The Pros and Cons of Different Business Structures
The given lecture was quite informative as it highlighted the various business structures that are possible in the Australian context. A rather intriguing aspect was not there are pros and cons associated with each of the discussed business structures and based upon a host of factors, the preferable structure would need to be decided. Additionally, there are separate legal requirements associated with these different business structures in relation to formation and reporting. While, business structures like sole trader and partnership could be formed with negligible legal hassles but the same cannot be said about company. Besides, it was interesting to learn that even after narrowing down choice on a particular business structure, there are sub-types whose characteristics need to be understood to make a prudent choice.
The article that was published by Olivia Maragna on 6th September 2016 titled “5 tips for choosing the best structure for your business” was relevant to the given lecture since it explains the importance of aligning business structure with the needs of the business by considering relevant factors. One of these is the nature in which income is earned which might have significant tax implications. Also, the ease of working with others could potentially result in decision between a sole trader and other forms such as partnership and company. Besides, it introduces trusts and highlights the situations when it should be preferred. Further, it also highlights that the decision maker needs to consider the pros and cons of various business structures before making a decision (Maragna, 2016).
The given lecture highlighted the process of incorporation of company which was quite tedious and involved a host of processes leading to the registration of the company with ASIC. One of the key steps was related to the selection of name which should be not only unique but should not contain few characters which are prohibited. Further, before registration, it is wise to check if a particular name is available or already has been taken. Additionally, the importance of appointing key internal personnel such as directors and company secretary cannot be overemphasised. Also, it was highlighted during the lecture how the legal requirements with regards to directors and company secretary tend to be different for various types of companies and must be considered while the company is incorporated.
The article that was published by Alison and Jillian Barrett on 27th April 2018 titled “How to protect your business name from other companies” was relevant to the given lecture since it highlighted the importance of business name and considered the subject not only from company’s perspective but also that of partnership and sole trader. The key difference as highlighted is that in case of company, there is no need to separately register a name which tends to be included in the company registration and incorporation. Further, one can also file an appeal to ASIC if a similar business name is given to another company and such a move has adverse impact on the business (Barett, 2018).
Choosing the Right Business Structure for Your Needs
The concept of company constitution was introduced in this lecture coupled with the importance of the same. The company constitution tends to highlight the rules related to the underlying relationships the company and the members. It tends to act as a contract between the various members of the company and company itself as has been highlighted in s. 140. The various powers derived by the directors could be traced to the company constitution which also would highlight key rules regarding the availability of authority and how to use the same. Any violation of the provisions of company constitution by any member of the company would result in contractual obligations as has been highlighted in previous case laws.
The article that was published by David Ferguson on 14th February 2013 titled “Australia: The Statutory Contract” was relevant to the given lecture since it highlights the precise role of constitution with reference to the relevant statutory provisions. Additionally, it sheds light on the contractual nature of the company constitution and the enforceability of the same in the eyes of law. Further, by referring to the case law it has also highlighted the interpretation that the courts have drawn in this regards which is imperative to derive the consequences of any breaches in this regards (Ferguson, 2013).
The lecture highlights how the company despite being a separate legal entity has authorised agents enacting contract with outside parties on behalf of the company. It may be possible that a given agent may enter into a contract for which the underlying authority is lacking. Also, the agent may enact a fraudulent contract with the outsiders. In such cases, as highlighted in s. 129 and s.128 of Corporations Act 2001, the outside parties would have an enforceable contract and the company would be obliged to enforce the contract despite the agent showing negligent or dishonest conduct. However, an important exception to the rule arises when the outside party is has reasonable suspicion to believe that the agent lacks requisite authority.
The article that was published by Beau Donelly on 11th November 2014 titled “ACCC alleges Europcar misled customers and had unfair contract” was relevant to the given lecture since it highlights that for unfair contracts that have been enacted by the directors and employees of the company, the company is being held responsible as the underlying contracts have violated the provisions of the Australian Consumer Law as highlighted by ACCC. Thereby, this article highlights that the company would be held responsible for any liability arising on account of dubious contracts enacted by agents with consumers. Further, the agents themselves would not be held liable unless there is fraudulent conduct which breaches the duties imposed on directors and other officers (Donelly, 2014).
