Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Legal and Taxation Aspects of Your Small Business 3 rd Edition `08 IAN.BIRT

2 Chapter: 2 Ownership Structures Legal and Taxation Aspects of your Small Business

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Objectives  After reading this chapter, you should be able to: –Describe the main ownership structures for operating a small business –Explain the liability of business in each ownership structure –Choose a suitable ownership structure for any small business

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Type of Ownership Structure  Sole trader  General partnership  Joint venture  Private company  Trading cooperative  Trading trust  Non-Profit organisations: Unincorporated associations Corporated associations

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Sole Trader  The simplest & cheapest ownership structure to establish & to operate under  No special legal requirements  Sole trader exclusively owns & controls the business  Profits & losses belong to the Sole Trader personally  Can have employees like any other ownership structure  Unlimited liability for the debts of the business –If debts cannot be met by business assets, the Sole Trader is personally liable

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia General Partnership - 1 “the relationship which exists between persons carrying on a business in common with a view to profit” (statutory definition)  Essentially an agreement between people to carry on a profit-making business together  Also called a ‘firm’  Partners share profits - & any losses – according to an agreed percentage  A partner can be active or silent in the business  Partnerships can have employees to a maximum of 20 – limits can be higher in professional partnerships

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia General Partnership - 2  Partnership can be formed verbally or in writing  Always preferable to have all partners sign a partnership agreement  Partners should be trustworthy  Under the Law, all partners are legally responsible for each partner’s actions during the partnership business.  A partner’s action is binding if: –Carried out in the course of partnership business –Carried out in the usual way  A partner’s action is not binding on the partnership if the partner acted without authority & the person they dealt with knew this

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia General Partnership 3 - Liability of Partners  Liability of partners for partnership debts & other liabilities is joint & several: Creditors can sue all partners jointly or each partner individually, for the amount owed If a partner is sued for all the partnership debts, the partner will have to sue the other partners for their respective contributions  Each partner has unlimited liability

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia General Partnership 4 - Partnership Agreement Contents 1.Business name of the partnership 2.Commencement date of the partnership 3.Type of business of the partnership 4.Business address of the partnership 5.Name & address of each partner 6.Partnership bank account details, including authorised account signatories 7.Amount of capital contributed by each partner 8.Amount and frequency of drawings by each partner 9.Percentage share of profits (and losses) belonging to each partner 10.Role of each partner in the business, including any limitations on authority 11.Ways in which the partnership can be ended 12.Process for settling disputes between the partners 13.Partners’ signatures

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia General Partnership – 5 Other Duties of Partners  Each partner must act honestly with the other in the best interests of the partnership  A partner cannot compete with partnership business, or use partnership information or resources for personal purposes, without approval of the other partners  Partners can sue fellow partners for any secret profits made

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia General Partnership – 6 Ending the Partnership  Unless otherwise sated in partnership agreement, a partnership is ended by: –Death or bankruptcy of a partner –Period ending – for a fixed-period partnership –A partner giving notice to leave –A Court Order being obtained to end partnership  Upon leaving the partnership: –A partner should inform (best in writing) the usual suppliers of the firm of his/her resignation to avoid being held responsible for later partnership debts

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Joint Venture - 1  An alternative to a partnership  Agreement between people to pool their separately owned resources & work together in a single venture, project or enterprise, for profit- making purposes  Each person: –maintains their separate identity –Is responsible for their own records, property & debts in the arrangement –Has a distinct & separate share of the final output, so that profits are received individually

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Joint Venture – 2  Established to avoid some of the pitfalls of operating as a partnership: –Separate ownership of property & debts –Separate ownership of income & profits received –Joint venturers are solely responsible for their own debts & can run outside businesses

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Joint Venture - 3  No special legal requirements for the formation or operation of joint ventures  Agreement should be in writing to protect each person’s interests  Care must be taken to ensure agreement cannot be legally interpreted as being a partnership and come under partnership law  Seek legal help to prepare a joint venture agreement

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Joint Venture 4 - Agreement Contents 1.Statement that the arrangement is intended as a joint venture 2.Business name of the joint venture 3.Description of the joint venture activity 4.Commencement date and duration of the joint venture 5.Name and address of each person involved in the joint venture 6.Statement that each person retains ownership of their own assets used in the joint venture 7.Statement that each person incurs their own debts & liabilities in the joint venture 8.Statement that each person has a separate share of the output (& income) of the joint venture 9.Statement that each person is responsible for their records in the joint venture 10.The ways in which the joint venture can be terminated 11.The process for settling disputes between the joint ventures Joint venturers’ signatures

