BSB250 – Business Citizenship: Business Structure Basics

Overview of Legal Structures

• Importance of understanding legal structures in the business environment.
• Key structures to explore:
  • Sole Trader
  • Partnership
  • Trust
  • Company
  • Other Forms of Corporations
• Analysing advantages and disadvantages of each structure for informed decision-making.

Introduction to Business Structures

• Role of the Rule of Law in business:
  • Enables protection of rights and accountability in transactions.
• Business complexity:
  • Involves multiple stakeholders (suppliers, customers, employees, managers, shareholders, government, community).
• Importance of legal structures for rights and responsibilities:
  • Impact on raising capital, sharing profits, and information disclosure obligations.

Core Types of Business Structures

• Types Encountered in Business Environment:
  • Sole Trader
  • Partnership
  • Trust
  • Company
  • Private Company
  • Public Company
  • Other Corporations
  • Government-Owned Corporations
  • Statutory Authorities
• Focus on three key entities for profit:
  • Sole Trader
  • Partnership
  • Company
• Note: Trusts and other corporations have distinct purposes primarily for regulatory affairs.

Selecting a Business Structure

• Decision-making factors for business structure:
  • Ease and cost of business setup.
  • Legal and financial liability exposure.
  • Tax obligations and payment methods.
  • Ability to raise finance.
  • Ongoing legal and regulatory obligations.

Sole Trader Structure

Definition

• A sole trader operates and owns the business independently.

Characteristics

• Ownership and operational control solely by one individual.
  • May employ others but retains sole responsibility.
  • Sole control over raising funds and business operations.
  • Entitled to all profits generated.

Liability

• Unlimited personal liability for debts and obligations.
• Required to register business names under the Business Names Registration Act 2011 (Cth) for names other than personal name.
• Must register for Goods and Services Tax (GST) if turnover exceeds $75,000.

Advantages

• Minimal formal requirements for setup.
• Full ownership leads to complete decision-making power.
• Full retention of profits.

Disadvantages

• Unlimited personal liability for business-related debts.
• Limited capital sources reliant on personal funds or secured loans.
• Skills gaps may hinder business success.
• Difficulty in business disposition tied to personal identity.

Partnership Structure

Definition

• A partnership involves two or more individuals operating a business together.

Key Aspects

• Not a separate legal entity; partners share mutual agency.
• Each partner is liable for the actions and debts incurred by the partnership.

Partnership as a Contract

• Partnership relationships governed by contractual agreements.
• Types of partnership agreements:
  • Formal written documents
  • Partly written, partly oral
  • Wholly or partly implied based on conduct.
• A written agreement, while not legally required, is advisable for clarity.

Partnership Creation

• Established based on the definition from the Partnership Act 1891 (Qld):
  • "Partnership is the relation which subsists between persons carrying on a business in common with a view of profit."
• Three essential elements:
  • Carrying on a business (e.g., repetition of activities, not a single venture).
  • In common (acting for collective interest).
  • With a view to profit (non-profit ventures yield unincorporated associations).

General Rules of Partnership

• A partnership arises under the conditions established in the Partnership Act (Qld) 1891:
  • Two or more individuals carrying on a business, seeking profit, and acting together.
• Important to ensure fewer than 20 partners, to avoid incorporation requirements.

Joint Ventures vs. Partnerships

• Distinguishing between joint ventures and partnerships:
  • Joint Venture defined as:
  • A contractual relationship where two or more parties collaborate on a specific business opportunity without mutual liability.
  • Unlike partnerships, parties in a joint venture act independently.
• Legal complexities related to defining whether a business collaboration is a joint venture or partnership underscore the need for formal agreements.

Partnership Agreements

• Key advantages of drafting partnership agreements:
  • Clearly defines partner identities, roles, and responsibilities.
  • Establishes a pre-agreed dispute resolution framework.
  • Allows flexibility in operational rules beyond statutory defaults.
• Common elements of a partnership agreement:
  • Partners' names and partnership title.
  • Business nature and purpose.
  • Duration of the partnership and ownership stakes.
  • Profit and loss sharing structures.
  • Authority distribution and decision-making rules.
  • Provisions for admitting new partners and managing partner exit (death/withdrawal).

Types of Partnerships

Limited Partnerships

• Allow for more than 20 members and segregated roles for investors.
• Composition:
  • General Partners: Limit of 20, manage the business, carry unlimited liability.
  • Limited Partners: No limit on numbers, no management role, liability capped to agreed amounts.
• Must be officially registered; treated as companies for tax purposes.

Incorporated Limited Partnerships

• Function as separate legal entities allowing for some partners to have limited liability alongside general partners.

Advantages and Disadvantages of Partnership

• Advantages:
  • Minimal formalities – relatively simple and inexpensive formation.
  • Diverse skills and capital contributions from multiple partners.
  • Greater privacy compared to corporations, barring GST and Business Names registrations.
• Disadvantages:
  • Unlimited personal liability affecting all partners.
  • Shared control requiring trust among partners.
  • Challenges in selling partnerships due to joint ownership of property and business assets.

Trust Structure

Definition

• A trust is established when a trustee holds property for the benefit of beneficiaries.

Historical Context

• Originated in 12th century English Law, linked to land ownership during the Crusades.

Ownership Structure

• Distinction between legal ownership (trustee) and beneficial ownership (beneficiaries).

Trust Components

• Roles:
  • Settlor: Establishes the trust and may be the original owner of the assets.
  • Trustee: Responsible for management and fiduciary obligations.
  • Beneficiaries: Individuals or entities benefiting from trust property.

Characteristics of Trusts

• Not a separate legal entity; assets are shielded from trustee’s creditors.
• Primarily utilized for wealth distribution and potentially tax advantages.

Company Structure

Definition & Historical Context

• Companies provide a distinct legal structure subject to the Corporations Act 2001 (Cth).

Company Attributes

• Perpetual existence; operates as a separate legal entity.
• Capable of incurring debts, holding property, engaging in legal actions, and maintaining operations regardless of ownership changes.
• Shareholders’ liability limited to their share subscription amounts.

Formation & Positions in a Company

• Established via registration with the Australian Securities and Investments Commission (ASIC).
• Key positions include:
  • Members/Shareholders
  • Directors
  • Officers (e.g., CEO, CFO)
  • Company Secretary

Types of Companies

• Companies categorized by liability:
  • Proprietary Companies: Limited share ownership, not publicly traded.
  • Public Companies: Shares available for public trading or listed on stock exchanges.

Advantages and Disadvantages of Companies

• Advantages:
  • Limited liability and perpetual succession.
  • Access to diverse capital sources and expert managers.
• Disadvantages:
  • High establishment and regulatory costs.
  • Administrative burdens and reduced ownership rights.

Other Corporations

Government-Owned Corporations (GOCs)

• Statutory entities created under legislation; operate commercial activities for the government.

Statutory Authorities

• Established to assist governments in regulation and public governance, such as ATO and ASIC.

Relevant Case Laws

Lloyd v Grace, Smith & Co

• Demonstrated mutual liability of partners for acts performed by an agent.

Khan v Miah

• Acknowledged that preparatory work can constitute business operations towards partnership.

Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (1974)

• Verified that business collaboration can be interpreted as a partnership based on functional criteria, despite labeling.

Saloman v Saloman & Co. LTD

• Established the separate legal entity principle of companies, affirming that shareholders are not personally liable beyond their investment amounts.

Lee v Lee's Air Farming Ltd

• Reaffirmed that a company and its owner are distinct entities, allowing the owner to receive employee compensation.