Key Issues In Establishing A Small Business In Fashion Industry And Importance Of Directors’ Duties Essay.

Letter to John Smith on key issues while establishing a small business in the fashion industry

1.You have the task of advising clients as an accountant. John Smith has come to your office and has told you that he is considering the establishment of a small business in the fashion industry, particularly in men’s clothing. He seeks you advice in relation to the formation of the most appropriate business structure to operate his new venture.

Draft a short letter to John advising him of the key issues that you consider important. Your answer should be set out in the form of a letter. You should try and present you letter in the most informative manner that is suitable for a client.

2.Outline the various directors’ duties that exist and discuss their importance in relation to the governance of companies.

1.Subject: A letter to John Smith advising him regarding the key issues those are likely to affect his business structure while establishing a small business in the fashion industry.

Respected Sir,

This is to inform you that in reference to your consultation regarding the establishment of a small business in the fashion industry, various options are available in order to form the most appropriate business structure. In order to start a new business, it is important to take into consideration various factors. Firstly, it is required to register the business venture that you wish to establish. However, prior to the registration of the business, it is essential to decide that what would be the appropriate form of business structure. Since you have decided to establish a small business related to men’s clothing, the appropriate form of business is sole proprietorship. The sole proprietorship is the simplest form of business structure that can be formed if an individual wants to invest in a small business of his own. It is worth informing you regarding the tax aspects involved in the sole proprietorship business. In case of sole proprietorship, the expenses will be your own and the income from such business shall be included within the purview of personal income tax. In this process, the profits and losses incurred in the concerned business shall be recorded in a prescribed form. This procedure is applied because the business you will be operating may suffer losses in the long run which may be offset the income earned from such business. It is worth examining that, being a sole proprietor, there is an authority on your part to calculate the amount he self-employment tax. In the process of payment of annual self-employment taxes, the estimation of tax payments must be taken into account.

Selection of appropriate business structure

There is an advantage related to the formation of a sole proprietorship business because the tax is deducted once in the year out of the earnings of the business. As a sole proprietorship involves the owner, therefore, the decisions regarding business operations will be taken by you. It is worthwhile to refer here that, the sole proprietorship is the simplest form of business and is recommended to those who intends to operate a new business venture. This form of business is easy to set up due to its simplicity and the involvement of nominal cost. In case of such business set up, the first and foremost requirement is to register your and thereafter secure the local licenses. However, in such case, you will be entitled to sign the contract in your own name as you will be the owner of the business as a whole. The structure of the business is such that it can be formed without the requirement of any expensive procedures. The formation of such business involves fewer formalities because there is no need to pay unemployment tax. There is an authority on the part of the owners to involve business with personal assets.

Though the structure of sole proprietorship business would be appropriate in your case however; various issues may arise during the operation process. The major issue is that, you will be personally liable for the debts incurred in the business. There will be an obligation in your part regarding the liabilities of the company. In case of financial crisis, there is a risk, that the creditors bring claim for proceedings in case of their personal loss. As a owner of sole proprietorship, you will be entitled to unlimited personal liability for the debts and losses incurred in the business operations. There will be no authority on your part to raise capital for the purpose of covering the losses by selling the interests of the business. As you will be liable for your own business therefore; the assets of your company may be at risk. However, raising money for the purpose of establishing the structure of sole proprietorship small business may be difficult because financial institutions may not be willing to sanction business loans. In such cases, the dependence shall be largely upon the financing sources which may involve savings and home equity.

In order to address the key issues associated with the sanction of loan while establishing a small business in the form of a sole proprietorship, as an advisor, I would suggest you to receive funds from personal resources. In this regard, mention can be made about the Small Business Administration which acts as a great source of financing for the establishment of small sole proprietorship businesses. These Small Business Administration are not involved in direct issuance of loans, they involve lenders who guarantees a portion of the loan to the sole proprietors. Therefore, lenders will readily approve a loan in case of establishment of a small sole proprietorship business.

Advantages and disadvantages of Sole Proprietorship

Since you have asked for the advice regarding the formation of most appropriate small business structure in the fashion industry, I would suggest you to opt for sole proprietorship business. This might be an extremely good option for you however; before you proceed with the registration process you should consider the key issues which has been mentioned above. However, I have provided alternative advice regarding the fact that how to overcome the difficulties associated with the sanction of loan. Therefore, I am sure that there is a willingness on your part to work hard and you will definitely gain success in whatever you do. Please feel free to consult me in case of any difficulties or if you need any further assistance regarding the matter in concern.

Yours Sincerely,

2.From the very beginning, the duties of the directors fall under the mechanism of corporate governance. These duties have been addressing the conflicts existing between the shareholders and the directors (Aguilera et al. 2015). It is evident that, a company is governed by its directors. In this regard, according to the provisions of Section 198A (1) of the Corporation Act 2001, the business of a company is managed under the governance of the directors (Allen 2017). Therefore, it is worth mentioning that, the duties and responsibilities on the part of a director under the provisions of the Corporations Act 2001 shall be applicable in case of various organizational structures.

