Choosing a Business Entity

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Choosing a Business Entity
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Choosing a business entity

• One decision that has to be made when starting a
  new business venture is what type of business
  structure to use.
• This decision will depend upon the answers to a
  number of questions.
• Each business structure has advantages
  disadvantages that need to be considered.

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• Think about who owns the business who employs
  you.
• What area of business is it in?
• What type of business structure is it?

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Issues relevant to establishing a business

• Complexity of structure
• Ease and cost of establishment
• Aspects of control
• Expertise
• Liability of participants
• Sale/transfer of assets - flexibility
• Entry of new participants
• Recurring costs
• Raising capital
• Taxation income splitting among participants
• Limitations of business life
• Complexity of winding up

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Organisational forms
Business Structures
Company
Sole Trader
Trust
Joint Venture
Incorporated Association
Unincorporated Association
Partnership
Exempt Company
Public Company
Proprietary Company
Large
Small
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Definitions

• Sole trader
• business is owned and operated by one person with
  all profits or losses attributed to the owner.
• Partnership
• relationship between 2 to 20 persons who carry on
  business in common with a view to profit.
• Joint venture
• usually a one-off enterprise, with participants
  receiving profits separately, based on
  contractual agreement.
• Not a technical legal term with a settled common
  law meaning.

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Definitions

• Unincorporated association
• body of 2 or more persons, organised for a
  particular purpose, which may or may not include
  the purpose of carrying on business with a view
  to a profit.
• Incorporated association
• body of 2 or more persons, organised for a
  particular purpose, which may not include the
  purpose of carrying on a business with a view to
  a profit.

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Definitions

• Company
• incorporated body created by a process called
  'incorporation', regarded by law as a separate
  legal entity.
• Trust
• relationship recognised by the law of equity,
  where a trustee holds property for a beneficiary
  or beneficiaries.

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Sole trader

• A sole trader owns and controls their own
  business.
• It is the simplest form of business organisation
  to create.
• Advantages of being a sole trader include
• keeping all the profits
• ownership and control of the business
• lack of formalities and inexpensive to form
• nature of the business can be easily changed
• maintenance of secrecy

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Sole trader

• Disadvantages of a sole trader include
• unlimited liability (i.e. the business and
  private assets of the sole trader are at risk if
  the business fails because the business and the
  sole trader are synonymous)
• because the business and the sole trader are
  synonymous, the death of thew sole trader will
  often mean the end of the business
• degree of personal element can make the business
  difficult to sell
• lack of management skills or expertise
• difficulty in raising large amounts of capital

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Partnership

• A basic form of collective ownership.
• A partnership is defined as the relation which
  subsists between persons carrying on business in
  common with a view to profit.
• Advantages of a partnership include
• lack of formalities and inexpensive to form
• the nature of the business can be easily changed
  by agreement between the partners
• tax advantages
• maintenance of secrecy
• potential for partners to pool capital and
  experience

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Partnership

• Disadvantages of a partnership include
• unlimited liability of partners, as partnership
  (like a sole trader) is not a separate legal
  entity from its members
• numbers limited to between 2 and 20 (except in
  the case of professional partnerships)
• lack of permanence as partners and business
  synonymous
• difficulty in selling ones interest
• Inability to contract with the firm
• loss of control of management of business

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Company

• Unlike a sole trader and partnership, a company
  is a separate legal entity to its members.
• Advantages of a company include
• a separate legal entity from the shareholders or
  members, as well as those who control its
  operation
• limited liability for its members (depending on
  the type of company)
• perpetual succession
• the company can sue and be sued
• transferability of shares
• taxation benefits
• a company can now be created with one or more
  members

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Company

• Disadvantages of a company include
• cost of establishment and ongoing fees
• 0nerous reporting and administrative requirements
  required by law
• limited management role for shareholders
• possible loss of control of the company to
  shareholders
• increasingly onerous legal responsibilities
  placed on directors and company officers

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Trust

• Five elements constituting a trust
• Settlor
• Person responsible for creating trust
• Trustee
• Person to whom trust property is given
• Beneficiary
• Person to benefit from the trust
• Trust property
• Property that is the subject of the trust
  essential contained in the body of the trust
• Trust instrument
• Document detailing terms of the trust

