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Unformatted text preview: Business Structures LAW101 Law, Business & Society
Week 4 Business Structures Part 1 Choosing a business structure
Different business structures have different implications for liability and control. control. Need to consider the different types of business structures and gain an understanding into the different legal implications they present. Choosing a business structure
Types of business organisations Sole trader Partnership Company Trust Each business structure has relative advantages and disadvantages. Sole Traders
A sole trader owns and controls their own business. It is the simplest form of business organisation to create. Sole Traders
Keeping all the profits Ownership and control of the business Lack of formalities and cheap to form Nature of the business can be easily changed Maintenance of secrecy 1 Sole Traders
Unlimited liability Business and sole trader are synonymous Degree of personal element can make the business difficult to sell Lack of management skills or expertise Difficulty in raising large amounts of capital Partnerships
A partnership is a relationship between persons carrying on a business, in common, for profit.
Section 1 Partnership Act 1892 (NSW) Partnerships
Three main elements:
Carrying on of a business
A `business' is any trade, occupation or business' profession and it must be an active occupation or profession continuously carried on: Smith v Anderson (1880) An isolated transaction or a single venture will not be treated as a partnership: Ballantyne v Raphael (1889) Partnerships
Three main elements:
Carrying on of a business in common The business must be carried on by, or on behalf of, all the partners in an agency relationship: Keith Spicer Ltd v Mansell  With a view to profit
The parties must intend to make a profit. When does a partnership exist?
A Partnership may be formed either EXPRESSLY or IMPLIEDLY, and in each case IMPLIEDLY, all the circumstances must be examined in order to ascertain:
The intention of the parties; Whether there has been a sharing of profits and losses accompanied by a state of agency; and agency; Whether each party has a voice in the management. When does a partnership exist?
In addition to the common law rules, the Partnership Act sets out other negatively framed rules to which `regard shall be had' had' if the answer is still not clear: Common ownership of property; Sharing of gross returns; and Sharing of profits. 2 When does a partnership exist?
The courts look not only at what the parties must be taken to have intended, but at their conduct towards each other while carrying on the business. Relationships like partnerships Relationships like partnerships
Associations of people which possess some of the features of partnership, but are not partnerships, include: Relationships like partnerships
Separate rights between the parties but a single owner against the rest of the world; Features of a joint tenancy are right of survivorship; and the `four unities' of possession, unities' interest, title and time. Co-ownership CoNot necessarily the result of agreement; A co-owner is not the agent of the other co-owners; cocoA co-owner can transfer their share without permission coof other co-owners; coCo-ownership does not necessarily involve carrying on a Cobusiness with a view to profit. Tenants in Common
Participate in co-ownership; coHave unity of possession but not necessarily the other three unities. Relationships like partnerships
A one-off commercial activity for profit although onea single undertaking can amount to a partnership where the parties are engaged in a commercial activity with a view to profit:
United Dominions Corp Ltd v Brian Pty Ltd (1985); Canny Gabriel Castle Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) Relationships like partnerships
Joint Ventures distinguished from Partnerships:
Usually ad hoc undertaking for a specific task or time It is a separate venture for each of the parties Assets are usually held as individual shares as tenants in common Liability is individual Profits are received individually Invoices are usually issued separately and paid individually The parties can dispose of their interest in a joint venture without the need to assign 3 Partnerships
There is no set statutory form for the creation of a partnership. However parties contemplating a partnership arrangement would be well advised to clearly and fully state the most important elements of the contract in written form. This is particularly important if the partners do not wish the provisions of the Partnership Act to apply. Partnerships
There are no formal requirements for formation. A partnership can be formed in four ways:
1. Verbally There is no requirement that a partnership agreement be in writing, but it is advisable as otherwise disputes may be difficult to resolve. Partnerships
Formation Continued Partnerships
Formation Continued 2. Written agreement Not compulsory but advisable The Partnership Act 1892 (NSW) sets out rules governing the operation of partnerships These rules can be varied by agreement If parties do not have a written agreement the Partnership Act will apply 3. By conduct/estoppel Where the parties by word or conduct lead others to believe that a partnership exists. Supplemented by presumptions... presumptions... Partnerships
Formation Continued Relationship to outsiders
Partnership Act 1892 (NSW)
Section 2 4. Statutory presumption The Partnership Act 1892 (NSW) sets out certain presumptions that assist courts in determining whether or not there is a partnership. The mere fact of common ownership does not of itself prove that there is a partnership. The sharing of gross returns does not of itself prove that there is a partnership The receipt by a person of a share in the profits of a business does not of itself prove a partnership Every partner is an agent of the firm and the other partners for the business of the partnership. Any act done in the usual course of partnership business can bind the firm and the partners. The authority of partners could be: Actual Ostensible or Apparent Implied 4 Partnerships
Partners are liable personally for the debts and share the profits. profits. Partners are agents and principals of the firm and are liable for the actions of the other partners.*** Partnerships
