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Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-1
Business organisations
Chapter 4
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-2
Learning objectives
At the end of this chapter you should
understand:
• the essential characteristics of sole traders, partnerships,
joint ventures, associations, companies, and trusts
• the legal obligations imposed on each type of business
entity
• the liability of the parties involved in each type of
business entity
• the advantages and disadvantages of each form of
business operation
• business name registration.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-3
Introduction
• There are various ways that a
business can be carried on.
• Each business structure has
advantages and disadvantages that
need to be considered.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-4
Definitions
• Sole trader—business is owned and operated by one
person with all profits or losses attributed to the owner.
• Partnership—relationship between 2 to 20 persons
who carry on business in common with a view to profit.
• Joint venture—usually a one-off enterprise, with
participants receiving profits separately, based on
contractual agreement.
• Unincorporated association—body of two or more
persons, organised for a particular purpose, which may
or may not include the purpose of carrying on business
with a view to a profit.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-5
Definitions (cont.)
• Incorporated association—body of two or
more persons, organised for a particular
purpose, which may not include the purpose of
carrying on a business with a view to a profit.
• Company—incorporated body created by a
process called 'incorporation', regarded by law
as a separate legal entity.
• Trust—relationship recognised by the law of
equity, where a trustee holds property for a
beneficiary or beneficiaries.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Formation
• Sole trader—simple; little documentation
• Partnership—partnership agreement advised; easy to
form
• Joint venture—normally involves a one-off enterprise
based on contractual agreement between two+ entities;
relatively high establishment costs
• Unincorporated association—formed by persons with
similar interests; no separate legal existence
• Incorporated association—unincorporated associations
can incorporate, but not if they have a view to trading;
relatively high establishment costs
• Company—relatively high establishment/compliance
costs
• Trusts—relatively high establishment costs
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-7
Control
• Sole trader—makes all the decisions
• Partnership—depends on partnership agreement. If
no agreement, all partners are considered equal and
each partner is considered as agent of the partnership
and every other partner for the purposes of
partnership business.
• Unincorporated association—control rests with
committee of associates
• Company—power is vested in the board of directors
to make decisions, unless power delegated to others
• Trust—trustee has power vested in him/her to make
decisions, subject to the terms of the trust deed and
the trustee legislation.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-8
Management
• Sole trader—in hands of individual; absences from
business difficult
• Partnership—leave other partner in charge when
absences required
• Joint venture—depends on terms of joint venture
agreement
• Association—in hands of committee of association
• Company—undertaken by board of directors
• Trusts—undertaken by trustee
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Flexibility
• Sole trader—nature of business can be altered
• Partnership—nature of business can be altered
with agreement of all partners
• Joint venture—depends on terms of joint venture
agreement
• Company—nature of business can be altered but
may have tax consequences
• Trusts—nature of business restricted by trust
instrument
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-10
Expertise
• Sole trader—limited to one person’s knowledge,
unless additional personnel are hired.
• Partnership—several areas of expertise available
from individual partners.
• Joint venture—can draw on the skills of those
involved in the joint venture.
• Association—can draw on the skills of the members.
• Company—can draw on the skills of all the directors.
• Trust—relies on the skills of the trustee.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-11
Taxation
• Sole trader—dependent on level of profits. Large profits
mean high taxation, as income only attributable to one
person.
• Partnership—profits of partnership are shared as agreed.
Taxed in the hands of the partners.
• Joint venture—income received separately.
• Company—special company tax rates. Can be distributed
to access tax advantages.
• Trusts—income taxed in hands of individual beneficiaries.
Can be distributed to access tax advantages.
(Discretionary trusts allow changing distributions of income
and capital between beneficiaries in different years.)
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-12
Liability
LIMITED
UNLIMITED
limited liability
no limit to liability
of the owners for the business debts
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Liability (cont.)
• Sole trader—unlimited liability.
Personal assets available for business
debts.
• Partnership—unlimited liability.
Personal assets of partners available for
business debts.
• Joint venture—unlimited liability for
individuals who may be sued collectively
or individually for the debts of the joint
venture. No liability for actions of other
participants.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-14
Liability (cont.)
• Unincorporated associations—limited to the
amount of a member’s subscription. Liability for
agents and breach of warranty of authority may
fall on members of committee.
• Incorporated—limited to payment of outstanding
fees of members.
• Companies—limited by shares or guarantees.
• Trusts—limited, if trustee is a company, to the
assets of the company. If not a company, trustee
personally liable for tortious and contractual
liabilities.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-15
Limitations of business life
• Sole trader—for life of owner, without interruption.
• Partnership—death, bankruptcy or withdrawal of a
partner will end partnership.
• Joint venture—subject to the terms of the joint
venture agreement; normally has limited business life.
• Association—perpetual succession.
• Company—separate entity from owners; perpetual
succession.
• Trust—terminates if trust property vests in person
ultimately entitled to it. If trust property has been
transferred to beneficiaries, continued administration
of trust would be illegal.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-16
Raising capital
• Sole trader—limited to ability of one person to
gain finance.
