Corporation Law of Accounting - Assignment Example

Name: Instructor: Course: Date: Corporation Law of Accounting Dear Jack and Jill, Part 1 Introduction When starting a business, it is important to determine the most appropriate structure for your business through considering factors such as the formation and registration process, taxation requirements and legal implications.1 A business owner can, therefore, choose to be a sole trader, partnership, joint venture, company or a trust. The various features of these structures are discussed in this paper. Further, some of the company issues discussed in the course of the essay include types of companies, the duties and obligations of directors and whether directors can be employees of the company. Business Structures There are several business structures that a business owner can choose from such as sole trader, partnerships, joint ventures, companies and trusts. These structures have different features and characteristics as discussed below. Sole Trader A sole trader type of business is regarded as the simplest form of business structure. In this structure, the owner of the business is the only proprietor and, therefore, runs the business as an individual. A sole trader can choose to run the business using either their name or a registered business name. Where the owner decides to use their name, there is no requirement for registration. However, if the owner uses a different name, then registration of the business name is compulsory. For a sole trader, there is no separation between the person and the business hence the liabilities of the business are the liabilities of the owner.2 One of the advantages of this structure is the fact that it is simple and inexpensive to establish due to the lack of registration requirements other than that of the business name. There are also fewer regulations to comply with compared to companies or partnerships. A sole trader is taxed as an individual hence the tax paid by the individual is the same for the business.3 This business structure will, however, not be suitable for Jack and Jill since they are two individuals yet a sole trader requires only one owner. Partnership A partnership exists where there are two or more individuals, corporate or other entities that have agreed to conduct business4 together with a view of making profit.5 Although not a mandatory requirement, a partnership agreement should be drawn which sets out in clear terms the role and authority of each of the partners, how disputes will be handled among other things. The law treats all the partners as equal hence, where there is no agreement between the partners, the profits, and losses from the business will be shared equally. A partnership can either be a general partnership or a limited partnership. A general partnership is where the liability of the partners is not limited such that any liabilities of the business can be charged against their property. Limited partnerships, on the other hand, are partnerships that exist as separate legal entities.6 This means that the liability of the partners is limited to the extent of their contributions. However, there is a requirement that there should at least be one general partner whose liability is not limited.7 Every partner in a partnership is considered an agent of the other partners and the firm. This means that any act by a partner done in the usual course of business is binding on the firm and the business.8 Regarding tax obligations, the tax is charged on each partner’s gains or losses while the partnership is not subject to tax obligations.9 Joint Venture In Australia, the term joint ventures refers to a variety of forms of business associations created by investors. A joint venture is an association created through an agreement between two or more parties for the sole purpose of conducting business.10 Joint ventures are in different varieties. A joint venture can be an incorporated joint venture which is a separate legal entity meant to pursue the interests of the parties in a particular project. In such a case, the tax obligations mirror those of the company, that is, it has its tax returns and a tax file number. It can also take the form of an unincorporated joint venture where the investors are in an association that does not have a corporate form and is not a partnership. In such a case, each of the joint venturers must lodge a tax return.11 Company A company or a corporation is a legal entity that exists separately from the owners and those who manage it.12 The members and directors of the company are, therefore, not liable for the debts or other obligations of the company.13 The fact that the company exists as a separate entity means that it can acquire and dispose of property and sue and be sued in its name. Companies also have perpetual succession such that the death of a shareholder does not lead to the dissolution of the company.14 Companies have limited liability for its owners or shareholders. This means that the shareholders are liable for the obligations of the company to the extent of their shares, in the case of a company limited by shares, or to the extent of the sum guaranteed, in the case of a company limited by guarantee. One of the advantages of a company is the fact it is easy to raise capital especially for a public company which can allow the public to subscribe for shares. A company has to be registered by lodging a completed Form 201 with the Australian Securities and Investments Commission and paying the appropriate fees. There are two categories of companies based on the type of liability of the company. A company can either be a company limited by shares or limited by guarantee. Companies limited by shares are those whose liability of members is on the value of their shares while a company limited by guarantee is where the liability is on the amount the members have agreed to contribute in case the company is wound up. Companies limited by shares can either be public companies or private companies. Regarding tax obligations, a company whose turnover exceeds $75,000 must pay goods and services tax as well as company tax. A company has its business number and tax return number.15 Trust A trust structure involves a trustee, who can either be an individual or a corporate, holding assets for the benefit others who are referred to as beneficiaries. The trustee has an obligation to use any property belonging to the trust for the benefit of the beneficiaries. There