Enterprise Law

Unit 700254

Topic 2: Business Structures

Topic Outcomes
On completion of Topic 2, you should be able to:
◦ Explain the essential characteristics and the advantages and
disadvantages of the following business structures:
◦ Sole trader
◦ Partnership
◦ Trading trust
◦ Corporation (Propriety or Public)
◦ Franchise
Business Structures
 Choosing a Business Structure
Factors to Consider
 duration of business
 cost and method of formation
 tax burden
 whether property is owned by the individual/s or entity
 access to further capital for future expansion
 requirements of lending institutions (banks etc)
 professional ethics or legal restrictions on organisational
structure
 level of financial risk involved in the enterprise undertaken
Sole Traders
 Very common structure

 A sole trader owns and controls his/her own business.

 It is the simplest form of business organisation to create.
 Subject to regulatory requirements for certain
businesses.
 No formal requirements if the name of the owner is used
 Proprietor is often owner, manager and investor (risk
taker)
 Common examples: lawn-mowing, dentists, tilers, florists
Sole Traders
Advantages
◦ Keeping all the profits
◦ Ownership and control of the business
◦ Lack of formalities and reporting requirements
◦ Inexpensive and quick to form
◦ Nature of the business can be easily changed
◦ Maintenance of privacy
◦ Profits taxed at personal tax rate
Sole Traders
Disadvantages
◦ Unlimited liability
◦ Personal assets exposed to creditors
◦ Business and sole trader are synonymous
◦ Degree of personal element can make the business difficult
to sell
◦ Owner may lack of management skills or financial/legal
expertise
◦ Difficulty in raising large amounts of capital/borrowing
Partnerships
 Another common way of structuring a business
 A basic form of collective ownership regulated by Statute
 Section 1 of the Partnership Act 1892 (NSW) defines
partnership as:
the relation which exists between persons
carrying on a business in common with a view of
profit
 Differs to a Joint Venture (one-off, specific time/task)
 Common examples: accountants, lawyers, architects,
engineers, auditors, real estate business
 Partnerships
Advantages
◦ Lack of formalities
◦ Inexpensive and quick to form (however, may require a Partnership
agreement to be drafted)
◦ The nature of the business can be easily changed by agreement
between partners
◦ Tax advantages
◦ Agency relationship may be convenient
◦ Maintenance of secrecy
◦ Sharing of skills, expertise and contacts
◦ Potential for partners to pool capital
 Partnerships
Disadvantages
◦ Unlimited liability of partners as not a separate legal entity from its
members
◦ Numbers generally limited to 20 (exceptions include law/accounting
firms)
◦ Lack of permanence as partners and business synonymous
◦ Difficulty in selling one’s interest
◦ Partners owe fiduciary duties
◦ Loss of control of management
◦ Agency relationship can be abused
◦ Partners are held jointly and severally liable
 Partnerships
Agency Relationship
◦ Partners act as agents for each other when entering into contracts
◦ If a partner enters into a contract in the course of the partnership
business, all partners will be bound by this contract
Joint & Several Liability
◦ Partners may be held jointly or severally liable for the full extent of
the debts incurred in the course of the partnership business
◦ The partner who is required to pay may then pursue the remaining
partners to seek their portion of the liability.
Partnerships
Fiduciary Duties :A legal obligation of one party to act in the best
interest of another. The obligated party is typically a fiduciary, that is,
someone entrusted with the care of money or property.
◦ Partners owe fiduciary duties to the partnership
◦ Within the scope of the business, they must put the
interests of the partnership ahead of their personal
interests
◦ Two main duties:
◦ To avoid a conflict of interests
◦ To avoid using position to receive a personal benefit
(unless specifically authorised)
Companies
 A ‘company’ or ‘corporation’ is an association of persons
who, having satisfied the requirements of the Corporations
Act 2001 (Cth) for registration, are given the status of a
separate legal entity
 Recognised by the law as a ‘person’, a company has rights
and obligations separate and distinct from the shareholders,
directors and other persons connected to its operation.
 Perpetual succession
 Two main types – proprietary and public
Companies
Proprietary Companies
 The vast majority of Australian companies are proprietary
 Generally relatively small in size (in terms of
revenue/assets/staff)
 Less regulation / reporting requirements under the
Corporations Act 2001
 Cannot raise capital from the general public
 Can have a sole director and shareholder
 Example: Smith Properties Pty Ltd
Companies
Public Companies
 Generally larger in size (in terms of revenue/assets/staff)
 High degree of regulation and reporting requirements under
the Corporations Act 2001
 Minimum 3 directors plus company secretary
 Can raise capital from the general public
 May seek listing on a stock exchange such as the ASX
 Example: Widget Ltd
Companies
Advantages