The provisions of the Corporation Act 2001, identifies four main duties of the directors which can be emphasized as-

Duty of Care and Diligence:

According to the provisions of Section 180 of the Corporation Act 2001, there is a duty on the part of a director to act in due diligence and care. However, the nature of the duty must be such as it could be expected on the part of any reasonable person of ordinary prudence (Armstrong et al. 2015). The nature of the decision made on the part of the director must be such that it has been made by involving good faith and for the particular purpose.

Duty to act in Good Faith:

According to the provisions of Section 181, the director of a company is required to act in good faith and in the best interests of the company. However, the purpose must be legal and should avoid conflict of interests to the highest priority (Berger, Imbierowicz and Rauch 2016). It is noteworthy to mention here that the nature of the duty must be such that it involves trust and fidelity. The decisions taken on the behalf of the company by the directors must be for the benefits of the company and not for their own interests or for the interests of any third party.

Obtaining funds for small business

Improper use of Position:

The duty of not to act in improper use of position is depicted in the provisions of Section 182 of the Corporation Act 2001. It is required on the part of the directors not to use their position in an improper manner for the purpose of gaining advantage for themselves or for any third party by causing detrimental harm to the company (Armstrong et al. 2015).  Therefore, it is worth noting that, the provisions of Section 182(2) of the Corporation Act 2001, prohibits directors from using their position in an improper way.

Improper use of information:

There is a duty under the provisions of Section 183 of the Corporation Act 2001, regarding the use of information (Coffee and Palia 2016).  According to Section 183, a director is not allowed to use the information obtained by them during their course of employment as a director in the company for their own benefit or for any third party which is detriment to the concerned company.

Duties to disclose material interests:

The most important duties entrusted to the directors of a company are depicted in the provisions of Section 191 of the Corporation Act 2001 (Iliev et al. 2015). According to the provisions of Section 191, a director may have material interest in the company however; the nature of the interest must be such that it is in relation to the affairs of the company. it is important on the part of the director to provide reasonable notice regarding the nature of the material interest to the other directors of the company (Kim, Jo and Lee 2016).

Apart from the general duties of the directors as mentioned above, there are additional duties of the directors under the provisions of the Corporation Act 2001.

Duties in relation to insolvent trading:

According to the provisions of Section 588 G of the Corporation Act 2001, there are duties vested on the part of the directors for the purpose of ensuring that the company is not involved in the trading of companies where the nature of the trade is such that is insolvent in nature.

Disclosure of Financial information:

According to the provisions of Section 344 of the Corporation Act 2001, directors are authorized to take reasonable steps in order to ensure the fact that the company is functioning by complying with the rules and regulations depicted in the Corporation Act 2001in relation to financial records and reporting.

Directors’ duties and their importance in governance

Disclosure of the interests of the directors:

It is important on the part of the directors to disclose matters which are in association with the affairs of the company (Klettner, Clarke and Boersma 2014). However, the provisions regarding the material interests of the directors are contained in the provisions of Section 191 of the Corporation Act. the nature of the material interest of the directors must be such that the approval of the shareholders are involved in case of related party transactions as depicted in the provisions of Section 208 of the Corporation Act 2001 (Laster and Zeberkiewicz 2014). There is a right on the part of the directors regarding the disclosure of the interests if, such interest is in relation to the disclosure of the directors interest in the market.

Continuous Disclosure:

According to the provisions of Section 674 of the Corporation Act 2001, there is a duty on the part of the director in case of listed companies which is in relation to the continuous disclosure to the market of information may not be available however; it may affect the share price of the company (Strine 2015).

It is evident that, from the beginning, the directors have a duty as a decision making body in the organization which is a central position in relation to corporate governance. The duties of the directors forms an important part of corporate governance mechanism (Levit and Malenko 2016). These duties of the directors has been addressing the existing conflicts between the shareholders and the directors by emphasizing upon the general duties of the directors in relation to duty of due care and diligence, lack of loyalty on the part of the directors which is governed by the duties to act honestly and for the best interests of the company (Mason and Simmons 2014). It is noteworthy to mention here that, the general and alternative duties of the directors are of utmost important towards the governance of companies. Whether the duties of the directors are truly independent in nature shall wholly depend upon the development of strategic plans and the monitoring of the performance of the management against such developed strategic plan (Misangyi and Acharya 2014). Justice Alex Chernov, while emphasizing upon the significance of the duties of the directors in relation to the governance of companies have explored the role of various practices of corporate governance towards the establishment of legal principles in relation to the directors. In this context, the specific practices of corporate governance and the development of legal principles can be emphasized as-

1. Division of functions as existing between the board of directors and the management.
2. The conflict of interests on the part of the executive directors and the chairman of the board.
3. The disclosure of the conflicts of interest.