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Trust

• A trust created by a settlor arises where
  property is held by a trustee for the benefit of
  another, called the beneficiary.
• A trustee holds the legal title or exercises
  control over property for the purpose of applying
  it to the benefit of others.
• Two main forms of trust can be identified
• express trusts are created by the intentional act
  of a person (a settlor) through a written
  instrument (e.g. a will)
• non-express trusts are those where intention is
  not expressed but it is possible for the courts
  to imply or infer that there was an intention to
  create a trust

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Express trust

• Intentional act of a settlor, created by words
  (written or spoken)
• identifying the trust property
• indicating nature and purpose of trust
• identifying beneficiaries
• can be discretionary, where trustee will choose
  the amount to be distributed to beneficiaries

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Express trust

• Express trusts include
• discretionary trusts
• fixed trusts
• unit trusts
• two-dollar nominee trusts
• trading trusts

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Classification of trusts

• Privatefor the benefit of private individuals
• Publicfor the benefit of some public purpose
• Tradingthe property of the trust is used in the
  running of a business
• Unitthe beneficiaries own units of the trust

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Duties and powers of a trustee

• Each State and Territory has a Trustee Act.
• The duties of a trustee are set out in the trust
  instrument and legislation and must be carried
  out faithfully, and with a high standard of care
  and diligence.
• The powers of the trustee are set out in the
  trust instrument and legislation and as far as
  practicable, should be carried out personally.

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Duties of trustee

• Maintain fiduciary relationship
• Familiarise themselves with the trust property
• Obey instructions
• Not delegate duties
• Not derive profit from their position
• Keep proper accounts
• Maintain impartiality
• Exercise reasonable skill and care
• Pay and transfer property only to those entitled

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Rights of a trustee

• A trustee is entitled to
• full indemnity and reimbursement out of the trust
  property for all expenses and costs that are
  incurred as a result of administering the trust
• take legal or other expert advice where there are
  difficulties or doubts as to the trustees powers
  and duties
• discharge where the trust has been finalised
• pay money into court (e.g. where a dispute arises
  between beneficiaries over trust property)
• commission or remuneration

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Liability of trustee

• Trustee has primary liability with right of
  indemnity against the trust property.
• Limited, if trustee is a company, to the assets
  of the company.
• If not a company, trustee personally liable for
  tortious and contractual liabilities.

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Beneficiaries interests

• There can be different types of beneficiaries
  under a trust those entitled to receive a share
  of capital and those entitled to receive income
  from the proceeds of investment of capital, for
  example.
• There are also different types of interest under
  a trust those who receive a life interest and
  those who have an entitlement in the remainder
  .
• These equate to those beneficiaries with interest
  in income of the trust and those with an
  interest in the capital.

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Breach and termination of a trust

• The liability of a trustee for breach of trust
  will depend on their conduct, the nature of the
  breach and the extent of the loss.
• The office of trustee may be terminated by
• death of the trustee
• retirement of the trustee, when another has been
  appointed to replace them
• removal by the court, or any power given to other
  trustees by the trust instrument
• conclusion of the trust
• where all the beneficiaries agree

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Franchise

• 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 in which 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
• expertise and training
• 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.

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Franchise

• The advantages of franchising for a franchisor
  include
• rapid market penetration
• access to capital resources of the franchisee
• risk sharing
• fewer staff problems
• The advantages of franchising for a franchisee
  include
• almost instant reputation/goodwill if the
  franchisors product is established in the
  marketplace
• marketing and management support
• access to a business system and financial
  expertise
• economies of scale

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Business names legislation

• Business name must be registered unless all names
  of operators or traders are included in business
  name, i.e. the full names of the operators or the
  surname, plus
• the first name or names
• the initial(s) of first name or names
• a combination of first name and initials
• the first name or names (or initials) by which
  individuals are commonly known.

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Purpose of registering business name

• Public knows who they are dealing with (Public
  Registry)
• To protect the goodwill of the business
• Restrictions on names registered
• identical to or closely resemble a name already
  registered
• undesirable
• suggestive of connection with the government or
  banks
• likely to be confused with names of companies or
  incorporated associations
• crown' or 'royal' must not be used

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Business names

• On registration, a business is issued with a
  certificate of registration of business name.
• The certificate is evidence of registration and
  while no proprietary right exists with
  registration, the business name can be protected
  by
• the tort of passing off if the plaintiff can
  establish that their business name is distinctive
  and the defendants conduct could mislead and
  cause a detriment to the public
• Trade Marks Law under the Trade Marks Act 1955
  (Cth) or
• the Trade Practices Act 1974 (Cth)
  specificallyss 52 and 53.