Commerical Law
— Topic 11: Managing a Business
Commercial Law
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Overview of this topic:
Managing a business: start-up;
Managing a business: business ownership; and
Managing a business: companies and corporate governance
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Learning Outcomes: Managing a business: Start-up
What should a person do first if they are thinking about starting a new business?
When will a business be required to register its business name, and how does it go about doing it? What licences will it need to apply for to conduct its new business?
Should the business lease its premises or own them outright? What is the difference between owning property and leasing property? What are the advantages and disadvantages of each?
When is a business allowed to be open for trading? What are the legal issues associated with setting up a website and acquiring a domain name?
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Learning Outcomes: Managing a business: Business ownership
What is a sole trader? What are the key features of the ‘sole trader’ business structure? What are the advantages and disadvantages of being a sole trader?
What is a partnership? What are the key features of the ‘partnership’ business structure? What are the rights and obligations of the members of a partnership?
What is a trust? What are the key features of the trust? What are the powers and rights of a trustee?
What is a franchise, and what are the benefits of becoming a franchisee? What are the rights and obligations of a franchisee?
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Learning Outcomes: Managing a business: Companies and corporate governance
What are the consequences of setting up a new business as a company? What are the advantages and disadvantages of this type of business structure?
How does the law regulate fundraising by companies?
How does the law regulate the relationship between directors and shareholders?
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Reading materials
Nickolas James's Business Law (Wiley, 5th ed, 2020) Chapter 14;
Chapter 15; and
Chapter 16
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Managing a business: start-up Preparation
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MANAGING A BUSINESS: Preparation
Before a person starts trading, they should:
do some research,
protect the IP,
prepare a plan,
raise some money, and
take out insurance.
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MANAGING A BUSINESS: Business structures
When starting a new business one of the most important legal questions a person will have to answer for themselves is which business structure they will adopt. A business structure is the legal form of a business organisation. The most common types of business structure are:
The sole trader,
The partnership , and
The company.
These business structures are not mutually exclusive. Two or more companies, for example, can form a partnership.
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MANAGING A BUSINESS: Business structures
The person’s choice of business structure will have important consequences in terms of:
The ease and cost of setting up the business,
Their legal and financial liability,
The way they pay tax,
Their ability to raise finance, and
Their ongoing regulatory obligations.
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MANAGING A BUSINESS: Types of business structures
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Managing a business: start-up Licences and registration
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MANAGING A BUSINESS: Registering the business name
Unless a business owner proposes to carry on business under their own name (including their surname and first name, or surname and initials) they must register their business name in each State and Territory in which they propose to carry on business.
This requirement applies to sole traders and partnerships. If the business owner chooses to use a company and proposes to carry on business under a name different to the registered name of the company, the business name must be registered.
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MANAGING A BUSINESS: Registering the business name
The purpose of requiring registration of a business name is not to protect the business owner’s interest in the name but to protect the public by:
Making the identity of the person or company behind the business name publicly available and identifiable in the event of a problem, and
Avoiding the potentially misleading situation of having two businesses with the same business name.
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MANAGING A BUSINESS: Complying with licensing requirements
LICENCES
A business may require one or more licences from the relevant Federal, State or Local government body. Examples:
A licence to erect advertising signage
Registration of a swimming pool
Music and video licences
Vehicle registration
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Managing a business: start-up Renting or buying the premises
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MANAGING A BUSINESS: Buying the premises
The process of acquiring ownership of real property is called the conveyance.
Under the old system of title, ownership is established by chain of title.
Under the Torrens system of title, ownership is established by registration.
When a person purchases real property they acquire:
The land,
The buildings, and
The fixtures (other than tenant’s fixtures).
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MANAGING A BUSINESS: Owning The Business Advantages And Disadvantages
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MANAGING A BUSINESS: Leases
Most business lease (or rent) their premises rather than own them.
A lease is a contract with the property owner according to which the property owner grants the business owner exclusive possession of the leased property in return for the payment of rent and compliance with other obligations in the lease.
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MANAGING A BUSINESS: Leasing business premises. The Advantages and disadvantages
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Managing a business: start-up Opening for business
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MANAGING A BUSINESS: Shop trading hours
Under the relevant State/Territory trading hours legislation:
Monday to Saturday trading hours may be restricted and
Sunday trading may be prohibited outside of major towns and tourist precincts.
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MANAGING A BUSINESS: Setting up a website
A business can operate an online business 24 hours a day.
Domain name disputes can usually be resolved without resorting to litigation by using either the auDA or the WIPO dispute resolution process.
