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Topic 1: Introduction to the Concept of CompaniesWhat is Company Law?  Company law: - Provides for the formation of companies (and ultimately, termination) - Confers (discuss and advisers) on companies some special attributes (For example, separate legal entity) - Sets out rules governing the dutie...

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Topic 1: Introduction to the Concept of Companies What is Company Law?  Company law: – Provides for the formation of companies (and ultimately, termination) – Confers (discuss and advisers) on companies some special attributes (For example, separate legal entity) – Sets out rules governing the duties of, and the relationships between, participants in companies (For example, the relationship between directors and shareholders) – Facilitates dealings between companies and outsiders (For example an outside is a customer)  As legal entities, companies are subject to the law in the same way as all other legal persons  This means that all laws such as criminal law, tort law, contract law, etc apply to companies. What does Company Law Cover?  Company Law deals with: – The creation and termination of companies, and confers on companies and their participant’s legal characteristics (separate legal entity, legal capacity and limited liability) – The relationships between participants in companies (members, directors, and other officers of the company) and between the company and its participants. – Corporate finance. The laws set out special rules that enable companies to raise capital, including equity capital and debt finance. – The implications for those outside companies of dealing with a company rather than an individual. Creation and Termination of Companies:  Companies are artificial legal persons created and extinguished by the state  Laws are necessary to confer and withdraw their existence  Company law both confers and defines the limits of special characteristics such as separate legal entity, corporate capacity, and limited liability. Relationships between Participants and the Company:  The members of companies are people who own shares in the company  Rules determine the rights and duties of each type of participants  Company law establishes the rules for managing companies, providing for appointment of officers to run the company, prescribing the respective decision-making powers of members and directors, and imposing duties on officers.  Company law also governs the mechanics of running a company, particularly through providing the framework for the operation of the company internal governance rules.  It also provides for sanctions and remedies where these rules are contravened. Corporate Finance:  A company can raise equity capital through the issues of shares, which maybe be ordinary shares or in a class with different or special rights attached.  Shares may be issued fully or partly paid  Company law rules allow for the issue of shares and provides for the maintenance of the company’s issued capital during its life  Company law allows for the issue of debentures by companies and for the creation of floating charges. Dealings between Companies and Outsiders:  A person may deal with a company voluntarily, where person elects to enter into legal relationship with that company.  A person may involuntarily come to deal with the company where the company commits a wrong that affects the person and the wrong is capable of legal remedy. How is Company Law Enforced?  Company law operates in some cases to impose duties or obligations on people and companies

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If a person or company breaches one of the rules of company law then, depending upon which rule is breached, one or both of the following may result: – The person may be made subject to public to public law sanction, such as a fine or a term of imprisonment-Sanction imposed by the state. – The person or company may be stopped from engaging in the wrongful conduct or required to do some further act or thing or required to compensate any person harmed by the breach- private law. Civil penalty provisions are where a person contravenes (breaks or breaches) a civil penalty provision, and as a result they may be subject to criminal prosecution or to be a civil penalty order. Breaches in certain provisions of the Corporations Act may also result in a person being banned from participating in the management of companies for a special period.

Example:  A director of a company breached the rule of company law prohibiting her from making improper use of her position to gain an advantage for herself. – S183 (1) a person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to (a) gain an advantage for themselves or someone else or (b) cause detriment (loss and damage) to the corporation.  If she does so dishonestly the director commits a criminal offence and can be fined or imprisoned, or both. – S184 (1) a director or other officer of a corporation commits an offence if they (a) are reckless or (b) intentionally dishonest, and a failure to exercise their powers ad discharge their duties (c) in good faith in the best interest of the corporation or (d) for a proper purpose. – S184 (2) a director, other officer or employee of a corporation commits an offence if they use their position dishonestly (a) with the intention of directly or indirectly gaining an advantage for themselves or someone else, or causing detriment to the corporation, or (b) recklessly as to whether the use may result in themselves or someone directly or indirectly gaining an advantage, or causing detriment to the corporation. – S184(3) a person obtains information because they are, or have, been, a director or other officer employee of a corporation commits an offence if they use the information dishonestly (a) with the intention of directly or indirectly gaining an advantage for themselves or someone else, or causing detriment to the corporation, or (b) recklessly as to whether the use may result in themselves or someone directly or indirectly gaining an advantage, or causing detriment to the corporation.  If she does so unintentionally, for example thinking that what she did was in the best interest of the company then she can be made the subject to a civil penalty order and required to pay a pecuniary penalty to the government.  If the company has been harmed by her actions, it can seek damages or an account of profits from the director, to compensate for the harm it has suffered or the benefit of which it has been deprived.  It can also seek orders that the director stop doing harmful things. The Main Sources of Company Law:  The Corporations Act (2001)  Case Law  Other sources of law, including, Corporations and Regulations, ASIC Act (2001), etc. The Corporations Act (2001):  The Corporations Act contains many key legal rules that govern or facilitate the formation, management, operation and termination of companies.  It also regulates takeovers, provides for registration and operation of managed investment schemes, and set out licensing and disclosure rules that apply to financial products, financial services and financial markets.  What does the Corporations Act (2001) Contain: – Formation of Australian companies and the registration of foreign companies’ operation in Australia – Regulates fundraising by companies, company management, reorganisation, takeovers, and the liquidation and winding up of companies.