1. The responsibility on the part of the directors in case of subsidiaries.

It is in the context of discussing the duties of the directors towards the significance of corporate governance, it is worth examining that, the existing legal developments has been recognized by the directors of the companies to a considerable extent which shall be essential in order to act in the best interests of the company by considering the interests of the stakeholders in such process (Plerhoples 2015). Certain legal duties are owed by the directors as well which has been recognized under the general and statutory provisions of the Corporation Act 2001. These duties can be emphasized as duty of care, skill and diligence, duty to act in good faith, the duty to act honestly and proper use of position and information.

The duties of the directors of a company from the very beginning, forms an important connection between the corporate governance and the performance of the directors of the companies (Stout and Blair 2017). In the existence of various mechanisms of corporate governance which can be market-based or legal (Pugliese, Nicholson and Bezemer 2015). The development of the duties of the directors of a company are greatly influenced by the practices of corporate governance which is entirely dependent on the fact that the statutory provisions of the business judgment rule would prove to be beneficial in enhancing corporate governance (Sapra, Subramanian and Subramanian 2014). Whether the duties on the part of the directors are influenced practices of corporate governance can be emphasized by evaluating the scope of the general and alternative duties owed by the directors of a company.

From the very beginning, the principles governing the concept of good corporate governance are concerned with the role of a director (Schmidt and Fahlenbrach 2017). The concept of good governance always complies with the role of a director which is related to the manifestations that how the duties of directors are fulfilled. Therefore, it can be stated that the concept if corporate governance is concerned with the quality flow of information within the company (Sharfman 2014). It also deals with the conflicts of interests between the director and the shareholders, the increasing transferability and accountability to shareholders.

 In the conclusion, it can be stated that, from the beginning, the ASIC has been encouraging the directors of the companies to act according to the principles of good governance and it should form a major part of the mindset of the directors in discharge of their duties. Finally, it can be concluded that, it is important on the part of the directors in ensuring that they have involved in a culture of good governance.

References:

Aguilera, R.V., Desender, K., Bednar, M.K. and Lee, J.H., 2015. Connecting the dots: Bringing external corporate governance into the corporate governance puzzle. The Academy of Management Annals, 9(1), pp.483-573.

Allen, W.T., 2017. Our schizophrenic conception of the business corporation. In Corporate Governance (pp. 79-99). Gower.

Armstrong, C., Guay, W.R., Mehran, H. and Weber, J., 2015. The role of information and financial reporting in corporate governance: A review of the evidence and the implications for banking firms and the financial services industry.

Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.

Berger, A.N., Imbierowicz, B. and Rauch, C., 2016. The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4), pp.729-770.

Coffee Jr, J.C. and Palia, D., 2016. The wolf at the door: The impact of hedge fund activism on corporate governance. Annals of Corporate Governance, 1(1), pp.1-94.

Iliev, P., Lins, K.V., Miller, D.P. and Roth, L., 2015. Shareholder voting and corporate governance around the world. The Review of Financial Studies, 28(8), pp.2167-2202.

Kim, Y.S., Jo, H. and Lee, S.M., 2016. The Effect of Internal and External Corporate Governance on Dual Class Firms.

Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), pp.145-165.

Laster, J.T. and Zeberkiewicz, J.M., 2014. The rights and duties of blockholder directors. The Business Lawyer, pp.33-60.

Levit, D. and Malenko, N., 2016. The labor market for directors and externalities in corporate governance. The Journal of Finance, 71(2), pp.775-808.

Mason, C. and Simmons, J., 2014. Embedding corporate social responsibility in corporate governance: A stakeholder systems approach. Journal of Business Ethics, 119(1), pp.77-86.

Misangyi, V.F. and Acharya, A.G., 2014. Substitutes or complements? A configurational examination of corporate governance mechanisms. Academy of Management Journal, 57(6), pp.1681-1705.

Plerhoples, A.E., 2015. Social enterprise as commitment: A roadmap. Wash. UJL & Pol'y, 48, p.89.

Pugliese, A., Nicholson, G. and Bezemer, P.J., 2015. An observational analysis of the impact of board dynamics and directors' participation on perceived board effectiveness. British Journal of Management, 26(1), pp.1-25.

Sapra, H., Subramanian, A. and Subramanian, K.V., 2014. Corporate governance and innovation: Theory and evidence. Journal of Financial and Quantitative Analysis, 49(4), pp.957-1003.

Schmidt, C. and Fahlenbrach, R., 2017. Do exogenous changes in passive institutional ownership affect corporate governance and firm value?. Journal of Financial Economics, 124(2), pp.285-306.

Sharfman, B.S., 2014. Shareholder wealth maximization and its implementation under corporate

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Strine Jr, L.E., 2015. The dangers of denial: The need for a clear-eyed understanding of the power and accountability structure established by the Delaware general corporation law. Wake Forest L. Rev., 50, p.761