◦ A separate legal entity from the shareholders or

members, as well as those who control its operation
◦ Limited liability
◦ Perpetual succession
◦ The company can sue and be sued
◦ Transferability of shares
◦ Access to larger capital base
◦ Taxation benefits
Companies
Disadvantages
◦ Cost of establishment and ongoing fees
◦ Onerous reporting and administrative requirements
required by law
◦ Limited management role for shareholders
◦ Possible loss of control of the company to shareholders
◦ Increasingly onerous legal responsibilities placed on
company officers and directors
◦ Loss of privacy (particularly for public companies)
Trusts
 A trust involves property being held by a trustee for the benefit of
the beneficiary.
 A trust arises when the owner of an asset (the settlor) transfers
the ownership of the property to a person (the trustee) to hold
for the benefit of others (the beneficiaries).
 Trusts are often created under a trust deed – a legal document
setting out the way the trust will be run.
 A trustee therefore holds the legal title and exercises control over
property for the purpose of applying it for the benefit of the
beneficiaries who have an equitable interest in the property
Trusts
 The trustee is under a legal obligation to manage the
property on behalf of, and in the best interests of, the
beneficiaries
 The trustee may be a natural person or corporation and will
generally be paid a fee for their services.
 Trusts used as business structure are called trading trusts
 In a trading trust the trustee owns the business assets and
goodwill, the beneficiaries are entitled to the profits.
Trusts
Fiduciary Duties of a Trustee
 to act in accordance with the trust
 to preserve the trust property
 to not deal with the trust property for their personal
benefit (in their capacity as trustee)
 to avoid personal conflicts of interest

.
Trusts
Rights of a Trustee
 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 trustee’s powers and duties;
 Discharge where the trust has been finalised;
 These may be altered under a trust deed
Trusts
Advantages
 Provides benefits to members of the family without losing
control over the trust’s assets
 Protects assets against creditors
 Provides limited liability if the trustee is a company
 May provide a tax effective structure
 High degree of privacy compared to a company or
partnership
Trusts
Disadvantages

 Can be expensive to establish

 Can also be significant ongoing legal/accounting costs to

maintain the trust
Franchises
 A franchise is a marketing concept for the distribution of
goods or services, not a business entity.
 In a commercial context, a franchise operation is a
contractual relationship between the franchisor and the
franchisee.
 The franchisor agrees to maintain a continuing interest in
the business of the franchisee in such areas as:
◦ Technical knowledge
◦ Advertising and marketing;
◦ Product control; and
◦ Expertise and training.
Franchises
The franchisee agrees to operate under a common trade
name, format and procedure owned and controlled by the
franchisor in a number of areas including manufacturing and
marketing.
The advantages of franchising for a franchisor include:
◦ Rapid market penetration;
◦ Access to capital resources of the franchisee;
◦ Risk sharing; and
◦ Fewer staff problems.
 Franchises
The advantages of franchising for a franchisee include:

◦ Almost instant reputation/goodwill if the franchisor’s

product is established in the marketplace;

◦ Training and ongoing support

◦ Marketing and management support;

◦ Access to a business system and financial expertise

◦ Economies of scale; and

◦ Business risk is reduced.