Choosing The Right Business Structure For Expansion And Benefits Of Incorporating A Company

1. Richard has an extensive olive grove in the Hunter Valley region of NSW. He has around 12,000 trees established and has recently purchased his neighbour’s adjoining property with a view to expansion?

2. Terry was an employee of Cosmo Mining Services Pty Ltd CMS. CMS is a subsidiary of Cosmo Mine Ltd CM as CM owns 120 of the 200 issued shares in CMS. CMS owns and operates a lead, zinc and copper mine at Gunbarrel, Western Queensland?

1.  Answer: On the basis of the facts that have been provided for this case, in the present case, a number of benefits can be achieved by Richard and his sons if they incorporated company for the purpose of expanding their business. These benefits will be available as compared to the situation where the business will be run as a sole trader or as a partnership. If they incorporated company, it will become easier for them to expand their business. The reason is that it is easier for a company to raise funds. Similarly even if the cost related with the registration of company can be higher as compared to the establishment of a sole trader business are partnership but this cost can be considered as a part of business expenditure. Similarly, if they decide to merely register the business name, it will be cheaper as compared with the registration of a corporation but in this case also, the benefits will not be available. On the other hand, if they incorporated a company for running their business, they are not required to register their business name. This is due to the fact that when a company has been registered, company’s full name, ending with "Pty Ltd" can be used. So far as the ongoing costs of the business are concerned, the law provides that the registration of the business name needs to be renewed and for this purpose, the government charges a fee. A corporation on the other hand is required to pay annual review fee and this fee has to be paid to the Australian Securities and Investments Commission (ASIC).

A noteworthy advantage that can be achieved by the owners of the business in they decide to incorporate a company is limited liability of the owners of the business. The law provides that in case of a company, the directors and shareholders of the company will be liable only to the extent of the shares that are owned by them in the company (Harris, Hargovan,  Adams, 2015). As compared to the situation, the sole traders and partners are considered by the law to be fully liable. Another major advantage that can be achieved by the owners of the business by incorporating the company is related with tax. The persons who have decided to run their business only under a registered business name are required to pay tax at the normal marginal rate while the companies have to pay the tax at a flat rate. This rate of tax is less as compared to the rate that is charged from the individuals. A company is allowed by the law to own property and it can also form contracts using its own name. In this way, the law considers that after registration, a company enjoys distinct legal identity. Due to this reason, the law treats a company as a distinct entity that is completely separate from the owners and directors of the business (Vermeesch and Lindgren, 2005).

Selecting the right business structure

In view of the significance that is associated with selecting the appropriate business structure for business, it is very important that the owners of the business select the most suitable business structure for running their business (Pentony et al., 2009). For instance, it has been decided in the present case by Richard and his sons that they should reduce recovery for the expansion of their business. For making this decision, the overall circumstances of the parties need to be considered. In this case, Richard had purchased the adjoining property of his neighbor for the expansion of his business. In the same way, David and Liam, the sons of Richard are also going to join him and help in the expansion of the business. Consequently, it appears that in the present case, the most appropriate business structure will be that of a company because it will help the parties in raising the funds required for expanding the business.

Richard wants that the business should be named as “Ridali” whereas David and Liam want that in honor of their father, the business should be named as “Rich's Guaranteed Olives”. It needs to be mentioned in this context that the registration of a company is not the same as the registration of a business name. When the owners of the business are going to select the name for the company, they have to consider certain issues. For instance, the name selected by them cannot be identical with an existing name. Only the name that is not identical with the name of a present company or a business name can be used by the parties. Hence, it is advisable that a name availability search should be made by the owners of the business in order to see if the name that they're going to use for their business is available to them or not. On the other hand, under the corporations law, if the parties are going to use an identical name, the law allows them to register the name of the company in some cases. Similarly, there are certain words that cannot be used as they may mislead the general public and hence these words cannot be used. For instance, if the words indicate an association with the government, the royal family or an organization of ex-servicemen, the words cannot be used.

The law requires that the name of the company should also show the liability of the members and their status. For example if the members of the company have limited liability towards any unpaid amount regarding the shares held by them, it is required that the name of the company should end with the words "Proprietary Limited"or "Pty Ltd". But if the members of the corporations have unlimited liability regarding its obligations, the name should end with the word “Proprietary”. In case the owner of the business was to display a different name, and option is available to the owners to register the name as a business name. In view of this provision, while the company incorporated by Richard and his sons can be named as “Rich's Guaranteed Olives” the name “Ridali” can also be registered by them as the business name. As a result, in such a case, the business will be able to trade under the name “Ridali” and the name can be used on all the signage of the company.

