Discuss about the Salomon and Separate Legal Entity Doctrine.
As per the facts stated by Peter and Susan, Peter is interested in setting up a property management business (PPM Services) by himself with the help of Susan. He is also interested in seeking help of his friend, Jack, who will bring in additional capital and business skills to expand the business. The main concern of Susan prior establishing the business is that she intends to protect their house for their young family as she is skeptical that there are chances that the family house is lost when the business fails.
Concerning the facts that are provided, it is submitted that in Australia, there are three kinds of business management that are mostly opted by people to establish their business. The first is a sole trade ship wherein only one person is the owner and who manages the business. Since, Peter intends to establish business with Susan, thus, Sole trader ship is not the right choice. (ClaytonUTZ, 2017)
Another business structure is partnership, wherein two people carry on business of continuous nature with the aim to earn profit and is analyzed in Smith v Anderson (1880) (Sydney, 2017) Further, a business can also be run by way of a company which is an entity registered as per the requirements of the Corporation Act 2001. Salomon v Salomon & Co  is the leading case which established the main elements of a company. (Ramsay & Noakes, 2001)
Considering the facts, it is advice that Peter and Susan must carry on their business by way of a company. The main advantages of operating a business management as a company rather than a sole trader or partnership are that, firstly, that it has limited liability which implies that the liabilities of the members is limited to the extent of their shareholding. No personal assets of the members are at risk even when the company is not able to meet its financial burdens (Lee v Lee's Air Farming Ltd (1961). However, in a sole trader ship or partnership form of business, the personal assets of the owners or partners are at risks if the business is not able to meet its liabilities; secondly, a company can hold property in its own name which is not the case when the business is run by way of partnership or sole trader ship; thirdly, it is very easy to attract or raise capital in the company when compared with any other kind of structure because the investors are not burdened to cope up with the financial crunches of the company and their investment is not at risk which is not the case in a partnership or a sole trader ship; fourthly, the coming or leaving of members will not hamper the existence of the company. Where as in partnership, any incoming or outgoing partner will result in the dissolution of the company. (Incorporator, 2017)
However, there are also few disadvantages that, is, firstly, the cost of registration of a company is much higher in comparison with sole trader ship or partnership. There is no requirement of any kind of registration when the person intends to establish the business by way of a partnership or a sole trader ship. But, in Australia, registration of a company requires $650-$750 for a one year registration; secondly, there is approximately $ 230 which must be paid to ASIC by a company which is not required of a business is in the form of partnership or sole trader ship; thirdly, the financial affairs of the company are public and any person can access the same but the same is not the case in partnership or sole trader ship where the financial position of the company is much confidential;
Further, in company, the reporting requirements is high, that is, as per section 292 of the Corporation Act,
- if a company is a large proprietary company then it must prepare/lodge directors and financial report every year.
- If the company is small, then, lodge financial reports in few situations.
- But, in partnership and sole trader ship there is not much reporting requirements. (Business, 2017)
So, it is advice to peter and Susan that continuing the business by way of a company is a better choice in comparison with a partnership or a sole trader ship.
Now, as already submitted, a company can be formed once the business management is registered.
ASIC is the regulatory body which regulates companies in Australia. If Peter ensures to register his business then, he must first register his business name. Registration of name is carried out with ASIC. It is necessary that the person must either have an ABN or is in the process of applying of an ABN. Once an ABN is obtained, then, the business name can be registered online. Once a name is registered, then, the person can carry on his business under the said name. A business name is a title under which a person conducts his own business. In Australia, it is necessary that a person must register a business name if he is not trading in his own name but if the individual is conducting business in his own first name or surname then there is no registration of business name requirement. (ASIC, 2017)
It is advice to Peter that there is no specific requirement of registration of business but he must register his business name for carrying out his business so that no other person can use the same name for their own business. Also, Peter can conduct business in his own name without any registration requirements.
Now if any person needs to change the ownership of the business then the same can be done either by selling the business; transferring your business to a family member or friend or adding new partners to the business.
Since Peter wants Susan to be co-owner of the business then the best option is to add her as new partner. This can be done by taking three steps. That is: (Business, 2017)
- The partnership must be updated;
- The new ABN number must be applied ;
- The details with the ATO must be updated for tax purposes.
By doing these steps, Susan can become the co-owner of the business.
Once a business name is registered then the business must also be registered in order to operate as a company. Chapter 2A of the Corporation Act 2001 deals with the registration of a company and there are several steps that Peter must able to comply with prior registering a business in Australia.