– Regulates the financial markets, the provision of financial services, and the offer of financial products in Australia. Other Sources of Company Law: Case Law:  Australia uses a ‘common law’ system in which the recorded decisions of courts operates as binding statements Corporations Regulations:  Additional rules, including rules relating to more mechanical, administrative matters are set out in the Corporate Regulations ASIC Act (2001):  Is the act that establishes ASIC and confers upon its powers to administer the Corporations Act and police the activities of companies.  ASIC Act facilitates the development of accounting standards and auditing and assurance standards, and provides for the operation of the FRC and AASB

ASX Listing Rules:  The ASX is a private company that provides a trading facility for securities issued by companies listed on it  Listing means that securities of issued by the company can be bought and sold by investors though public, organised, listed markets. Regulation of Companies (2-520): ASIC:  Main regulator of companies and the body responsible for carrying out the administrative functions set out in the Corporations Act  The main focus of ASIC is to: – Register companies – Gathering and disseminating (distributing) information about companies – Educating companies and individuals about laws – Modifying the Corporations Act in certain circumstances – Registering company auditors and liquidators – Investigating breaches of law – Enforcing the law ASX:  ASX list companies’ securities on the stock market  Companies must comply with ASX Listing Rules  ASX is private, for-profit company, not a governmental or regulatory agency  Section 792D of the Corporations Act requires ASX to cooperate with ASIC in the performance of ASIC’s functions  ASX must notify ASIC if it believes that a person is breaching the Listing rules or the Corporations Act.

Owner(s) of the Business

Sole Proprietorship

General Partnership

Limited Liability Partnership

Company

Business Trust

Registered Business Trust

Sole Proprietor

Partners

Limited Liability Partnership (partners have a share in the capital and profits of the LLP)

Company (members own ‘shares’ in the company that give them certain rights

Trustee (on trust for beneficiaries)

Trustee-manager (on trust for unitholders)

Legal status

in relation to the company) Separate legal entity Company

Not separate legal entity Sole Proprietor

Not separate legal entity Partners

Separate legal entity Limited Liability Partnership

Responsibility for management of business Comparative Regulatory/ Administrative compliance requirements

Sole Proprietor

Partners

Partners

Board of directors

Trustee or manager appointed by trustee

Minimal

Minimal

Low

Low to high depending on size and whether it is listed

Low to medium depending on requirements in trust deed

Access to finance

Only from proprietor’s personal investment and borrowings

Only from partners’ personal investments and borrowings

Only from partners’ personal investments and borrowings

Can access capital market

Returns

Proprietor entitled to full profits from business

Partners entitled to share of profits from business

Partners entitled to share of profits from business

Taxation

No tax paid by business. Personal tax paid by proprietor

No tax paid by partnership. Personal tax paid on share of profits by partners

No tax paid by LLP. Personal tax paid on share of profits by partners

Shareholders entitled to share of dividends when declared. Dividends can only be paid out of available accounting profits Corporate tax paid on profits. No tax paid by shareholders on dividends.

Limited to amount placed in the trust. No access to retail investors in capital market Beneficiaries entitled to share of distributions. Distributions may be paid out of operating cash flows

Party that is liable for debts of the business

Not separate legal entity Trustee/Beneficiary (may draw from assets under the trust)

Tax paid by trustee on income generated by trust. Personal tax paid by beneficiaries on share of income to which they are entitled. Tax system in place to avoid ‘double taxation’.

Not separate legal entity Trusteemanager( may draw from assets under the trust Trustee-manager

Medium to High depending on profile of unitholders( eg. Whether retail or institutional) Can access capital market

Unitholders entitled to share of distributions. Distributions maybe be paid out of operation cash flows

Tax paid by trustee on income generated by trust at corporate tax rate. Distributions received by unitholders exempted from tax

Organisational Structures

Sole Trader

Partnership

Company

Trust

General

Proprietary

Fixed

Limited Liability Partnership

Public

Discretionary

Incorporated Association

Managed Investment Scheme Self Managed Superannuation Fund

Factors to Consider when choosing a Business structure: Establishment fees Financing options Compliance costs Record keeping Disclosures Tax issues Asset protection Personal liability Industry issues Ownership changes Succession planning Forms of Organisations: Forms of that can be used for Not-for-Profit Activities: Unincorporated Associations:  Are clubs and societies which are formed to carry on various activities but where the members do not aim to make a profit and distribute it to themselves.  They are not a separate legal entity; therefore, they may not hold property in their own name and enter into contracts in its own name  They cannot be sued or sue their own name  The members of the club or society do not benefit of limited liability Incorporated Associations:  An association may incorporate under the Association Incorporation Act of the state or territory in which the association operates  Main Advantages of Incorporated Associations: – Separate legal entity – There is limited liability for the members of the association – They are able to hold property and enter into contracts in their own name – Cheap and straightforward to establish

