1. Contract & Consumer Law Chapter 8
Business Structures

2. 8.1 Types of Business Structure
The law defines and regulates types of business structures differently.
In choosing the business structure, owners should consider the following:
The size and type of business.
Whether it is intended to trade locally, nationally or internationally.
Formation costs and ongoing costs of the particular structure chosen.
Future capital requirements.
Management and employment requirements.
Liability of the owners.
Taxation.
Regulation and compliance.

3. Sole Trader
A sole trader is a business owned and controlled by an individual.
Legal liability falls entirely on the owner of the business.
The owner is personally liable for all debts of the business and can collect all
profit as personal income.

4. Sole Trader (continued)
Advantages
The most basic form of organisation and the easiest to set up.
No requirement to disclose results other than through tax obligations.
Retains all profits.
Disadvantages
Difficult to raise capital.
Business and owner are legally one and the same.

5. Partnership
A partnership exists between 2 to 20 people who carry on business with a view to profit. (Note the exception of ‘outsize partnerships.’)
So, for a partnership to exist all of the following elements must be in place:
A commercial relationship exists between the persons;
A common business is repeatedly conducted by those persons;
The business is conducted to make a profit.
A partnership is not a separate legal entity and all partners have unlimited personal liability for the debts of the partnership.
Limited liability partnerships may be set up where some partners have limited liability but these partners must not have an active role in business management and there must be at least one general partner with unlimited personal liability.

6. Partnership (continued)
Each partner is a contractual agent for every other partner and a contractual agent for the firm in the course of carrying out normal partnership business.
The concepts of actual and apparent authority apply.

7. Partnership (continued)
Advantages
Easy to set up but commercially sensible to have written partnership agreement.
No requirement to disclose results except through taxation obligations.
Capital can be raised with the introduction of a new partner.
Each partner can bring expertise to the business.
Can take advantage of income splitting.
Disadvantages
Limited to 20 members except for professional partnerships.
Partners are bound by the actions of other partners.
Achieving agreement between partners can be difficult.
Unlimited personal liability for the business decisions of all partners.

8. Associations
An Association is an organisation formed by two or more persons for a common purpose, whether it is for profit or not.
There are two types, incorporated associations and unincorporated associations.

9. Associations (continued)
Unincorporated associations are formed by persons with a common interest and objective (e.g. Club or society).
Not recognised as a separate entity by law which means:
The legal liability rests with its members.
It cannot sue or be sued.
It cannot own property.
It cannot enter into contracts.

10. Associations (continued)
Incorporated Associations are formed under legislation in each State or Territory.
Differences - An Incorporated association:
Has the legal liability of its members limited to their outstanding fees.
Can sue or be sued.
Can own property in the name of the association.
Can enter into contracts in its own name.
Incorporated associations cannot be run for profit. Profits must not be distributed to members but be used for the purposes of the association. association.
Incorporated associations often exist to manage community, arts or sports organisations.

11. Associations (continued)
Advantages
Easy and cheap to set up.
Limited liability for incorporated associations.
Disadvantages
Formal accounts must be prepared.

12. Companies
A company is an incorporated body that has undergone the process of registration with ASIC under the Corporations Act 2001 (Cth) and is therefore a separate legal entity from its members (owners).
A company has its own contractual capacity separate from the human beings who own it (the shareholders) and the human beings who manage it (the directors) and therefore;
can sue or be sued;
can own property;
can enter into contracts with anyone, including its own employees and members;
has perpetual succession.

13. Companies (continued)
Limited Liability Companies
In a company limited by shares, members or shareholders are only liable for the costs of the shares they have purchased.
Members or shareholders are not liable for any debts the company has incurred and this describes the ‘limited liability’ which protects each shareholder.
A company is a separate legal entity from its members/shareholders who are its owners and the directors which are its mind. This is often called the corporate veil.
Both proprietary and public limited companies are required to have the word ‘Limited’ or ‘Ltd’ in the company name to warn potential creditors that the personal assets of the shareholders are not available to them if the company cannot meet its debts.