• Partnership—limited to ability of partners to
individually gain finance.
• Joint venture—limited to the ability of the joint
venture participants to gain finance.
• Private company—limited to ability of directors
to gain finance.
• Public company—capital raised by way of
either share capital by issue of prospectus or by
debenture issue.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-17
Types of companies
• Companies limited by shares:
Shareholders liable for unpaid amount on their shares
– Public companies
– Proprietary companies (1 to 50 members):
 small
 large
• Companies limited by guarantee
• Unlimited liability companies
• No liability companies—mining companies
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Incorporating a company
• For a company to become a separate
legal entity, it must go through a
process called ‘incorporation’.
• Under the Corporations Act 2001, ‘to
register a company, a person must
lodge an application with ASIC’.
• Must nominate:
– shareholder(s)
– director(s).
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Directors
• A director is a manager or ‘mind’ of a company.
• Depending on the size and the nature of the
company, is simply appointed or elected by
shareholders
• Natural person
• Over 18 years of age
• Power to manage company assets
• Upper age limit of 72 years for public companies
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Duties of directors
• Act in good faith for the interests of the
company
• Exercise powers for a proper purpose
• Use discretions properly
• Avoid a conflict of interest
• Act honestly
• Not to misuse company information
• Not to obtain a gain by using their position
• Use care and diligence
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Personal liability of directors
Directors may face personal liability for:
• making false and misleading statements or
omissions in prospectus
• failing to appoint a company secretary
• incurring debts when the company had little
prospect of repaying the debts.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-22
Criminal offences for directors
in breach of their duties
These include:
• recklessly or intentionally failing to act in good faith
to protect the interests of the company
• dishonestly using the position of director within the
company, either intentionally or recklessly, to gain
an advantage
• dishonestly using company information, either
intentionally or recklessly, to gain an advantage.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-23
Rights of shareholders
Entitled to:
• Notice of meetings
• Attend meetings
• Receive dividends
• Financial information
• Sue on behalf of the company
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Winding up a company
Reasons
• No longer carrying on a business
• Fails to commence business within 1 year of
incorporation
• Outstanding debts of at least $2000
• Members have passed a special resolution to
wind the company up
• Membership falls below a certain number
Can be initiated by a director, a member or a
liquidator of a company.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Trusts
• Five elements constituting a trust
– Settlor—person responsible for creating trust
– Trustee—person to whom trust property is given
– Beneficiary—person to benefit from the trust
– Trust property—property that is the subject of
the trust
– Trust instrument—document detailing terms of
the trust
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Express (direct or declared) trusts
Intentional act of a settlor, created by
words (written or spoken):
• Identifying the trust property
• Indicating nature and purpose of trust
• Identifying beneficiaries
• Can be discretionary, where trustee will
choose the amount to be distributed to
beneficiaries
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Non-express trusts
No intentional action by the settlor:
• Implied trusts (presumptive trusts)—law
draws inference from the circumstances that
a trust was intended
• Resulting trusts—where property returns to
the creator of the trust
• Constructive trusts—result from the
operation of law (of equity)
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Classification of trusts
• Private—for the benefit of private
individuals
• Public—for the benefit of some public
purpose
• Trading—the property of the trust is used
in the running of a business
• Unit—the beneficiaries own units of the
trust
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Duties of trustees
• Maintain fiduciary relationship
• Familiarise themselves with the trust property
• Obey instructions
• Not delegate duties
• Not derive profit from their position
• Keep proper accounts
• Maintain impartiality
• Exercise reasonable skill and care
• Pay and transfer property only to those entitled
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Rights of trustees
• Reimbursement for expenses incurred
• Indemnification against all costs
• Seek contribution for losses
• On completion of administration of
trust, entitled to receive a discharge
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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Liability of trustee
• Personally liable for tortious and
contractual liabilities
• A court or the beneficiaries have the
power to relieve a trustee from
liability.
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PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-32
Business names legislation
• Business name must be registered
unless all names of operators or traders
are included in business name, i.e. the
full names of the operators or the
surname, plus:
– the first name or names
– the initial(s) of first name or names
– a combination of first name and initials
– the first name or names (or initials) by which
individuals are commonly known.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-33
National Business Names
Register
• Previously, business names were registered on a
state and territory basis.
• From April 2011 business names are registered
nationally for between one and three years.
• The system is managed by ASIC and registration
can occur online and a joint application can be made
for a business name and ABN.
• Business names previously registered in the states
and territories will automatically be transferred to the
National Business Names Register.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
•2-34
Purpose of registering
business name
• Public knows who they are dealing with—public can
search online at www.asic.gov.au
• To protect the goodwill of the business.
• Restrictions on names registered:
– identical to or closely resemble a name already
registered
– undesirable
– suggestive of connection with the government or
banks
– likely to be confused with names of companies or
incorporated associations
– ‘crown' or 'royal' must not be used.
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Barron, Fundamentals of Business Law 7Rev
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