BLAW1004 Lecture Notes - Lecture 10: Australian Business Number, Corporations Act 2001, Sole Proprietorship
12 Jun 2018
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Lecture 10 – Business organisations
Types of business organisations
• In Australia, a business owner has a choice as to how they structure and run their
business.
• As a general rule, simpler structures are suitable for smaller businesses and larger
enterprises require more complex structures.
• Sole proprietorships
• Trusts
• Partnerships
• Companies
Choosing a business structure
• Things to consider can include:
- Size of the business
- Risk
- Purpose of the enterprise
- Requirements of capital (or risk)
- Privacy
- Whether the business is likely to last for a long time or even forever
- Costs of establishing and running a business
- Regulation/intervention
- Taxation
- Control and equality
- Ease of transferring the business
- Intellectual property
Sole proprietorship/sole trader
• An individual who owns a business enterprise as a principal.
• The simplest way to structure a business
• Can trade under their own name or under a different trading name
• Can also obtain an Australian Business Number (ABN).
• Completely responsible for all risks associated with business (unlimited liability)
• No separation between business and personal affairs
• Business is not a separate legal entity
• Initial capital comes from own resources or personal loans
• Succession problem
• Sole trader receives profits not wages (pays tax on profits at individual tax rate)
Sole proprietorship/sole trader
• No legislation that specifically regulates sole traders
• Few formalities required to set up business
• Professional qualifications might be required
• Registration for GST (must register if annual turnover is more than $75,000)
• Subject to CCA and ACL (Consumer legislation)
find more resources at oneclass.com
find more resources at oneclass.com
Sole proprietorship: advantages and disadvantages
Advantages:
• Easy to set up
• Minimal regulation
• Greater privacy
Disadvantages:
• Difficulty of raising capital
• Higher tax rate for individuals v companies rate
• Unlimited liability
Partnerships
• Partnership is the relation, which subsists between persons carrying on a business
in common with a view of profit.
• The tests for determining if a partnership exists are whether:
- A commercial relationship exists between the parties (an enterprise);
- A common business is conducted by the parties (that is, there is some
mutuality
- A business is conducted with a view to profit (to share profit).
• Created and regulated by agreement; supplemented by Partnership Act of relevant
state.
What is not of itself a partnership:
• Joint ownership of property Davis v Davis [1894]
• Sharing of gross returns Cribb v Korn (1911)
• Receipt of a share of profits but it is prima facie evidence that person is a partner
Partnership agreements:
• Can be express or implied
• Express agreements (in a written form) can resolve a lot of potential problems
• Agreements can determine:
- The very existence and membership of the partnership
- Rights, liabilities and contributions of each partner
- The genuineness of the partnership for taxation purposes
- May modify some implied terms set by the legislation
• Partnership agreements can be made through a standard form
Partnership: legal significance
• Partners have no separate legal entity from the partnership
• Partners have unlimited liability
• Partners are both principals and agents for each others – their actions bind other
partners
• The partnership may enter into contracts and be sued
• Partners do not receive a salary and cannot be employees
find more resources at oneclass.com
find more resources at oneclass.com
Partnership: regulation
• Partnership regulation is determined by state and territory legislation.
• Common law applies to partnerships
• A partnership cannot be contrary to public policy
• Partnerships may be between 2 and 20 people. Once a partnership is of more than
20 people, it normally must incorporate: Corporations Act 2001 (Cth) s 115.
Though there are many exceptions with professions
• Must register a business
Types of partnerships:
Limited liability
• Allows for non-participating, working or general partners
• Must have at least one general partner with unlimited liability
• Offers a simpler means of limiting personal liability, without the expense of
registering and meeting the regulatory requirements of a company
• Allows for more confidentiality
• Losses sustained by the partnership not distributed to partners
• Now taxed like companies
• Silent (non-participating) partners who do not take part in the management can be
designated as limited partners
• Allows for silent partners (non participating) to invest without taking part in
management
Joint and several liability of partners
• Joint liability for contract debts or court judgments mean that all partners are
liable together, but must be sued in one action.
• Several liability means that partners are liable altogether and individually – each
partner could be sued one by one.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Choosing a business structure: things to consider can include: Whether the business is likely to last for a long time or even forever. Costs of establishing and running a business. Initial capital comes from own resources or personal loans. Advantages: easy to set up, minimal regulation, greater privacy. Disadvantages: difficulty of raising capital, higher tax rate for individuals v companies rate, unlimited liability. Partnerships: partnership is the relation, which subsists between persons carrying on a business in common with a view of profit, the tests for determining if a partnership exists are whether: A commercial relationship exists between the parties (an enterprise); A common business is conducted by the parties (that is, there is some mutuality. A business is conducted with a view to profit (to share profit): created and regulated by agreement; supplemented by partnership act of relevant state.
