Letter Of Advice On Setting Up A New Business Venture

1. What are the various business structures that are available to Henry and Henriette with respect to the type of business that they would like to establish.

2. Assume that a company structure is the most appropriate business entity to operate the Health Care Centre and provide advice on:

(a) the type of company to be formulated;
(b) the various types of obligations and liabilities that each director is subjected to; and
(c) can Henry and Henriette be employees of the company. 

Letter of Advice

Dear

Henry and Henriette 

I refer to your conference meeting on.....................March 2017. I note you are seeking advice on setting up your new business venture. You would also like to understand your obligations and liabilities as co-owner and directors if you set up your company. Also, you seek advice whether you can become employees of your own company.

I would like to submit that in Australia, there is no one kind of business structure that is available. If any person wants to establish his business, then, I advice that he can do so by way of sole trader, partnership, joint venture, trusts or company.

In sole trader ship, one person establishes the business and he owns and controls the business and faces all the liabilities and obligations on his own. (Business, 2017)

However, it is advices that since, you, the clinetee, are only two persons; thus, a sole-trader ship is not an appropriate form of business structure to opt for.

In Trusts, a trust property is held by the trustee for the gain or benefit of trustees, thus, involves three parties. in Daoud v Boutros [2013] it was held that a trusts are normally formed in high risk capital, such as, manufacturing, publishing, hospitality management, property development, etc (Australian Corporate Law, 2016). Thus, it is advice that the you should not structure your business as joint venture because it requires three people and you (Henry and Henriette) are just two in number. Also, it is for very limited purpose, the liability is also individual.

If you elect to form a company, then, The Corporation Act 2001 governs the working of the company. As per section 124, a company once registered has separate legal entity in law and is distinct from other trading entities. In Salomon v Salomon & Co Ltd [1897], it was held that the members’/directors are separate from the company and the acts of the company are not binding upon them (Bottomley, 2016). Once a company is incorporated, it has limited liability, that is, the liability of the shareholders is limited to the value of their shares; it has perpetual succession as the company never dies; it has the right to be sued or sued and can hold property. But, there are few cons, that is, in exceptional situations, the separate legal entity can be disregarded and the veil of the company can be pierced and is held in Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987). The process of registration is very lengthy and requires lots of paper work. Once a company is registered, there are various statutory provisions which must be compiled with and there are many tax obligations. (Ramsay & Noakes, 2001)

Sole Trader

It is advice that even though there are various advantages, but, the cons that are associated with a company is enormous. The Health care centre by Henry and Henriette does not require such a complicated structure and cannot face so much statutory and tax obligations.

Thus, it is not advisable to establish a company.

If you elect to form a partnership, then, as per section 1 of the Partnership Act 1892 (NSW), a partnership is a structure where in two or more persons (maximum twenty as per section 115 of the Act or 1000 for accountants or 400 for lawyers or 50 for doctors/actuaries) collectively can establish a business of continuing nature with common objective, mainly to earn profits and share losses. (Australian Corporate Law, 2014)

If you form a partnership then there are various advantages that can be availed by you, that is, it is the most informal and inexpensive business structure that can be established, that is, orally, by written agreement or by conduct (by estoppel). There is financial privacy because there is no need to register documents to ASIC. The partnership can acquire greater capital. The confidentiality of the business can be maintained as there are no outsiders. But, there are few cons, that is, the liability of partners is unlimited. in Polkinghorne v Holland (1934), it was submitted that the partners are agents of each other and thus held liable for each other acts. Section 9 and section 10 of the Act submits that the contractual liability is joint amd that the partners are jointly and severally liable for tortuous wrongs of the firm and is roightly held in Lloyd v Grace, Smith & Co [1912] AC 716). Further, the life of the partnership is limited and the firm is dissolved if any partner dies, retires, incoming or outgoing. Any legal consequences against the firm will bind all the partners together. (Sydney, 2017)

It is advice to you that there are various advantages that are associated with a partnership and the formation of partnership is also very easy. Further, the cons are not so enormous that cannot be dealt with. Considering that both Henry and Henriette are friends and the confidentially is maintained, partnership is an appropriate business suture.

Thus, it is advisable to both you, Henry and Henriette, that you should carry out your business in the form of PARTNERSHIP. 

However, if you would like to set up the company, then, there are number of options to select from.

Trust

First is a company limited by Guarantee, where, there is no share capital and the liability of the members is maximum which is guaranteed by them in case of winding up. Normally found in non-profits associations; second, where the liability is unlimited and is not for trading purposes, then, an unlimited company can be formed; third, no liability companies are those which are only for mining companies and the members have no liability on the unpaid share capital. It must have constitution and should use word ‘No Liability’. (Tomasic,et, al, 2002)

Now, it is advice that since you want to establish the company for trading purposes, so company limited by guarantee and unlimited company and no liability company cannot be formed.