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company - 1  Companies are heavily regulated under the Corporations Act 2001 (Cwlth)  ASIC is the body responsible for administering the Act   All Companies must report information & pay fees annually to ASIC  Reported information is open for public access  Companies are incorporated with ASIC and come into existence on the day shown on Certificate of Registration issued by ASIC  The law recognises companies as artificial persons, whereas individuals are natural persons

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company - 2  Different types of companies allowed under the Act  The type relevant to small business is a proprietary company limited by shares: –Privately owned with issued share capital –Company name ends “Pty Ltd” –Cannot raise funds by inviting the public to invest in it –Cannot have more than 50 shareholders

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company - 3 Proprietary companies are either small or large under the Act  A small proprietary company must meet any two of the following criteria: –Annual gross revenue less than $10 Million –Total assets at the end of the financial year less than $5 Million –Fewer than 50 full-time employees (or part- time equivalents) et the end of the financial year

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company - 4 Small proprietary companies are given special privileges under the Act  Generally they do not have to: –Hold annual general meetings of shareholders –Keep records of meetings –Prepare annual financial reports (unless requested) –Appoint an auditor to audit their accounts

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company - 5  The operation of a proprietary company (large or small) requires: –A minimum of one director –A minimum of one and a maximum of 50 non- employees shareholders –A registered office address –Internal management rules, which can be standard rules found in the Corporations Act –A bank cheque account in the company name –A public officer appointed for income tax purposes

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company - 6  A proprietary company can be run by a single person who is the sole director and shareholder, as well as the appointed public officer  In a company, there is a clear division between ownership & control: –Shareholders own the company –Directors control the company –Shareholders are entitled to any dividends the directors determine and any surplus assets remaining if the company is wound up

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company – 7  a company is an artificially created separate legal entity from the persons who own and control it

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company – 8 As a separate legal entity a company can, in its own name:  Sue and be sued  Buy, own and sell property  Enter contracts  Join partnerships or joint ventures  Become a trustee  Employ people  Pay taxes

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company – 9  A company employer must arrange and pay compulsory workers compensation insurance for all its paid employees, including directors  Commonly used to operate businesses where the risk of being sued is high: –Personal assets are separate from business ones –Only company-owned assets ca be used to pay business debts –Most major creditors, however, require directors to give written personal guarantees for company debts

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company – 10  Company shareholders liability is limited to the issue price of their shares  Directors have heavy legal obligations under company law: –Must perform their duties with honesty, care & diligence –Must not abuse their position to make personal gain at expense of the company –Can be held personally liable for company debts if trading while insolvent

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Private Company – 11  Corporations Act requires that companies: –Keep financial records correctly recording and explaining all their transactions –Keep their financial records are kept for 7 years after transaction date  Company has a continual existence: –Only ends when correct steps are taken to wind it up –Procedures to follow contained in Corporations Act –Cease to exist when deregistered by ASIC

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Trading Cooperative -1 A democratic organisation owned and controlled by its members for a common purpose  A cooperative is a separate legal entity  Registered with the local Registry of Cooperatives  Cheaper to establish than company

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Trading Cooperative -2  Registration of a cooperative requires: –At least 5 members –A set of internal rules ( meeting the requirements of the local Cooperatives Act) –A board of directors –The holding of annual general meetings –The maintenance of prescribed records The internal rules can limit the extent of members’ liability if the coop is wound up

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Trading Trust - 1  Established by preparing a trust deed document  A trust arrangement is a way to own property: –Real estate, –Shares –Business assets  Dual ownership: –Trustee is the legal owner –Beneficiaries are the equitable owners –A person or a company can be appointed as Trustee

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Trading Trust - 2  Trust property is held by the Trustee for the benefit of the beneficiaries

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia  In a trading trust, the business is the trust property  Trust can be either fixed or discretionary  Fixed trust: –Beneficiaries have fixed, defined entitlement to any net income of the trust  Discretionary trust: –Beneficiaries’ entitlement at discretion of trustee –Useful for family income-splitting for income tax purposes and to protect business assets from creditors Trading Trust - 3

Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Structuring your Business Various factors to consider  Liability  Control  Resources  Taxation  Costs  Regulation  Confidentiality