Legal Requirements for Business Formation and Reporting
This week lecture defined the membership of the company along with their powers and the concept of dividends. One of the key members of the company are the shareholders who often are not involved in the day to day working of the company. The management makes the crucial decisions along with board of directors and the decisions taken by these tend to have an impact on the shareholders’ wealth. As a result, members of the company have been provided certain powers by the Corporations Act 2001 so as to minimise agency related issue and ensure that the managers are upholding the interest of the company and shareholders. One of the tools available to members is in the form of shareholders’ resolution whereby approval from shareholders is necessary for the board to proceed.
The article that was published by Ruth Williams on 26th October 2017 titled “Shareholders want power to ‘escalate’ issues” was relevant to the given lecture since it highlights the shortcomings of the powers available to shareholders particularly in the form of shareholders’ resolution. This is because the scope of shareholders’ resolution is limited only to the matters which are to be decided by the shareholders and not to matters which are to be decided by the board. As a result, concerns of certain members related to environment and society remain unaddressed. In order to introduce changes in the internal management, it is imperative to bring changes in company constitution which requires more than 75% votes and hence shareholders have limited effect in this regards. (Williams, 2017).
This week lecture introduced the concept of corporate governance and emphasised the importance of the same with regards to management of company. This is especially important in case of large or listed companies where there are a number of shareholders that have no business involvement. In the past, there have been several instances of corporate fraud which has been facilitated through unsound corporate governance practices. As a result, there is significant emphasis in this regards so that the internal processes of the company are conducted in an ethical manner. A crucial role is played by the non-executive directors who tend to safeguard the interest of the minority shareholders and also insure independence of various committees. Also, it was highlighted that corporate governance is imperative for both large and small companies.
The article that was published by Tony Featherstone on 5th June 2018 titled “Are you fit to get behind the ‘wheel’ of a small business?” was relevant to the given lecture since it highlights the shortcomings with regards to corporate governance in small companies. An interesting point advocated is that the promoters can register the company without having any training with regards to governance related issues coupled with compliance and regulation. Also, it is likely unlikely that some training module related to corporate governance and related compliance issues. The author suggests that going forward, there needs to be a yardstick related to governance and compliance introduced especially for small companies at the time of registration (Featherstone, 2018).
Incorporating a Company in Australia
This week lecture highlighted that since the directors and other officers tend to occupy key positions in the internal management of the company, hence there are certain duties imposed through the Corporations Act 2001. Before the enactment of Corporations Act 2001, the duties on directors were derived from fiduciary duties of the agent (directors and officers) towards the company (principal). It is imperative that the directors must discharge the duties bestowed on them while exercising their power or else they could be personally held liable despite them being agents to the company. Further, various previous cases were also cited which highlighted the consequences of breach of duties of directors. These consequences are also highlighted in relevant sections of the Corporations Act 2001.
The article that was published by Belinda Williamson on 26th January 2017 titled “The cost of small business company directors’ ignorance” was relevant to the given lecture since it highlighted how some promoters tend to form companies in order to reap the gains of limited liability. In order to fulfil the necessary regulations, typically friends and family members are appointed as directors to the company. However, these directors tend to be ignorant about the duties of directors and at times tend to serve their own interest ahead of the company. Such conduct can lead to violation of the statutory provisions relating to duties of directors and may lead to significant financial penalties besides criminal charges also in certain cases (Williamson, 2017).
This lectures introduced the various means of financing that the company can potentially utilise. A company needs finances as working capital and also in the form of long term loans meant for business expansion and acquisitions. The company has choice with regards to raising capital through debt or equity. Both the sources of finance have their own pros and cons and it depends on the underlying circumstances as to which one should be preferred. Usually, a healthy mix of the two sources of finance is considered to be idle since relying on only one means of finance is not preferred. The company structure unlike other business structures can issue shares to various entities without impacting the underlying identity in accordance with Corporations Act.
