owns and operates the business by themselves.
• Characteristics:
  • Can engage employees.
  • Sole responsibility for raising startup funds.
  • Complete control over business operations.
  • Entitled to all profits.

Liability and Legal Requirements

• Unlimited personal liability for debts and other legal obligations.
• No formal legal requirements for establishing this structure; however:
  • Business Names Registration Act 2011 (Cth) mandates registration if trading under a name other than the owner's.
  • Must register and remit Goods and Services Tax (GST) if turnover exceeds $75,000.

Advantages of Sole Trader

• Minimal formalities required.
• Full ownership allows for complete decision-making control.
• Retaining all profits.
• Only personal income tax applies to profits.

Disadvantages of Sole Trader

• Unlimited liability for business debts.
• Limited sources of capital (dependent on personal means).
• May lack all necessary skills for success.
• Difficulty in disposing of business as contracts are personal.
• Challenges in establishing goodwill as the business identity is tied to the owner.

Partnership

• Definition: A partnership consists of two or more individuals who own and operate a business together.
• Key Concept: Not a separate legal entity. Partners are mutually liable for each other's actions.
  • Each partner functions as both principal and agent, bearing liability for actions, contracts, and debts incurred by any partner.

Formation and Characteristics

• No formal steps required to form a partnership, akin to forming a contract.
• Terms are typically defined in a partnership agreement:
  • May be written, partly written, oral, or implied from conduct.
• Importance of a written agreement to define roles and mitigate disputes.

Legal Definition of Partnership

• Based on the Partnership Act 1891 (Qld):
  • Defined as the relationship between persons carrying on a business with a view to profit.
• Three elements must be satisfied:
  1. Carrying on a business
  2. In common
  3. With a view of profit
• A partnership may exist even if the parties are unaware or mislabel their arrangement.

General Rules of Partnership

• A partnership arises under s5 of the Partnership Act (Qld) 1891 when:
  • Carrying on a business: Must involve ongoing trading, not a single isolated occurrence.
  • In common: Reflects mutual agency among partners.
  • With a view of profit: Must aim for profit; otherwise, it’s an unincorporated association.
• No more than 20 partners are allowed in a general partnership without incorporating.

Distinction Between Partnership and Joint Venture

• Partnerships often carry mutual liabilities, while joint ventures allow for independent actions.
• A joint venture is defined as a contractual agreement between parties to pursue a specific business opportunity, acting separately rather than as partners.
• Importance of legal consultation when entering joint ventures due to the complexities of partnership law.

Partnership Agreements

• Essential for outline of partnership roles and rules:
  • Identification of partners.
  • Rights and responsibilities of each partner.
  • Profit and loss sharing mechanisms.
  • Authority of partners and decision-making processes.
  • Admission or withdrawal of partners, including matters of dispute resolution.

Types of Partnerships

• Limited Partnerships:

  • Allows over 20 members; members limit their liability.
  • Consists of General partners (unlimited liability) and Limited partners (liability limited to a specific investment).
  • Registration is required; treated as companies for tax.

• Incorporated Limited Partnerships:

  • Separates legal entity status for some partners, must have a general partner with unlimited liability.

Advantages and Disadvantages of Partnerships

Advantages:

• Minimal formalities and low formation costs.
• More ideas, skills, and capital inputs.
• Privacy regarding partnership formation as it does not require registration, barring GST and Tax obligations.

Disadvantages:

• Unlimited liability for each partner.
• Lack of complete control due to shared ownership.
• Mutual agency increases trust necessity among partners.
• Ownership difficulties regarding selling or transferring partnership interests.

Trust

• Definition: A trust involves a trustee owning property for the benefit of beneficiaries.
• Historical Context: Originated in the 12th century due to issues arising from the Crusades concerning property management.
• Focus on two ownership types:
  • Legal Ownership: Held by the trustee.
  • Equitable Ownership: Benefits the beneficiaries.
• Trusts can consist of individual or corporate trustees and can encapsulate various assets including entire businesses.

Structure of Trusts

• The Settlor establishes the trust and may be the original property owner.
• The trustee has a fiduciary duty; they manage and distribute income to beneficiaries.
• Trust properties are protected from the trustee's creditors if they face bankruptcy or liquidation.

Applications of Trusts

• Often utilized in wealth distribution among family members or as a tax-effective business structure.

Company Structure

• Definition: Defined under the Corporations Act 2001 (Cth), it operates as a permanent and separate legal entity.
• Characteristics include:
  • Perpetual existence
  • Separate legal personhood allowing it to incur debts and hold property independently.
• Shareholders are typically not liable beyond their share subscription price.
• Important legal precedents include:
  • Saloman v Saloman & Co.: Reinforces the company as a separate entity from its shareholders.

Types of Companies

• Private Company:
  • Limited to fewer than 50 non-employee shareholders, told together with distinct regulatory requirements.
  • Indicated by “Pty Ltd” in names.
• Public Company:
  • Can be listed or unlisted; must comply with higher regulatory standards and annual meetings.
  • Indicated by “Ltd” in names.

Advantages and Disadvantages of Companies

Advantages:

• Limited liability for owners.
• Access to various capital sources.
• Separation of ownership and management facilitates expert administration.
• Perpetual succession means continuity beyond ownership changes.

Disadvantages:

• Higher costs related to establishment and compliance.
• Onerous regulatory requirements and disclosure obligations.

Other Corporations

• Additional incorporated bodies created by government include:
  • Government Owned Corporations (GOCs): Operate commercial activities for the government under their legislation.
  • Statutory Authorities: Corporations designed to help manage government functions, such as ATO, ASIC.

Case Law Examples

• Lloyd v Grace, Smith & Co: Partners liable for agent's actions via agency principles.
• Khan v Miah: Partnership exists even during preparatory work before opening a business.
• Canny Gabriel v Volume Sales: Clarifies partnership declaration does not negate established partnership through joint action.
• Saloman v Saloman & Co.: Separate legal entity defined, illustrating corporate liability limitations.
• Lee v Lee’s Air Farming Ltd: Reinforces that a sole shareholder can also be an employee under corporate entity principles.