14. Companies (continued)
Public Companies
A public company can raise funds by offering their shares for sale, by listing them on the share market (ASX).
Usually large companies.
Subject to heavy reporting burdens to ASIC and rigorous operating restrictions as they seek and utilise public investment.
All people working within Australia and consequently receiving compulsory superannuation payments are directly or indirectly shareholders in public companies.

15. Companies (continued)
Proprietary Companies
Cannot raise funds by selling shares to the public and the right of shareholders to transfer shares to third parties is restricted.
Less reporting burden than public companies.
Usually smaller than public companies.
May be classified under law as small or large proprietary companies depending on revenue, assets and the number of employees.

16. Companies (continued)
Advantages
Ability to raise capital
Limited liability
Lower flat tax rate
Separate legal entity, able to exercise its own contractual authority
Registered nationally
Perpetual succession
Disadvantages
More expensive to set up
Formal accounts must be prepared
Accounts must be audited
Another major advantage of companies is that they have ‘perpetual succession’, this means that unlike sole traderships or partnerships, if a human participant, a shareholder or a director dies or resigns, the company entity is not effected. The company continues to exist until it is de-registered.

17. Cooperative Advantages
Suitable for activities that benefit the community
Limited liability for members
Disadvantages
Conflict between members can make decision making difficult
Not suitable for most types of businesses
Reporting obligations

18. Joint Ventures
A joint venture is a legal collaboration formed between two parties who intend to take on an activity together for the individual gain of each party.
Usually set up by a formal agreement which states the rights and responsibilities of each party.
May be incorporated or unincorporated.
Not a separate legal entity, cannot sue or be sued.
Question: What are the major differences between a partnership and a joint venture?

19. Joint Ventures (continued)
Advantages
Permits two parties to combine expertise and resources.
Often creates a new product or service that would not be available otherwise.
Disadvantages
Can be difficult to set up, requires a formal agreement.
May lead to sharing of a party’s confidential information.

20. Franchises
A franchise is a relational form of contract where expertise, knowledge , methods of operation and/or intellectual property rights are granted by a franchisor to a franchisee for a period of time in return for payment.
Same choice of ownership structure as in any other business.
The franchisor is the supplier of a good or service, or the owner of a business system, copyright or trademark.
The franchisee is the reseller who trades under the franchisor’s name.
Question: In what ways may workers in the financial service industry such as book keepers or accountants be involved in the legal transfer of a franchise from a franchisor to a franchisee?

21. Trusts
A trust is a relationship where one person, known as the trustee, holds property on behalf of another, known as the beneficiary.
May be set up to hold land or property for someone that cannot legally hold title themselves or for taxation purposes.
The trustee has legal ownership and control of the property but has an equitable obligation to act in the best interests of the beneficiary.
Must be actioned (i.e. property given to the beneficiary) within a certain time frame

22. Trusts (continued) Elements required for a trust to exist:
Intention to create a trust, usually evidenced by the trust deed or document.
The settlor who creates the trust.
Property which will become trust property, controlled by the trustee but used for the benefit of the beneficiary.
The person who will benefit from the trust, the beneficiary.
The person who agrees to hold and preserve the property on behalf of and for the benefit of the trustee.

23. Trusts (continued) Advantages Limited liability for beneficiary.
Tax benefits.
Disadvantages
Can be difficult and expensive to set up and maintain.
Dissolution of the trust can be difficult.
Not a separate legal entity.

24. 8.2 Business Names
Businesses operating as a sole trader or a partnership which decide to use a name other than their own, must register a trading name with ASIC under the National Business Names Registration System.
ASIC has had national responsibility for registering, renewing and administering business names for all Australian businesses since May 28, 2012.
Business names that already existed on State and Territory registers were ‘grandfathered’ to the national register.
Names cannot be registered if:
they are too similar to existing business names and the similarity will mislead people,
they are undesirable,
contain foreign language characters or
they suggest a connection with the government