Firstly, Peter must ensure to fulfill is to choose a company name. Peter may select any name for his company but such name should not be identical to any existing company or business name. Also, the name must not contain certain words or phrases without seeking approval of the government minister, such as, trust, bank, Royal, incorporated. Also, Peter must ensure that no name should be selected that misguides people with respect to the working of the company, which is offensive or which suggest illegal activity. A name can also be reserved with the help of Form 410 which can later be registered. But the reservation is only for 2 months. Whatever name is selected, it must show the legal status of the company. Thus, if Peter is registering a company with limited liability then the name must include ‘Proprietary Limited’ and if the liability is unlimited then it must include ‘proprietary’; Secondly, Peter must decide the working and operations of the company prior its registration. He must decide whether the business is governed by its constitution, its replaceable rules or both; Thirdly, Peter must ensure all of his obligations before registration of his business, that is, maintenance of records of the company, payment of annual review and lodgment fees etc; Fourthly, the consent of all the directors, secretary and members must be attained prior the registration of the company; Fifthly, If the registered office is not the asset of the company, then, Peter must seek written permission to use the address and a record of the same must be maintained. (ASIC, 2017)
Once all these formalities are done then the registration can be done in two manners, firstly, Registration of the business can be done with the help of a private service provider who have access to ASIC system; Secondly, Form 201 can be filled and mailed to Australian Securities and Investments Commission, PO Box 4000, Gippsland Mail Centre VIC 3841. The fees must be enclosed along with the form. Once the application is confirmed then Peter will attain an ACN, corporate Key and a certificate of registration. (ASIC, 2017)
It is thus advice that Peter must ensure all the above steps while registering his business.
Elements of the company
Once a company is registered then there are various elements that can be associated with a company and with which Peter must be aware of and which are also mentioned under part 2B.1 of the Corporation Act 2001, that is, (Australia, 2017)
- firstly, as per section 124, a company is a separate legal person in the eyes of law and has its own personality. It is an artificial legal person once registered and has the capacity to carry out the tasks in its own name:
- secondly, when a company is registered then it never dies, even when its entire member eases to exists,
- fourthly, it can enter into contracts;
- fifthly, it is distinct from its directors and its members.
Now, if at later stage, Peter wish to make Susan as part owner of the company, then, it is advice to him that he must issue shares of the company as per section 254B of the Corporation Act 2001. The main requirements of section 254 B are;
- firstly, a record of the issue of shares must be kept by the company in its ‘shares register’;
- secondly, the company must within 28 days of the issue of shares notify ASIC by lodging a change of company details wherein the details regarding the number of issues shares, class of shares, amount paid or to be paid etc are specified;
- thirdly, a new ABN number must be applied and the details must be updated with the ATO for taxation purposes.. (Veromo, 2017)
Once the changes are done, then, Susan will become part owner of the company and holds ownership to the extent she hold shares in the company.
Also, as per the facts, If Peter wish that jack and his other friends must join the business at a later stage than he has two options, firstly, he can issue shares in their favour and make them members of the company. Once they become the member of the company, then, Jack and the other friend has to company with all the shareholders right and obligations. Also, Peter has to comply with all the formalities that are required to issue shares; secondly, Peter can also employ Jack and his other friends as employees of the company and can seek their expertise and opinion without changing the structure of the company.
It is advised to Peter that he must employee Jack and his other friend’s without bringing any kind of change in the structuring of the company by issuing shares. Issue of shares will involve time and expense. It is advisable that by employing them not much of costs will occur and Jack and other friends will also become part of the business by joining the same.
So, when a company is registered then it becomes a separate legal entity in the eyes of law and which implies that it is distinct in personality and is not associated with its members and directors (MacLaine Watson & Co Ltd v Department of Trade and Industry ). A company is an artificial person and has the capacity to sue or sued in its own name, hold property and take decisions. Also, the directors and members are not answerable to the liabilities of the company personally. (GV Puig, 2000)
It is thus submitted, that Peter and Susan can protect their personal assets in case the business fails provided they operate business in the form of company and not in the form of partnership or ole trader ship. The members of the company has limited liability, that is, they are only answerable to the extent they hold shares in the company. No personal assets of the members are at risk when the company is not able to meet its financial burdens. The other business structures, that is partnership and sole trader ship does not have the element of separate legal entity and limited liability, thus, there is no protection of personal assets if the business fails.
GV Puig (2000) A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine, Volume 7, Number 3 (September 2000).
Ramsay & Noakes (2001) 19 Company and Securities Law Journal 250-271.
Sydney (2017) Partnership, Topic 3.
Lee v Lee's Air Farming Ltd (1961).
MacLaine Watson & Co Ltd v Department of Trade and Industry .
Salomon v Salomon & Co .
Smith v Anderson (1880)
The Corporation Act 2001
Australia (2017) (Online). Available on: https://guides.slv.vic.gov.au/companies/structures. Accesses on 29th August 2017.
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ASIC (2017) Steps to register a company (Online). Available on: https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/. Accesses on 29th August 2017.
Business (2017) Company - advantages and disadvantages (Online). Available on: https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/proprietary-company-advantages-and-disadvantages. Accesses on 29th August 2017.
Business (2017) Change of ownership (Online). Available on: https://www.business.gov.au/info/exit/change-of-ownership. Accesses on 29th August 2017.
Clayton UTZ (2017) Doing Business in Australia (Online). Available on: https://www.claytonutz.com/ArticleDocuments/501/3_BusinessStructures.pdf.aspx?Embed=Y. Accesses on 29th August 2017.
Incorporator (2017) Register Company? - Some pros and cons of registering a company in Australia & some considerations regarding the appropriateness of registering an Australian company (Online). Available on: https://www.incorporator.com.au/pros-cons-company.asp. Accesses on 29th August 2017.
Veromo (2017) shares and shareholders (Online). Available on: https://www.veromo.com/help-faqs/starting-business-australia/shares-shareholders/#can-you-issue-shares-after-the-initial-share-issue-upon-registration. Accesses on 29th August 2017.