– Disclosures and other regulatory obligations are minimal 

Main disadvantages of Incorporated Associations: – More disclosure obligations than unincorporated corporations – More administrative and record-keeping obligations than an unincorporated association

Sole Proprietorship (Sole Trader):  Basically involves accepting money in exchange for providing good or services  An individual person carries on a business in his or her own name in their own right  There is no separation between business and personal assets or obligations of the person conducting the business  The sole proprietorship signs all contracts to the business, owns its assets, and is personally liable for its debts.  Income generated by the business is the income of the proprietor, the proprietor is the taxpayer, and business losses or profits can be offset against the proprietor’s income  Has unlimited liability and are personally responsible for the debts of the business and if either unwillingly or unable to meet business liabilities, they can be bankrupt.  It is quick and inexpensive to establish, and inexpensive to wind down  Factors to consider when deciding to be a sole trader: – The type of business activity – How much risk and liability are they willing to bear – The extent to which they wish to be independent or control the management of the business – Their taxation positions – How much capital they have? – Whether they are willing to be solely responsible and accountable for what the business does and does not do Main advantage of being a sole trader: – Has full management authority – Fewer regulatory and reporting obligations – Business affairs are relatively private – Minimal costs – Free to close and wind up the business whenever desired Main disadvantage of being a sole trader: – Unlimited liability – More difficult to raise financial capital – Life of the business is limited by the working life of the sole trader Partnership:  A association of people carrying on business in common with a view to profit  A partnership agreement is a legal document where the terms of the contract between the partners are recorded and regulates how the partnership will operate.  A partnership is not a separate legal entity  The individual partners in the partnership must own the assets of and incur the obligation relating to the partnership’s business personally and in their own names  Partners do not have limited liability unless they are partners of a limited partnership  Each partner is personally liable for all the debts of the partnership, even if they are caused by decisions or acts by other partners.  An individual partner can incur an obligation for which the other partners are also responsible  If the identity of partners change the original partnership is dissolved and a new on is formed.  The right to be a partner cannot be assigned or transferred to another person without the unanimous consent of the other partners.  The profits and losses generated by the partnership business are taxable in the hands of the individual partners, and can offset against their income.  Under s115 of the Corporations Act, partnerships with more than 20 people are not permitted without the consent of the relevant minister

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Main advantages of a partnership: – Enables individuals to combine capital – Not taxes separately for income tax purposes – Business affairs are relatively private – Easy to establish Main disadvantages of a partnership: – Joint and several liability – No more than 20 partners – Decisions must be unanimous in some matters

Limited Partnership:  Allows investors who want only to contribute capital to a business, and to have no say in it day-to-day management, to join with others to invest in a partnership structure with the benefit of limited liability.  Must have at least one general partner who carries on the business and who does not have limited liability  Must have at least on limited partner who is the person contributing capital to the venture, as long as they are not involved in the management of the business their liability will be limited to the amount invested into the partnership  Rarely used as they are taxed on the same basis of a company, and therefore based on tax treatment it is more preferable to use a company structure. Joint Ventures:  An unincorporated joint venture is simply a contractual agreement between two or more people that will cooperate to conduct a particular venture or related ventures.  Is not a separate legal entity and the assets and obligations of the venture are those of the ventures personality?  Participant’s respective contributions and entitlements will be agreed on in advance, and will be specific  Joint venturers are not agents of each other and their liability with respect debts incurred in the course of the venture, while personal and unlimited, is several and not joint.  The parties of joint ventures are only responsible for their respective obligations, not for the obligations of any of their joint venture partners.  A joint venture agreement is usually drawn up to regulate the relations between joint venturers  Main advantages of joint ventures: – Established for a specific one off project or a defined period of time – Parties are legally separate from each other – Particular interests in a joint venture can be sold

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Main disadvantages of joint ventures: – Parties have their own priorities and objectives – Parties may ensure that they do not become partnerships – A separate manager may be necessary

Trust:  A trust arises where one person is required to hold or invest property for the benefit of another person  The person who holds the property is the trustee, and the people who are entitled to enjoy the property and receive the income and other proceeds from it are the beneficiaries.  A settlor is a person who sets up the trust  A trustee is the person who manages the trust property  Beneficiaries are the people or person, for whom the investments or assets are held and to whom income is paid  A trust is not a legal entity  Trustees are personally liable for debts incurred on behalf of the trust

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The beneficiaries generally ...