The article that was published by Danny Bradbury on 10th October 2017 titled “Five common options for financing your small business” was relevant as it highlighted the various options of financing that are available especially from the perspective of a small business. Additionally, it also lists down the various pros and cons in regards to each source of financing that has been proposed so that an informed choice can be made by the owners on how to raise finance. This is similar to the case with company financing which was discussed in the lecture where the ideal source was dependent on underlying situation (Bradbury, 2017).
Understanding Company Constitution: Rules and Relationships
This lectures aimed to highlight the various remedies that are available to the members in case of grievances. These remedies have been outlined in the Corporations Act 2001. One of them is the oppression remedy which is availed especially by minority shareholders when the management takes decisions which are not in the interest of minority shareholders or tends to serve the interest of the majority shareholders at the cost of minority shareholders. Another remedy available under s. 401 tends to demand the company being wound up owing to oppression by directors or conduct of the directors being in breach of the provisions of the Corporations Act. Further, s. 1324 allows the shareholders to seek injunction from court if the provisions of the Corporations Act are breached.
The article that was published by Leon Gettler on 20th November 2014 titled “A new remedy for family business oppression” was relevant as it highlighted the issues that minority shareholders tend to face especially in case of family owned businesses when there is death of founder and there are issues with regards to succession resulting in mismanagement of the business. In such cases, one of the relevant reliefs that minority shareholders may aim for is in the form of winding up of the company. However, this typically takes time and may also be expensive to pursue. As a result, the Victoria Supreme Court has introduced a pilot program for six months in order to ensure that relief is extended to minority shareholders at lower cost (Getller, 2014).
References
Alison and Barrett, J. (2018). How to protect your business name from other companies. Available at: https://www.smh.com.au/business/companies/how-to-protect-your-business-name-from-other-companies-20180427-p4zc05.html [Accessed: 5 September 2018].
Bradbury, D. (2017) Five common options for financing your small business, Available at: https://business.financialpost.com/entrepreneur/money/five-common-options-for-financing-your-small-business [Accessed: 5 September 2018].
Donelly, B. (2014) ACCC alleges Europcar misled customers and had unfair contract, Available at: https://www.smh.com.au/national/accc-alleges-europcar-misled-customers-and-had-unfair-contracts-20141111-11ki46.html [Accessed: 5 September 2018].
Featherstone, T. (2018). Are you fit to get behind the wheel of a small business? Available at: https://www.smh.com.au/business/small-business/are-you-fit-to-get-behind-the-wheel-of-a-small-business-20180605-p4zjlf.html [Accessed: 5 September 2018].
Ferguson, D. (2013) Australia: The Statutory Contract, Available at: https://www.mondaq.com/australia/x/221404/Contract+Law/The+Statutory+Contract [Accessed: 5 September 2018].
Getller, L. (2014) A new remedy for family business oppression, Available at: https://www.theaustralian.com.au/business/business-spectator/a-new-remedy-for-family-business-oppression/news-story/9dfb8f4b254ba20d0082d9a9f326e9ab [Accessed: 5 September 2018].
Maragna, O. (2016). 5 tips choosing the best structure for your business. Available at: https://www.smh.com.au/business/markets/5-tips-for-choosing-the-best-structure-for-your-business-20160906-gr9q1c.html [Accessed: 5 September 2018].
Williams, B. (2017). The cost of small business company directors’ ignorance. Available at: https://www.smh.com.au/business/small-business/the-cost-of-small-business-company-directors-ignorance-20170126-gtyyun.html [Accessed: 5 September 2018].
Williams, R. (2017). Shareholders want power to ‘escalate’ issues. Available at: https://www.smh.com.au/business/shareholders-want-power-to-escalate-issues-20171026-gz8nnl.html [Accessed: 5 September 2018].
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