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MANAGING A BUSINESS: Setting up a website
The holder of a domain name must surrender that domain name if:
The domain name is identical or confusingly similar to a trade mark,
The domain name holder has no rights to legitimate interests on the name, and
The domain name has been registered and is being used in bad faith.
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MANAGING A BUSINESS: Online e-business resources
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Managing a business; business ownership: The sole trader
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BUSINESS OWNERSHIP: Sole Trader
A person is a sole trader if they directly own and operate the business by themselves. A sole trader:
may engage employees but they are the sole owner of the business,
has sole responsibility for raising the funds to start the business,
has sole control over the operation of the business, and
is entitled to all of the profits of the business.
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BUSINESS OWNERSHIP: Sole Trader
The sole trader has unlimited personal liability for the debts and other legal obligations of the business.
There are no formal legal requirements that need to be satisfied to establish this type of business structure.
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Managing a business: business ownership: The partnership
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BUSINESS OWNERSHIP: The Partnership
A person is a partner in a partnership if they and at least one other person directly own and operate a business together.
Mutual liability: Each partner is both the principal and the agent of the other partners.
Each partner has unlimited personal liability for the debts of the partnership.
Partnerships are regulated by State/Territory partnership legislation.
See: Partnership Act 1958 (Vic).
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BUSINESS OWNERSHIP: Forming A Partnership
There are no formal steps that need to be taken to form a partnership. A partnership is:
the relation which subsists between persons
carrying on a business
in common
with a view of profit.
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BUSINESS OWNERSHIP: Forming A Partnership
Persons: There can be no more than 20 partners (subject to certain exceptions).
Carrying on a business: There must be some continuity or repetition of trading activities.
In common: Each person must be acting on behalf of the others as well as on his/her own behalf.
With a view of profit: If the persons are carrying on a business together for a non-profit purpose they will have formed an unincorporated association rather than a partnership.
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BUSINESS OWNERSHIP: Partnership Agreement
The relationship between partners is a contractual one. The terms of the contract are set out in the partnership agreement which may be:
formal written document,
partly in writing and partly oral, or
wholly or partly implied from the conduct of the
partners.
A written partnership agreement is not essential to the existence of a partnership, but it is nevertheless a very good idea to have one.
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BUSINESS OWNERSHIP: Partnership Agreement
A written partnership agreement should set out:
The names of the partners and the name of the partnership
The nature of the business
The term of the partnership
Each partner’s contribution
Sharing of profits and losses
Authority of partners
Decision-making
Duties and obligations
Admitting new partners
Withdrawal or death of a partner
Dispute resolution
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BUSINESS OWNERSHIP: Authority Of Partners
The express authority of each partner is the authority expressly granted by the other partners. Partners have implied authority to act on behalf of the other partners in doing all the usual things that are necessary to carry on the business of the partnership, including authority to:
buy and sell trading stock,
hire employees, and
borrow money and charge the partnership assets.
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BUSINESS OWNERSHIP: Authority Of Partners
A particular partner may have apparent authority to act on behalf of the other partners. Apparent authority is the authority a partner appears to have, but does not actually have.
The other partners will be liable for the actions of a partner P relating to partnership business – including debts incurred by P and torts committed by P – unless:
P was not actually authorised to undertake that action on the other partners’ behalf, and
the person with whom P was dealing either knew that P was not authorised or did not know that P was a partner.
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Managing a business; business ownership: The trust
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BUSINESS OWNERSHIP: The Trust
A trust arises when one person, called the trustee, owns property (e.g. a business or real property) on behalf of beneficiaries.
The trustee is the legal owner of the trust property, and the beneficiaries are the equitable owners.
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BUSINESS OWNERSHIP: The Trust
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BUSINESS OWNERSHIP: Types Of Trust
The four principal types of trust are:
1. the express trust,
2. the implied trust,
3. the resulting trust, and
4. the constructive trust
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BUSINESS OWNERSHIP: Trustees And Beneficiaries
Trustees owe duties to the beneficiaries of the trust and have a number of powers and rights:
distributing the trust income and, eventually, the trust property in accordance with the terms of the trust deed,
preserving and protecting the trust property,
managing the trust property for the beneficiaries in the manner of a reasonable trustee.
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(See more on page 574)
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BUSINESS OWNERSHIP: Trustees And Beneficiaries
Trustees have the power to:
lease or sell the trust property when necessary,
invest the trust property,
repair or improve the trust property, and
insure the trust property.
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BUSINESS OWNERSHIP: Rights Of Beneficiaries
Rights of the beneficiaries.
