Chapter 9A: An Introduction to Business Relationships and Organisations Flashcards
What is a common form of business relationship?
The principal-agent relationship.
What is an agent?
An agent is simply a person who acts in the name of and on behalf of another (virtually, all commercial activity relies on agency). As such, agency covers a vast range of activities and relationships.
It includes a real estate agent acting for a vendor etc.
What are the key questions in agency law?
Is an “agent” actually an agent?
What is the scope of the agent’s authority?
What are the rights and duties among the parties?
To answer these we must look to the general law of agency including the relevant cases and (in relation to corporations and partnerships) specific sections of the Corporations Act and the Partnership Act respectively.
Partnerships and agency principles.
Agency principles are so much a part of the way partnerships work that they are actually regarded as a branch of agency law.
With one significant difference: each partner is both an agent and a principal of the others.
Partners can bind each other (as agents do) and be bound by the actions of one of their partners. In this case, the fiduciary obligations that characterise the duty an agent owes to a principal (a duty of good faith) flow both ways.
Corporations and agency principles.
A corporation, unlike a partnership, is a legal entity. But, because it is only a legal entity - it is a creation of the law, a fiction, not a natural person - it inevitably has to work through agents such as its directors, officers and employees.
What are the factors that determine the most appropriate organisation?
. The size of the business
. The degree of risk associated with the business
. The need for capital or loans
. The need for privacy
. The intended longevity of the business
. The establishment costs and regulatory requirements
. The taxation implications
. Management and control issues
. Ease of change in ownership and individual lifestyle concerns
What is a sole trader?
A sole trader is the simplest form of business organisation: one individual doing business on his or her own. Although they are the most common form of business organisation, they do not generate the revenue of the other organisations.
What are the advantages of being a sole trader?
. Setting up can be simple and inexpensive
. It is easy to dissolve the business (simply pay the debts)
. Usually lower compliance costs and regulatory considerations
. Taxation is personal - the income of the business is the income of the trader (which may be an advantage for lower incomes)
. Sole trader has total control and management rights and is entitled to all the net profits
What are the disadvantages of being a sole trader?
. Unlimited personal liability for the debts of the business (can be reduced by adequate insurance but the sole trader is nevertheless exposed)
. No inherent continuity or succession (if the sole trader dies or cannot carry on the business because of serious injury, the business cannot carry on in that form)
. In the absence of security, it is often difficult for a sole trader to borrow money
What is a trust?
A trust is created when one person (the settlor) transfers the legal ownership of property to another person (the trustee) with the instructions that the property is to be administered for the benefit of another (the beneficiary).
There are a number of different kinds of trusts, but the essence of a trust is constant - that of a person holding property for the benefit of another.
Trust for the purpose of running a business.
For the purpose of running a business, the trading trust is most relevant. In a trading trust, the property of the trust is used in the conduct of a business.
The trustee of a trading trust is often a limited liability private company, the effect of which is to afford the advantages of limited liability protection to the trading trust.
The trustee distributes income generated by the business to the beneficiaries and because the trustee has a discretion, it can distribute the income in a way that create taxation advantages.
What are the advantages of a trust?
. A trust, like a partnership, is not a separate legal entity, however, the use of a corporate trustee enables the business to trade under conditions of limited liability
. Meaning, the beneficiaries will not be personally liable for the debts of the business
. The creditors can look only to the corporate trustee that has limited liability. In this way, the risk (for the beneficiaries and the trustee) is minimised
What are the disadvantages of a trust?
. It can be a complex structure that requires considerable work when created and there are ongoing accounting and taxation complexities
. The trust is taxed if the profits generated by the business are not distributed
. The trustee has significant responsibilities and can be held to account by the beneficiaries
What is a partnership?
A partnership consists of two or more individuals in business together. Partnerships may be as small of a family cafe business or as large as some of the big legal or accounting firms.
What are the advantages of a partnership?
. Two or more individuals can combine strengths and assets
. Can be inexpensive to establish and dissolve (however, more complex professional partnerships inevitably have partnership agreements)
. Less regulatory and compliance costs than corporations
. Greater potential to obtain loans (depending on the partnership)