Apart from the above you can also form a company limited by shares wherein the company has share capital but has limited liability (Ltd) to unpaid share capital of the members is a company limited by shares. In CIT Credit Pty Ltd v Keable [2006], it was held that mainly they are for trading purposes. (Tomasic, et, al, 2002)

It is advice that since you want to set up a company for trading purpose then a company limited bys hares is the best option.

But, the company limited by shares can also be proprietary or public.

Every company other than proprietary company is public. There should be at least three directors, at least one secretary (204A(2)); an AGM must be conducted (204A(2). (Tomasic, et, al, 2002)

Now, since, you are only two in number, thus, it is advice that a public company is not permissible.

Now, Section 112 and 113 of 2001 Act deals with proprietary company. It has share capital and the number of shareholders must not be more than 50 (non-employees). No activity must be undertaken which requires disclosures as per Chapter 6D of the Act. Only two directors are required (Section 201A).

This company can be large or small. A company which is not small are large companies.  A large company has to prepare profit & loss a/c and balance sheet (section 292(1)); has to appoint an auditor and to file financial statements with ASIC. But, a small company is defined under section 45A of the 2001 Act. it is a company if it has less than $25m consolidated operating revenue or $12.5m consolidated gross assets or 50 employees (any two criteria’s must be met).

It is advice to you that you should establish small proprietary company because they are two people and there must be two directors in a company, wherein a public company requires three directors. Also, the company must be with share capital and limited liability so that the financial position of the clients can be secured. Also, a small proprietary company does not require various formalities.

Company

However, if the business later grows then you may convert the same in a public company.

Now, once a company is formed then as per as per section 9, a director is the person who manages the affairs of the company and comprises of de facto and shadow directors. Thus, it is the working which determined whether a person is designated as a director or not. Also as per section 198A of the Act, the directors have power to manage the company. (Bottomley,, 2016)

Thus, a director is a very important person in a company but every company directors has various obligations. Generally, every director has an obligation to act in good faith, act for proper purpose, with skill and diligence, retain discretion and avoid conflict of interests and is held in Ngurli Ltd v McCann - [1953], (Percival v Wright [1902]).

Apart from the above there are various statutory obligations that are imposed, such as, they must act with all due care and skills under section 180 of the 2001 Act  (Commonwealth Bank v Friedrich (1991)); must act with proper purpose as per section 181 of the Act; must act honestly as per section 181 of the act; must not abuse the position as per section 182 of the Act;  must not abuse the information as per section 183 of the Act; The material personable interest must be disclosed as per section 191 of the Act.

Further, they must protect the shareholders from risks (Spies v R (2000), consider the interest of the employees, must not issue shares which benefit their own interest;

It is advice that the directors must comply with their legal obligation otherwise they will be penalized for civil liabilities under section 1317E off the Act. The civil penalties include disqualification, compensation and pecuniary penalties (ASIC v Adler [2002]).  Further, if the breach of duty is with reckless and dishonest intention then the directors will be criminally prosecuted.

Lastly, if both you intend to form a proprietary company and wish to become its shareholders and directors, then, it will not debar you from becoming the employees of their own company and is held in Lee v Lee's Air Farming Ltd [1960]. But, a company has a separate legal personality, thus, their status as an employee is distinct from e status of the directors and they can be employed under normal wage or salary rules and subject to personal tax provisions. (Finance, 2017) 

Thank You

XXX 

Reference list

Books/Articles/Journals

Australian Corporate Law (2016) 5th ed.

Ramsay & Noakes (2001) Piercing the Corporate Veil in Australia,19 Company and Securities Law Journal 250-271

Stephen Bottomley (2016) The Constitutional Corporation: Rethinking Corporate Governance, Routledge.

Sydney (2017) Partnership- Topic 3.

Tomasic, et, al (2002) Corporations Law in Australia.

Case laws

ASIC v Adler [2002] NSWSC 171

CIT Credit Pty Ltd v Keable [2006] NSWCA 130.

Commonwealth Bank v Friedrich (1991)).

Daoud v Boutros [2013] NSWSC 687.

Lee v Lee's Air Farming Ltd [1960] UKPC 33

Lloyd v Grace, Smith & Co [1912] AC 716.

Ngurli Ltd v McCann - [1953] HCA 39.

Percival v Wright [1902] 2 Ch 401

Polkinghorne v Holland (1934) 51 CLR 143.

Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987).

Salomon v Salomon & Co Ltd [1897].

Spies v R (2000).

Online Material

Business (2017) sole trader (online). Available at: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/business-structures-and-types/sole-trader. (Accessed on 30th March 2017).

Finance (2017) Proprietary limited company.