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UNSW Foundation Studies
2016 B/B+ Semester 2
Unit 3:
Choice of Business Structure
Lecturer: Hui Thong
Business Law
Unit 3: Choice of Business Structure
Overview
Unincorporated business organisations Sole trader Partnership
Incorporated business structures Company Concept of separate legal entity Concept of corporate veil Lifting of the corporate veil
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Introduction
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Starting a business
Consider a variety of questions
Main question: Which business structure to adopt?
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Choice of Business Structures
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Numerous forms of structures available, including:
Sole Trader
Partnership
Company
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Choice of Business Structures
Unincorporated
Sole trader Partnership
Incorporated
Limited company
Private
(Pty Ltd)
Public
(Ltd)
Unlimited company
No liability company
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Choice of Business Structures
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Main grounds relevant to selecting the most appropriate choice of business structure:
Purpose, nature and objectives
Formalities and cost
Finance
Management and control
Taxation advantages
Extent of liability
Privacy and confidentiality
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Sole Trader7
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Sole Trader
A person carrying on a business as an independent individual
Easy to establish and run
Owns and has full control of the business
No disclosure requirements
Access to limited resources/finance
Risk of personal liability
Liable for payment of tax
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Partnership9
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Partnership
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Exists between persons carrying on a business in common with a view to profit. Governed by Partnership Act
Maximum of 20 partners
Easy to establish
Partners may provide an ongoing source of funds
Control is divided between partners
Not a separate legal entity (See Slide 14)
Risk of personal/joint liability
Income splitting
No disclosure requirements
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Company11
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Company
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An association of persons who satisfy Corporations Act 2001 (Cth) for registration
Formalities: Created through the process of registration (incorporation)
Separate legal entity (See Slide 14)
Members of a limited company have limited liability
Management is separated from ownership
Taxed at a flat rate
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Proprietary and Public Companies
Maximum 50 shareholders
Most suitable for use by a small business
Restricted fundraising ability
Less regulatory burdens than public companies
Financial secrecy for small proprietary companies
May be listed on ASX
Raise funds from the public
Subject to financial disclosure and more regulation
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Proprietary company Public company
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Legal Effects of Incorporation
Upon the incorporation of a company, it becomes a separate legal entity, separate from its members and controllers
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Company as a Separate Legal Entity
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Salomon v Salomon & Co Ltd [1897] AC 22
Facts
Mr Salomon:
major shareholder, director and secured creditor
borrowed money from Mr Broderip, lent it to the company
Company’s business failed; value of assets were insufficient to pay both Mr Salomon and company’s other creditors
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Company as a Separate Legal Entity
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Salomon v Salomon & Co Ltd [1897] AC 22
Issue
Was Mr Salomon personally liable for debt owed to Broderip?
Held
No. Upon the incorporation of a company, it becomes a separate legal entity from its founders, directors, members and controllers
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Corporation Veil
The artificial screen that separates legal identity of company from its members/directors
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Lifting the Corporate Veil
Courts are prepared to lift/pierce (disregard) the corporate veil in special and limited circumstances
Courts may look behind the corporate veil to determine why the company was formed
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Lifting the Corporate Veil
Avoidance of legal obligation
Attempts by the owner to deliberately use the company to avoid legal/contractual obligations undertaken by them
Corporate veil lifted to enforce legal/contractual obligations
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Lifting the Corporate Veil
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Gilford Motor Co Ltd v Horne [1933] 1 Ch 935
Facts
Horne signed an employment contract with GMC promising not to take its customers when he leaves GMC
Horne resigned and set up a company which targeted GMC’s customers
Lifting the Corporate Veil
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Gilford Motor Co Ltd v Horne [1933] 1 Ch 935
Held
Horne misused the corporate personality to avoid obligations under his employment contract when he left GMC
Corporate veil lifted
Lifting the Corporate Veil
Effects of lifting the corporate veil
No distinction between identity of company and identities of owners/directors
Forces personal liability for debts of company onto owners/directors
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End of Lecture
Students must:
Read prescribed reading for Unit 3 (Choice of Business Structure)
Attempt Tutorial Exercises BEFORE going to Tutorial in Week 4
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