Right to direct the trustee to terminate the trust and distribute the trust property to them, unless the trust deed provides otherwise.
Insist the trustee provide them with up to date information and accounts relating to the management of the property.
They may also have the right to replace the trustee, or to appoint an additional trustee, depending upon the terms of the trust deed.
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(See more on page 575)
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Managing a business: business ownership: The franchise
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BUSINESS OWNERSHIP: What Is A Franchise?
A franchise is a contractual arrangement with a franchisor according to which the franchisor permits the franchisee to:
use the franchisor’s business name and/or trade mark,
manufacture or sell the franchisor’s products, and/or
use the franchisor’s business system.
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BUSINESS OWNERSHIP: What Is A Franchise?
In return the franchisee pays to the franchisor a regular fixed fee and/or a percentage of their income or profits.
A key feature of the franchise arrangement is that the franchisor and the franchisee are (usually) not partners, employer and employee, or principal and agent, but separate contracting parties who are generally not responsible for each other’s actions.
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BUSINESS OWNERSHIP: The Benefits Of Franchising
Benefits for the franchisor:
Growth of the franchise network is achieved using the financial and labour resources of the franchisee.
The franchisor need not be concerned with the day-to-day operation of each franchise outlet.
The franchise network has the potential to grow rapidly.
The manager of each outlet is the owner of the business, and will therefore tend to be motivated to be successful.
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BUSINESS OWNERSHIP: The Benefits Of Franchising
Benefits for the franchisee:
Joining an existing franchise is much less risky than attempting to start a stand-alone business.
The franchisor may provide detailed training.
The franchisee owns their own business.
The franchisee operates under the name and established reputation of the franchisor.
The franchisee will usually need less capital.
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BUSINESS OWNERSHIP: The Benefits Of Franchising
Benefits for the franchisee:
The franchisor may provide advice in identifying suitable trading locations.
The franchisee benefits from the franchisor’s advertising and promotional activities.
The franchisee benefits from the bulk purchasing power and negotiating capacity of the franchisor.
The franchisee has access to a large knowledge base.
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BUSINESS OWNERSHIP: Franchising Code Of Conduct
Franchising Code Of Conduct: Seeks to ensure that a franchisee is sufficiently informed about a franchise before entering into it by:
imposing significant disclosure obligations on the franchisor,
granting the franchisee a 7 day cooling off period, and
prohibiting certain terms in the franchise agreement, e.g. release of the franchisor from all liability.
Seeks to provide a cost-effective dispute resolution scheme.
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Managing a business: companies and corporate governance : The company
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MANAGING A BUSINESS: The Company
DEFINITION
A corporation is an artificial legal person
separate from its owners
able to make contracts,
own property and
be a party to litigation in its own name.
A company is a type of corporation; one incorporated under and regulated by the Corporations Act 2001 (Cth).
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MANAGING A BUSINESS: Types Of Corporation
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MANAGING A BUSINESS: The Company
CREATION BY REGISTRATION
A company is created by registration by the Australian Securities and Investments Commission (ASIC). A company must have:
at least one owner or member (usually called a shareholder), and
at least one director, who is responsible for managing the company’s business.
It is possible for the director and the shareholder to be the same person, although in larger companies there is a separation of ownership and control.
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MANAGING A BUSINESS: The Company
POWERS AND LIMITED LIABILITY
A company has a separate legal personality and can:
incur debts in its own name,
hold property in its own name,
be the plaintiff or the defendant in legal proceedings,
continue unchanged even if the owners sell it to another person, and
enter into legal relationships with the owners.
The owners are not liable for any debts or other obligations of the company beyond the subscription price of their shares.
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MANAGING A BUSINESS: Proprietary And Public Companies
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Managing a business: companies and corporate governance: Corporate finance
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MANAGING A BUSINESS: Borrowing By Companies
COMPANY BORROWING
The Corporations Act 2001 (Cth) closely regulates certain aspects of borrowing by companies.
A debt payable by a company is called a debenture.
A company charge is a security given by the company over some or all of its property in favour of a creditor.
There are two types of company charge:
a fixed charge, and
a floating charge.
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MANAGING A BUSINESS: Share Capital
A company’s share capital is the amount of money or assets contributed by shareholders when they subscribe for shares in the company. The most common classes of shares are:
ordinary shares, and
preference shares.
When a company is formed, a certain number of shares are issued to the initial shareholders.
The company may later decide to raise money by increasing the number of issued shares.
