choosing a business entity (2)

8/7/2019 Choosing a Business Entity (2)

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Choosing a Business Entity


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Choosing a business entity One decision that has to be made when

starting a new business venture is what type

of business structure to use.

This decision will depend upon the answers to

a number of questions.

Each business structure has advantages &

disadvantages that need to be considered.


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Think about who owns the business

who employs you.

What area of business is it in?

What type of business structure is it?


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Issues relevant to establishing a business Complexity of structure

Ease and cost of establishment

Aspects of control

Expertise

Liability of participants

Sale/transfer of assets - flexibility

Entry of new participants

Recurring costs Raising capital

Taxation income splitting among participants

Limitations of business life

Complexity of winding up


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Organisational formsBusiness

Structures

SoleTrader

Partnership

Joint

Venture Incorporated

Association

Trust Company

Proprietary

Company

Exempt

Company

Public

Company

Large Small

Unincorporated

Association


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D

efinitions Sole trader

business is owned and operated by one personwith all profits or losses attributed to the owner.

Partnership relationship between 2 to 20 persons who carry

on business in common with a view to profit.

Joint venture usually a one-off enterprise, with participants

receiving profits separately, based on contractualagreement.

Not a technical legal term with a settled commonlaw meaning.


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Definitions

Unincorporated association

body of 2 or more persons, organised for a

particular purpose, which may or may notinclude the purpose of carrying on business

with a view to a profit.

Incorporated association

body of 2 or more persons, organised for aparticular purpose, which may not include the

purpose of carrying on a business with a view

to a profit.


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D

efinitions Company

incorporated body created by a process called

'incorporation', regarded by law as a separatelegal entity.

Trust

relationship recognised by the law of equity,

where a trustee holds property for a beneficiaryor beneficiaries.


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Sole trader A sole trader owns and controls their own

business.

It is the simplest form of businessorganisation to create.

Advantages of being a sole trader include: keeping all the profits

ownership and control of the business

lack of formalities and inexpensive to form

nature of the business can be easily changed

maintenance of secrecy


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Sole trader Disadvantages of a sole trader include:

unlimited liability (i.e. the business and privateassets of the sole trader are at risk if the

business fails because the business and the soletrader are synonymous)

because the business and the sole trader aresynonymous, the death of thew sole trader willoften mean the end of the business

degree of personal element can make thebusiness difficult to sell

lack of management skills or expertise

difficulty in raising large amounts of capital


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Partnership

A basic form of collective ownership.

A partnership is defined as the relationwhich subsists between persons carrying on

business in common with a view to profit. Advantages of a partnership include:

lack of formalities and inexpensive to form

the nature of the business can be easily changed

by agreement between the partners tax advantages

maintenance of secrecy

potential for partners to pool capital and

experience


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Partnership

Disadvantages of a partnership include: unlimited liability of partners, as partnership (like

a sole trader) is not a separate legal entity from

its members numbers limited to between 2 and 20 (except in

the case of professional partnerships)

lack of permanence as partners and businesssynonymous

difficulty in selling ones interest Inability to contract with the firm

loss of control of management of business


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Company

Unlike a sole trader and partnership, a company is aseparate legal entity to its members.

Advantages of a company include:

a separate legal entity from the shareholders ormembers, as well as those who control itsoperation

limited liability for its members (depending on thetype of company)

perpetual succession the company can sue and be sued

transferability of shares

taxation benefits

a company can now be created with one or more

members


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Company

Disadvantages of a company include:

cost of establishment and ongoing fees

0nerous reporting and administrative requirementsrequired by law

limited management role for shareholders

possible loss of control of the company to

shareholders

increasingly onerous legal responsibilities placed

on directors and company officers


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Trust

Five elements constituting a trust:

Settlor

Person responsible for creating trust

Trustee

Person to whom trust property is given

Beneficiary

Person to benefit from the trust

Trust property

Property that is the subject of the trust essential

contained in the body of the trust

Trust instrument

Document detailing terms of the trust


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Trust

A trust created by a settlor arises where property isheld by a trustee for the benefit of another, called thebeneficiary.

A trustee holds the legal title or exercises controlover property for the purpose of applying it to thebenefit of others.