must be a trust deed which gives power to the trustees to administer the trust. A trust can either be a unit trust or a discretionary trust. A unit trust is one where each of the beneficiaries owns units in the trust and the income from the trust must be distributed according to the units held. A discretionally trust, on the other hand, is where the trustee has the discretion to decide which beneficiaries are to receive contributions from the income and the amount of such contributions. Although they are easy to form, the law governing trust is complex. The trust itself does not pay income tax on profits but are rather deducted from the shares of each of the beneficiaries. However, a trust may also pay tax as a company depending on the nature of the businesses controlled by the trust.16 Advice Based on the features of the various business structures discussed above, the best structure that Jack and Jill’s fitness centre should consider is a company. This is because a company has limited liability such that the extent of their liability for the obligations of the company is limited to their shares. Further, a company allows them to acquire property and pass it on to their generations since the company has perpetual succession. Question 2 Part a The type of company that best suits Jack and Jill’s fitness centre would be a proprietary company limited by shares. A proprietary company is a private company that can be formed by a small group of shareholders with a limitation of 50 shareholders who are not employees.17 Further, the company cannot invite the public to acquire or subscribe for shares. Jack and Jill would be the shareholders, and each of them would be required to contribute some amount of money as capital to the company. There are no minimum requirements as to the amount of capital hence, Jack and Jill can contribute depending on their financial abilities.18 Their liability is also limited meaning that the obligations of the company cannot be charged on their personal property. Jack and Jill will have to fill Form 201 and pay a fee of $467 to register the company. Part b A corporation is formed with the objective of conducting business and creating wealth for the owners or the shareholders. The role of directors is to manage the company on behalf of the members and to ensure the maximization of profits for the shareholders.19 Since the Jack and Jill’s company is a proprietary company, both parties will be the directors and members of the company. Due to the need to safeguard the interests of shareholders, the Corporations Act 2001 has set certain duties and obligations that directors have to follow. These duties are also established in the constitution of the company and by general law or common law. The Corporations Act 2001 requires a director of a company to perform their duties while exercising a degree of care and diligence that would be exercised by a reasonable person if they were a director.20 The duty of the directors to act with care and diligence requires the directors to make business judgments in good faith, without personal interest and in the best interests of the company. In discharging their responsibilities, directors have to act in good faith.21 The duty implies that the directors have to act in the best interests of the company and also for a proper purpose.22 This suggests that all decisions should be made in a way that benefits the company. It is important for directors to know that they act as agents of the company. This means that they have a duty not to use their positions in ways that are detrimental to the company or beneficial to them.23 All benefits from transactions regarding the business should be to the company. This duty extends to the use of information that directors obtain from the company. Such information must not be used to gain an advantage to others or themselves.24 The use of such information must be in the way that benefits the company. Jack and Jill, as directors, should also know that any breach of these duties amounts to an offence. Any director who fails to exercise their powers for a proper purpose or in good faith or who uses their position to benefit themselves or others commits an offence.25 Such an offence leads to hefty fines as well as a ban from acting as a director of a company. In the case of ASIC v Adler (2002), Adler and another director were banned from acting as directors of a company for 20 years and ten years respectively for breaching sections 180, 181, 182 and 183 of the Corporations Act. A director is also liable where a company becomes insolvent because of their actions or judgment.26 Part c The case of Salomon v Salomon (1897) established the principle that a company is a legal person distinct from its members. A company is, therefore, not an agent of the members. Since a company exists separately from its members, it has the right to own property and enter into contracts.27 In Lee v Lee’s Air Farming Ltd (1961), Lee was the principal shareholder and the director of the company which performed aerial top dressing for farmers. Mr. Lee worked as a pilot for the company and was paid for the work. There was a work accident which led to the death of Mr. Lee and his wife claimed from the worker’s compensation policy. The insurer, however, argued that since Mr. Lee was a director, he could not be an employee. The court dismissed the insurer’s arguments and held that the capacity of the company to enter into a contract was not limited by the fact that Mr. Lee was a director. This means that a director of a company can also be an employee. Based on the decision, Jack and Jill can be employees of the company. References Armour John, Hansmann Henry and Kraakman Reinier, The essential elements of corporate law: What is corporate law? (John M. Olin Center for Law, Economics, and Business, 2009) Commonwealth of Australia, Directors’ duties and corporate governance (2008) Corporations Act 2001 (Cth) Corrs Chambers WestGarth, Doing business in Australia (2013) CPA Australia, Forms of public practice business structures (2016) Partnerships Act 1892 (NSW) Pinto Arthur and Branson Douglas, Understanding corporate law (LexisNexis, 2013) Ramsay Ian and Noakes David, ‘Piercing the corporate veil in Australia’ (2001) 19 Company Securities Law Journal 250-271 Ramsay Ian, Corporate governance and the duties of company directors (The University of Melbourne, 2015) Small Business Victoria, Choosing the best structure for your business (2012) Read More