Choosing the Right Business Structure

Discuss about the Corporation Law for Theories, Principles and Practice.

For a person who has been in business for some years or just starting up, choice of the best structure for the business is very important. On the other hand making the wrong choice could bring the business into a total failure. This is because the structures of the business can be the determinant of various things in operations of the business in question. These include how much tax the business owner will pay, and owner’s asset protection, responsibilities of the business owner and businesses on-going costs and paper work volume (Roman Tomasic, 2002). By looking into the facts David and Liam are advising their farther Richard to turn his business into a company. This might be quiet a brilliant idea as there are some benefits of a company over sole proprietorship and partnerships. This is the most crucial attribute of incorporating a business. In partnerships and sole proprietorship, business owners are personally liable for their debts.

It is also pointed out by the facts that Richard’s sons have realised that there are tax benefits in operating a business through company a business structure than as a sole trader or partnership. This is a great one. Under the Tax Code, sole proprietorships are taxed progressively at the rates of five to thirty-two per cent. A corporation is taxed at thirty per cent of its taxable net income. Therefore, the corporation enjoys a lesser income tax rate of two per cent than a sole proprietorship (Cassidy, 2006). There are more business expenses in corporations than there is in a sole proprietorship. For example business meeting expenses, director fees, etc. Sole proprietorship’s income is immediately taxed under its owner’s account. Corporations are taxed under net income only after actual cash distributions and property dividends. In the computation of forty per cent uncompelled standard deductions, corporations take the cost of sales under consideration while sole proprietorship considers gross sales or net receipts.

Since David and Liam would like to be further involved in the business even after their father, incorporation is a wise idea. This is because corporations live longer than natural persons. For example around us, there are many corporations that are more than hundreds of years old. This means there is an opportunity of opening new markets and expanding the business as necessary even after the death of Richard. The death of a sole proprietorship owner marks the end of a business legal entity (Jason Harris, 2011). As the saying goes “men who want to be immortal might plant a tree, or raise sons that they will continue the virtue and the attribution to the name”. I now propose registration of a corporation as an addition.

Incorporation: Advantages and Benefits

Richard and his son have to the follow the following procedure to register and incorporate a company under the Australian law. In registering a PTY Ltd Company, a person must fill and submit an ASIC Form 201 and pay AUD 457 as the prescribed fee. A person who is appointed as a secretary or director of that company should prove his consent to that appointment in writing. Every shareholder of the company must also have consented to become a shareholder similarly. A minimum of one director or one secretary if the company has appointed any must be an ordinary resident in Australia (Australia), 2009). The registered company’s office must be an address in Australia.

If the company does not adopt its constitution, it must rely upon the “Replaceable Rules in the Corporations Act 2001.” Before the applicant lodges an application for registration, he or she should confirm if the proposed name is available (University of Melbourne. Employee Share Ownership Project, 2007). To check if the proposed name is available (i.e. Ridali or Rich’s Guaranteed Olives) they must do an ASIC name search. After doing a name search, one must make sure that nobody else is using that name for the similar kind of business. If there is it could cause future problems for the company as the company might be required to stop using that name by legal action even after registration. Richard and sons should also make sure that they do not infringe registered trade mark through doing a trademark search. If there is no name that is agreed upon, the company will be known by its Australian Company Number. A certificate of incorporation will be issued to the company by ASIC upon registration. This will be to prove that the company has been incorporated as at that date hence forth (Australia, 2008). Finish the preliminary documentation that is required before the registration and incorporation of the company. For example, consents of shareholders and directors.

Secondly, register for ABN with the Australian Taxation Office (ATO). Before starting a business, lodge an application for an Australian Business Number (ABN) following the incorporation. This process needs to be completed as per the Income Tax Assessment Act 1936 and Goods and Service Act of 1999 (Limited, 2011). A company is supposed to comply with taxation prerequisites that are dependent on their location and circumstances.

In case the yearly company turnover is AUD 75, 000 or above the company must strictly register for Goods and Services Tax. This is through obtaining an eleven digit ABN (Australian Business Number) (University of Melbourne. Employee Share Ownership Project, 2007). The yearly company turnover is the gross annual business income and not its profits.

Registering a Company under Australian Law

The application can be electronically submitted to the ABN through the business entry point, i.e. www.abr,gov.au. An ABN will be provided to the applicant at the end of the Internet session if the electronic submission has gone through. On the other had a hard copy application might be submitted to the ATO. After the submission, the ATO will send back an ABN after four weeks (28 days) of receiving the application (Australia), 2009). The Richard’s should also register for Pay As You Go (PAYG) at www.abr.gov.au. Or else they might register with ATO by phone or postal mail or through an agent. Territory and state taxes might also be imposed. Requirements might vary regarding the company location.

Failure to register for an ABN might result to levying GST on all company sales from the registra tion date (Jason Harris, 2011). This will not care whether any services or goods have not been grossed up to include the tax. Any overdue payments may further more attract penalties to the company.

Finally, the company will be required to sign up for worker compensation at an insurance agency. Workers Compensation Act of 1987 together with the Workplace Injury Management and Workers Compensation Act of 1998 provides for compulsory worker compensation insurance for all Australian employees (Roman Tomasic, 2002). The premium rate is based on company’s main business description.

