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Chapter 4 - Business organisations. At the end of this chapter you should understand: the essential characteristics of sole traders, partnerships, joint ventures, associations, companies, and trusts; the legal obligations imposed on each type of business entity; the liability of the parties involved in each type of business entity;...
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Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 2-1 Business organisations Chapter Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-2 Learning objectives At the end of this chapter you should understand: • the essential characteristics of sole traders, partnerships, joint ventures, associations, companies, and trusts • the legal obligations imposed on each type of business entity • the liability of the parties involved in each type of business entity • the advantages and disadvantages of each form of business operation business name registration Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-3 Introduction • There are various ways that a business can be carried on • Each business structure has advantages and disadvantages that need to be considered Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-4 Definitions • Sole trader—business is owned and operated by one person with all profits or losses attributed to the owner • Partnership—relationship between 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 contractual agreement • Unincorporated association—body of two or more persons, organised for a particular purpose, which may or may not include the purpose of carrying on business with a view to a profit Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-5 Definitions (cont.) • Incorporated association—body of two or more persons, organised for a particular purpose, which may not include the purpose of carrying on a business with a view to a profit • Company—incorporated body created by a process called 'incorporation', regarded by law as a separate legal entity • Trust—relationship recognised by the law of equity, where a trustee holds property for a beneficiary or beneficiaries Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-6 Formation • Sole trader—simple; little documentation • Partnership—partnership agreement advised; easy to form • Joint venture—normally involves a one-off enterprise based on contractual agreement between two+ entities; relatively high establishment costs • Unincorporated association—formed by persons with similar interests; no separate legal existence • Incorporated association—unincorporated associations can incorporate, but not if they have a view to trading; relatively high establishment costs • Company—relatively high establishment/compliance costs • Trusts—relatively high establishment costs Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-7 Control • Sole trader—makes all the decisions • Partnership—depends on partnership agreement If no agreement, all partners are considered equal and each partner is considered as agent of the partnership and every other partner for the purposes of partnership business • Unincorporated association—control rests with committee of associates • Company—power is vested in the board of directors to make decisions, unless power delegated to others • Trust—trustee has power vested in him/her to make decisions, subject to the terms of the trust deed and the trustee legislation Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-8 Management • Sole trader—in hands of individual; absences from business difficult • Partnership—leave other partner in charge when absences required • Joint venture—depends on terms of joint venture agreement • Association—in hands of committee of association • Company—undertaken by board of directors Trustsundertaken by trustee Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-9 Flexibility • Sole trader—nature of business can be altered • Partnership—nature of business can be altered with agreement of all partners • Joint venture—depends on terms of joint venture agreement • Company—nature of business can be altered but may have tax consequences • Trusts—nature of business restricted by trust instrument Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-10 Duties of directors • Act in good faith for the interests of the company • Exercise powers for a proper purpose • Use discretions properly • Avoid a conflict of interest • Act honestly • Not to misuse company information • Not to obtain a gain by using their position • Use care and diligence Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-21 Personal liability of directors Directors may face personal liability for: • making false and misleading statements or omissions in prospectus • failing to appoint a company secretary • incurring debts when the company had little prospect of repaying the debts Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-22 Criminal offences for directors in breach of their duties These include: • recklessly or intentionally failing to act in good faith to protect the interests of the company • dishonestly using the position of director within the company, either intentionally or recklessly, to gain an advantage • dishonestly using company information, either intentionally or recklessly, to gain an advantage Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-23 Rights of shareholders Entitled to: • Notice of meetings • Attend meetings • Receive dividends • Financial information • Sue on behalf of the company Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-24 Winding up a company Reasons • No longer carrying on a business • Fails to commence business within year of incorporation • Outstanding debts of at least $2000 • Members have passed a special resolution to wind the company up • Membership falls below a certain number Can be initiated by a director, a member or a liquidator of a company Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-25 Trusts • 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 – Trust instrument—document detailing terms of the trust Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-26 Express (direct or declared) trusts Intentional act of a settlor, created by words (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 to beneficiaries Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-27 Non-express trusts No intentional action by the settlor: • Implied trusts (presumptive trusts)—law draws inference from the circumstances that a trust was intended • Resulting trusts—where property returns to the creator of the trust • Constructive trusts—result from the operation of law (of equity) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-28 Classification of trusts • Private—for the benefit of private individuals • Public—for the benefit of some public purpose • Trading—the property of the trust is used in the running of a business • Unit—the beneficiaries own units of the trust Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-29 Duties of trustees • 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-30 Rights of trustees • Reimbursement for expenses incurred • Indemnification against all costs • Seek contribution for losses • On completion of administration of trust, entitled to receive a discharge Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-31 Liability of trustee • Personally liable for tortious and contractual liabilities • A court or the beneficiaries have the power to relieve a trustee from liability Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-32 Business names legislation • Business name must be registered unless all names of operators or traders are included in business name, i.e the full names 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 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-33 National Business Names Register • Previously, business names were registered on a state and territory basis • From April 2011 business names are registered nationally for between one and three years • The system is managed by ASIC and registration can occur online and a joint application can be made for a business name and ABN • Business names previously registered in the states and territories will automatically be transferred to the National Business Names Register Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-34 Purpose of registering business name • Public knows who they are dealing with—public can search online at www.asic.gov.au • 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 or banks – likely to be confused with names of companies or incorporated associations – ‘crown' or 'royal' must not be used Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-35 .. .Business organisations Chapter Copyright © 20 14 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-2 Learning objectives At the end of. .. accompany Barron, Fundamentals of Business Law 7Rev • 2-9 Flexibility • Sole trader—nature of business can be altered • Partnership—nature of business can be altered with agreement of all partners... Copyright © 20 14 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-1 1 Taxation • Sole trader—dependent on level of profits Large profits mean