If partnership determined - significant legal implications: Joint and several liability
Can be sued together, or separately For the whole of the debt, Once a creditor or other person makes a choice of suing either one partner, or all, if he is unsuccessful he can't then seek the other alternative. can' Sections 9 13 Partnership Act 1892 (NSW) Liability of Partners
A person who holds themselves out as a partner by their words or conduct may become liable as an `apparent partner'. partner'
Section 14 Relationship Between Partners
Unless the Partnership Agreement states otherwise, the Partnership Acts outlines the rights partners will have:
Share equally in profits and losses; Indemnity for any liabilities incurred while acting in the ordinary course of business of the firm; Interest on advances; Interest on capital;
Partnership Act 1892 (NSW)
Section 24: Partnership Act 1892 (NSW) Share in management of the business; Relationship Between Partners
Wages cannot be paid although partners can receive drawings; Consent of all partners is needed for the introduction of new partners; A unanimous decision of all partners is required to change the fundamental nature of the business; Partners are to have access to partnership books; and A majority of partners cannot expel a partner
Section 25 PA 1892 (NSW) The duties of each partner
The partners are under a fiduciary duty towards each other to:
Render true accounts; Account for private profits; and Refrain from competition with the partnership firm. 5 Partnership property
Partnership property includes:
items brought into the partnership property as partnership property; items acquired on account of the firm; and items acquired for the purposes of and in the course of the partnership business
ss 20 - 21 Partnership Act 1892 (NSW) Liability - Change of Partners
Section 36 - PA 1892 (NSW) Remain liable for debts incurred before retirement unless the creditors and other partners agree otherwise; May be liable for debts incurred by the partnership after retirement if they have not taken steps to notify former and new customers of their retirement. Dissolution Dissolution
Dissolution of Partnership Sections 32-34 PA 1892
(NSW) Subject to any specific agreement between the parties, a partnership will be dissolved in the following circumstances: At end of an agreed term or undertaking Upon reasonable notice by a partner If a partner dies, or becomes bankrupt If the firm's enterprise becomes unlawful firm' Methods of dissolution Dissolution
Dissolution Continued Section 35 Dissolution
Each partner is entitled to a proportionate return of their contribution to capital before distribution. If the partnership is being dissolved because of death, insolvency or bankruptcy, it is necessary to distinguish between partnership property and private property to determine the rights of the different groups of creditors. PA 1892
(NSW) The Court also has the power to dissolve a partnership on the following grounds:
A partner going insane Partner guilty of conduct prejudicial to business Wilful and persistant breach of the partnership agreement Where business can only be carried on at a loss Where it is just and equitable to dissolve the partnership 6 Partnerships
Limited liability partnerships Some states, including NSW, have allowed for the formation of limited partnerships. This means that partners can limit their liability providing there is one partner that has unlimited liability. Partnerships
Limited partners are not are not liable for debts beyond their capital contribution. Registration is required in all States. Partnerships
Legal and administrative procedures, costs of formation are relatively inexpensive A partnership syndicates for the business the combined labour, expertise, management labour, skills and financial resources of the partners More flexibility to distribute income Partnerships
Unlimited liability of each partner for the debts and the conduct of the business, including the activities of each partner Potential for disputes and breakdown in the mutual trust of the partners Problems with partners wanting to retire No separate legal entity Size restrictions Companies
Features A `company' or `corporation' is an company' corporation' association of persons who, having satisfied the requirements of the Corporations Act 2001 (Cth) for Cth) registration, are given a separate legal entity. entity. Features Trusts
A trust created by a settlor arises where property is held by a trustee for the benefit of the beneficiary. beneficiary. A trustee holds the legal title or exercises control over property for the purpose of applying it to the benefit of others. 7 Franchises
A franchise is a marketing concept for the distribution of goods or services. In a commercial context, a franchise operation is a contractual relationship between the franchisor and the franchisee. Franchises
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. Franchises
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 Franchisor' marketplace; Marketing and management support; Access to a business system and financial expertise; and Economies of scale. Business Names
Registration of a business name is required in all jurisdictions by Business Names legislation where the owner/s do not use their own names. 8 Business Names
The purpose of registration includes:
Virtual monopoly rights on registration (but no proprietary right); Identification of the owners; Avoiding confusion by preventing similar or identical names being registered; and Provision of a public registry where information concerning the registered business can be accessed. Business names
While no proprietary right exists with registration, it allows the Business Name to be protected by:
The tort of `passing off' - the plaintiff establishes that off' their business name is distinctive and the defendant's defendant' conduct could mislead and cause a detriment to the public; Trade marks law - Trade Marks Act 1955 (Cth); or Cth); Trade Practices Act 1974 (Cth) - eg. ss52 and 53. Cth) 53. Next week...
In next week's lecture week'
We will look at
Companies Trusts The End NEXT WEDNESDAY... WEDNESDAY...
Essay due by 5pm through eLearning site 9 ...
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- Spring '08