Selecting the appropriate business name

2.  On the basis of the facts that have been given in this question, the issue that needs to be decided is if Terry and other employees can sue Cosmo Mine Ltd (CM). These employees have been working for Cosmo Mining Services Pty Ltd (CMS) and CM was a subsidiary of this company. It was unanimously decided by the shareholders of CMS that they will create a new company and sell the business of CMS to this company and CMS will be wound up. Consequently, the question arises if Terry and other employees can take any action against the newly formed company or they can take action against the parent company CM or their employer, CMS.

The general rule of the corporations law that is applicable in such cases is called the notion of separate legal identity. This rule was provided by the court the decision given in Salomon v Salomon (1896). In this case, it was the decision of the court that a corporation has distinct legal personality. In this way, this doctrine provides that under the corporations law, a corporation has a separate identity. Thus a registered company has a separate identity that is different from the owners of the business. In view of this doctrine, the law allows a company to own property using its own name. Similarly the liabilities of the company can also be enforced against the company itself. This doctrine also allowed a company to be sued in its own name. As a result of the doctrine of separate identity, another doctrine that was used by the courts was that of limited liability. In view of this doctrine, the law provides that the liabilities of a particular corporation can only be enforced against such corporation only. The result is that the debts and obligations are considered as being in foreseeable only against the company and these obligations cannot be enforced against the directors and the shareholders of the company.

The above-mentioned rule is the general rule and there is an exception present to this general rule. This exception is piercing the corporate veil. Under the corporations law, sometimes the law allows the courts to ignore the principle of separate identity and in such cases, the decision to pierce the corporate veil may be made by the courts. Such a decision can be made by the courts in cases where the court wants to impose any liability on the persons having control over the company. This requirement has also been mentioned in the tort law which provides that in cases related with negligence, a relationship of proximity should exist between the concerned parties (Crosling, 2009). A same case is present regarding the pacing of corporate veil. For instance in Barrow v CSR Ltd (1988), it was felt that the parent company should be held liable for the tort that has been done by the employees belonging to the subsidiary company. As a result of this negligence, an employee of the subsidiary company suffered from asbestosis. In its decision, the court stated that it did not matter if agency law has been used to describe the case or if the proximity between the employees of paving company and the subsidy company has been used or if piercing the corporate veil has been used or the issue has been described in terms of control. The ultimate result in all such cases will be the same. Another relevant case in this context is Briggs v James Hardie& Co Pty Ltd (1989). In this case also, the issue was concerned with negligence. The court had to deal with the problem of joining the pacing of corporate veil with the notion of foresee ability.

As a result of the cases that have been decided by the courts regarding this issue, the legal position is that if the subsidiary company does not have the resources for compensating the party under the law of tort, it is available to such a party that it may claim compensation from the parties who have ultimate control over the subsidiary company. As a result of the legal position stated above, in this case also, it is available to Terry and other employees to claim compensation from the parent company CM. The shareholders of CMS have unanimously arrived at the decision that they should wind up the company and the business of CMS should be sold to the new company, Lazarus Pty Ltd.

In this case it is evident that the new company Lazarus has been formed only with a view to evade the liability of CMS towards the former employees and other residents of Gunbarrel. These persons have contracted cancer because they have been drinking water that was contaminated as a result of the activities of CMS. The situation is that the subsidiary company, CMS does not own the resources to pay this compensation. On the other hand, the parent company, CM has the ownership of 120/200 shares of CMS. it is also worth noting that CS has complete control on the activities of CMS. Even the mining equipment was leased by the patent company, CM and this equipment was subleased to its subsidiary.

On these grounds, it can be said that in this case, Terry may be allowed by the court to take action against the patent company, CS or the new company, Lazarus for claiming the compensation. In such a case, the court will be ready to pierce the corporate veil and impose liability on the persons who have ultimate control over CMS.

References

Crosling G M, (2009) Murphy H M, How to Study Business Law 4th Edition, Butterworths,

Harris, J. Hargovan, A.  Adams, M. (2015) Australian Corporate Law LexisNexis 5^th edition  Butterworths 

Pentony, Graw, Lennard & Parker, (2009) Understanding Business Law 3rd ed Butterworths

Vermeesch, R B, Lindgren, K E, (2005) Business Law of Australia, 11th Edition, Butterworths

Case Law

Barrow v CSR Ltd (1988) Unreported

Briggs v James Hardie& Co Pty Ltd (1989) 16 NSWLR 549

Salomon v A Salomon & Co Ltd [1896] UKHL 1