Two main forms of trust can be identified:

express trusts are created by the intentional act of a person(a settlor) through a written instrument (e.g. a will)

non-express trusts are those where intention is notexpressed but it is possible for the courts to imply or inferthat there was an intention to create a trust


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Express trust

Intentional act of a settlor, created bywords (written or spoken)

identifying the trust property

indicating nature and purpose of trust

identifying beneficiaries

can be discretionary, where trustee will

choose the amount to be distributed tobeneficiaries


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Express trust

Express trusts include:

discretionary trusts

fixed trusts

unit trusts

two-dollar nominee trusts

trading trusts


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Classification of trusts

Privatefor the benefit of private

individuals

Publicfor the benefit of some publicpurpose

Tradingthe property of the trust is used

in the running of a business

Unitthe beneficiaries own units of the

trust


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Duties and powers of a trustee

Each State and Territory has a Trustee Act.

The duties of a trustee are set out in the

trust instrument and legislation and must becarried out faithfully, and with a high

standard of care and diligence.

The powers of the trustee are set out in the

trust instrument and legislation and as far as

practicable, should be carried out

personally.


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Duties of trustee

Maintain fiduciary relationship

Familiarise themselves with the trust property

Obey instructions Not delegate duties

Not derive profit from their position

Keep proper accounts

Maintain impartiality

Exercise reasonable skill and care

Pay and transfer property only to those entitled


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Rights of a trustee A trustee is entitled to:

full indemnity and reimbursement out of the trust

property for all expenses and costs that are

incurred as a result of administering the trust

take legal or other expert advice where there are

difficulties or doubts as to the trustees powers

and duties

discharge where the trust has been finalised pay money into court (e.g. where a dispute arises

between beneficiaries over trust property)

commission or remuneration


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Liability of trustee

Trustee has primary liability with right

of indemnity against the trust property.

Limited, if trustee is a company, to theassets of the company.

If not a company, trustee personally

liable for tortious and contractualliabilities.


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Beneficiaries interests

There can be different types of beneficiaries undera trust those entitled to receive a share ofcapital and those entitled to receive income from

the proceeds of investment of capital, forexample.

There are also different types of interest under atrust those who receive a life interest and thosewho have an entitlement in the remainder .

These equate to those beneficiaries with interestin income of the trust and those with an interestin the capital.


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Breach and termination of a trust The liability of a trustee for breach of trust

will depend on their conduct, the nature ofthe breach and the extent of the loss.

The office of trustee may be terminated by: death of the trustee

retirement of the trustee, when another has been

appointed to replace them removal by the court, or any power given to other

trustees by the trust instrument

conclusion of the trust

where all the beneficiaries agree


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Franchise A franchise is a marketing concept for thedistribution of goods or services.

In a commercial context, a franchise operation is acontractual relationship between the franchisor andthe franchisee in which the franchisor agrees tomaintain a continuing interest in the business of thefranchisee in such areas as: technical knowledge

advertising and marketing

product control expertise and training

The franchisee agrees to operate under a commontrade name, format and procedure owned andcontrolled by the franchisor in a number of areas

including manufacturing.


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Franchise The advantages of franchising for a franchisor

include: rapid market penetration

access to capital resources of the franchisee risk sharing

fewer staff problems

The advantages of franchising for a franchisee

include: almost instant reputation/goodwill if the franchisors product

is established in the marketplace

marketing and management support

access to a business system and financial expertise

economies of scale


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Business names legislation

Business name must be registered unless

all names of operators or traders are

included in business name, i.e. the fullnames of the operators or the surname,

plus:

the first name or names

the initial(s) of first name or names

a combination of first name and initials

the first name or names (or initials) by which

individuals are commonly known.


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Purpose of registering business name

Public knows who they are dealing with (Public

Registry)

To protect the goodwill of the business

Restrictions on names registered:

identical to or closely resemble a name already

registered

undesirable

suggestive of connection with the government orbanks

likely to be confused with names of companies or

incorporated associations

crown' or 'royal' must not be used


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Business names On registration, a business is issued with a certificate

of registration of business name.

The certificate is evidence of registration and while noproprietary right exists with registration, the businessname can be protected by: the tort of passing off if the plaintiff can establish that their

business name is distinctive and the defendants conductcould mislead and cause a detriment to the public;

Trade Marks Law under the Trade Marks Act1955(Cth); or

the Trade Practices Act1974 (Cth) specificallyss 52 and 53.

choosing a business entity (2)

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