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MANAGING A BUSINESS: Disclosure Documents
Generally, a company must provide investors with a prospectus containing detailed information about the company and the shares before the investors decide to subscribe for those shares, unless the issue falls within one of the exemptions set out in the Act.
Any person who suffers loss or damage as a result of a defective disclosure statement is entitled to sue the company for damages.
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MANAGING A BUSINESS: Listing The Company
A listed company is a company that has elected to be admitted to the official list of the ASX and have one or more classes of its shares granted Official Quotation for trading on the stock market conducted by the ASX.
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Managing a business: companies and corporate governance: Corporate governance
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MANAGING A BUSINESS: Corporate Governance
The way in which a company is managed and controlled is known as corporate governance.
One of the distinguishing features of a large company is the division of decision-making responsibility between the board of directors and the shareholders in general meetings.
The specific powers of each body are defined by the company’s constitution as well as by the general principles of company law.
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MANAGING A BUSINESS: Corporate Governance
The directors have the power to generally manage the business of the company, and the shareholders are only entitled to vote on limited matters.
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34.
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MANAGING A BUSINESS: Corporate Governance
The internal governance rules consist of:
the replaceable rules set out in the Corporations Act 2001 (Cth),
a customised constitution, or
a combination of both.
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MANAGING A BUSINESS: Company Constitution
The company constitution will deal with matters like:
the appointment, removal and powers of the directors,
the procedure for convening and conducting board meetings,
the procedure for convening and conducting general meetings of shareholders,
any special rights attaching to classes of shares,
rules relating to dividends, and
rules relating to the issue and transfer of shares.
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MANAGING A BUSINESS: Company Constitution
The constitution has effect as a contract:
between the company and each shareholder,
between the company and each director, and
between the individual shareholders.
This means that the constitution is only capable of being enforced by another party to the relevant contract.
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MANAGING A BUSINESS: Company Directors
A director of a company must:
be an individual and not a company,
be at least 18-years-old, and
not be disqualified.
Different types of company have different requirements
Proprietary companies must have at least 1 director
Public companies must have at least 3 directors.
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MANAGING A BUSINESS: Company Directors
Executive and Non-Executive Directors.
Executive directors are involved in:
Full-time management of the company and
are employees of the company.
Non-executive directors are not employees of the company (they do not hold a role within the organisation structure)
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MANAGING A BUSINESS: Directors (Direct And Indirect Action)
A company can act directly in any one of three possible ways:
the common seal (a stamp with the company name and ACN) is affixed to a written contract and signed by two directors,
a written contract is simply signed by two directors, without use of the company seal, or
any other procedure set out in the company’s constitution.
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MANAGING A BUSINESS: Company Agents
More commonly, companies act indirectly, through agents. An agent of a company – such as a director – can have:
Express actual authority
Implied actual authority or
Apparent authority
According to the indoor management rule, persons dealing with a company in good faith may assume
that acts within its constitution and powers have been properly and duly performed and
are not bound to inquire whether acts of internal management have been regular.
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MANAGING A BUSINESS: Directors’ Duties
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MANAGING A BUSINESS: Directors’ Duties
A director found to have breached one or more of their statutory duties may be:
disqualified from being a director,
fined up to $200,000 for each breach of duty,
ordered to compensate the company for any loss, and/or
ordered to pay to the company profits made as a result of the breach.
If the breach was deliberate and fraudulent they may be subjected to criminal penalties, including in some circumstances a jail term.
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MANAGING A BUSINESS: Shareholders Position And Powers
Each shareholder is part-owner of the company. Shareholders have powers such as:
voting rights,
distribution rights, and
rights to receive information.
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MANAGING A BUSINESS: Shareholders Position And Powers
Decision-making power is exercised by shareholders at general meetings.
Public companies are required to hold an annual general meeting at least once in every calendar year.
Companies may also hold:
extraordinary general meetings, and
class meetings.
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MANAGING A BUSINESS: Shareholders Position And Powers
The types of decisions on which shareholders are usually entitled to vote include:
decisions relating to the structure or constitution of the company,
decisions relating to the composition of the board of directors,
decisions to veto certain transactions, including related party transactions by public companies, and
the decision to initiate a shareholders’ voluntary winding up.
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MANAGING A BUSINESS: Shareholders Position And Powers
A shareholder who is dissatisfied with the way the company is being managed may be entitled to:
commence a legal action against the company if they can establish oppressive conduct,
seek an injunction to stop a director, shareholder or other person breaching the Corporations Act, and/or
bring a statutory derivative action in the event of a breach of duty by a director.
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