The company should set up an Australian bank account. Identification of company signatories and directors will be needed will be needed for certification (Anon., 2008). NB necessary legal protection like terms and conditions of the business should be put in place as they are very important.

At times a parent company can become liable for the actions of its subsidiary and the corporate veil that could normally separate them can be impaled in various circumstances (Limited, 2011). Third parties may at certain circumstances seek to lift corporate veil and follow parent companies for its subsidiary liabilities. This may include situations where the subsidiary company does not own any assets for debt enforcement, or the said subsidiary has become insolvent. As provided in the facts CMS is a subsidiary of CM which owns 120 of its 2000 issued share capital. That is more the 50% of the issued share capital. It can also be noted that CMS Company owns no assets since the mining equipment are leased from the bank by CM which later subleases the equipment to CMS at an extra 10 percent.

Registering for ABN and Worker Compensation

Since CMS has been bought by Lazarus Pty Ltd, it, therefore, means that CMS is no longer in existence and the victims cannot sue a company that does not exist.

In general, a subsidiary company is liable for its omissions or acts as the law provides that in exceptional cases only a parent company can be held responsible for the acts or omissions of its subsidiary company. In those exceptional cases, the parent company might be made responsible for the acts or omissions of the subsidiary company by lifting derivative liability (corporate veil) or through imposing direct liability for corporate negligence.

A company is regarded to as a legal person after registration, and its primary imperative lawful personality is that it bears its own lawful/corporate personality is explained in the case of Salomon v. A Salomon and Co. Ltd 1987 (Australia), 2009). A legally registered subsidiary company also bears its legal personality afar from its parent company. It is immaterial if a subsidiary company is partly or wholly owned by the parent company as in the case of Adams v. Cape industries Plc 1990.

As in the case of Salomon, it was discovered that the concept of separate lawful personality is applied and there are instances where it is acceptable for the courts of law to lift derivative liability, in case there is fraud, a relationship of agency & the company is a sham/ facade (James F. Corkery, n.d.). If the subsidiary company acts as an agent of a parent company os in case both economic companies operate as one economic unit, derivative liability may be lifted to make the parent company responsible for the omissions or acts of its subsidiary.

Nevertheless, there are no common terms governing the area of lifting derivative liability/ corporate veil (Roman Tomasic, 2002). Courts have usually lifted the corporate veil with arbitrariness. It is however acknowledged that each case will be decided by its facts.

As in James Hardie & Co Pty v. Hall a parent company may be directly responsible because of it failing to govern its subsidiary company prudently. The basis of this kind of liability is control. Therefore, the way a parent company exerts control causes it to incur a legal obligation to avoid possible harm if it could (University of Melbourne. Employee Share Ownership Project, 2007). According to Sheller JA Corporate veil may be lifted on a parent company that controls a subsidiary company due to its acts or omission. Otherwise, the parent company might incur separate and direct responsibility on the grounds of negligent corporate governance. Negligent corporate governance is the lack to properly run control over a subsidiary company.

The depiction of a number of companies conjoined together by shareholding, as one enterprise where one is considered an actor and its omissions or acts should be accredited to other companies in the same group, involves lifting a corporate veil, assuming the actor as an agent or commanding upon other companies in the group a duty for the purpose of the degree or way of influencing the actor (Australia, 2008). The difference among these ideas is only blurred.

It this case the residents of Gunbarrel and former employees of CMS should sue CM as it is the parent company of CMS and it failed to exercise proper control over the subsidiary. Lazarus Pty Ltd is not liable for an acts or omissions.

References

Anon., 2008. Corporate Governance: Theories, Principles and Practice. 3, illustrated ed. Oxford: Oxford University Press.

Australia), B. (. :., 2009. Australian Corporation Law: Legislation. London: Butterworths.

Australia, N. L., 2004. Australian National Bibliography. Canberra: National Library Australia.

Australia, N. L. o., 2008. Australian National Bibliography. Canberra: National Library Australia.

Cassidy, J., 2006. Concise Corporations Law. revised ed. Leichhardt : Federation Press.

James F. Corkery, B. W., n.d. Principles of Corporate Law in Australia. Salariya: Scribblers Publishing.

Jason Harris, A. H. M. A. A., 2011. Australian Corporate Law. 3 ed. London,: LexisNexis Butterworths.

Limited, C. A., 2011. Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Macquarie: CCH Australia Limited.

Roman Tomasic, S. B. R. M., 2002. Corporations Law in Australia. revised ed. Leichhardt: Federation Press.

University of Melbourne. Employee Share Ownership Project, U. o. M. T. G. U. o. M. C. f. E. R. L. U. o. M. C. f. C. L. a. S. R., 2007. Employee Share Ownership Plans in Australia: The Corporate Law Framework. Melbourne: University of Melbourne. Employee Share Ownership Project, University of Melbourne. Tax Group, University of Melbourne. Centre for Employment Relations Law, University of Melbourne. Centre for Corporate Law and Securities Regulation.