20 Choice of Business Structure © Oxford University Press, All rights reserved.

Choice of Business Structure Meaning of incorporation: the act of becoming a company upon registration Consequences of incorporation: the company is a separate legal entity: Salomon’s case company has powers of a natural person plus some corporate powers

Choice of Business Structure cont … Consequences of incorporation (cont): company is able to sue and be sued company can enter into contracts company can acquire, hold and sell property company has a continuing existence limited liability may be conferred on members.

Choice of Business Structure cont … Legal forms of association: Unincorporated forms: sole trader partnership joint venture trust franchise.

Choice of Business Structure cont … Legal forms of association (cont): not for profit associations – may be: unincorporated, or incorporated as an incorporated association under state legislation: eg. Associations Incorporation Act 1981(Vic).

Choice of Business Structure cont … Legal forms of association (cont): Incorporated forms: co-operatives: – may be non profit or business – incorporated under state legislation eg. Co-operatives Act 1996 (Vic) company/corporation – registered under Corporations Act 2001 (Cth).

Choice of Business Structure cont … Main grounds for choice of business structure: purpose of the business, eg. profit or non-profit capital and credit requirements – ie. financing management and control taxation treatment – fixed corporate v individual variable extent of liability- Personal v limited liability

Choice of Business Structure Cont … Main grounds for choice (cont): privacy and confidentiality formalities and cost transferability of interest brand value. Note importance of priorities of participants.

Choice of Business Structure cont … Sole trader: few formalities; financial privacy maintained; no special regulatory burdens. However disadvantages include: limited life limited access to finance as business grows unlimited liability no sharing of responsibility or business expertise.

Choice of Business Structure cont … Partnership: may be informal and relatively low-cost maintains financial privacy combines skills & resources of number of persons flexible. However disadvantages include: unlimited liability; upper limit on numbers; and transferability of interest may not be easy.

Choice of Business Structure cont … Joint Venture: flexible relative financial privacy participants not liable for acts of co-venturers. However disadvantages include: high transaction costs.

Choice of Business Structure cont … Trusts: fewer formalities than a company financial privacy flexibility and simplicity some tax advantages. However disadvantages include: personal liability of trustee.

Choice of Business Structure cont … Franchises: set-up costs minimal economies of scale use of known brand, marketing, equipment, training and goodwill. However disadvantages include: various potential problems arising out of the franchisor-franchisee relationship.

Choice of Business Structure cont … Companies: separate legal entity with powers of natural person + corporate powers limited liability taxation treatment succession: continuing existence However disadvantages include: onerous costs and compliance; loss of financial privacy.