Business Structure and Liability

Question: Discuss about the Business Structure and Liability. Answer: 1. In the given case study, Kate is having a business of women shoes and as the business is expanding day by day so Kate wants to update his business structure form sole trader to other. She asked her accountant to brief her about the various options available for the business structure.I will suggest her following options with advantages and disadvantages of the same. The description of various options is as below- Name of option Details Advantages Disadvantages Sole Trader It is the simplest business structure having no legal entity. An individual is the owner of such unit and he will be responsible for all rights and liabilities. Every contract or legal agreement of business goes in the name of owner as trade name is only fictitious in case of sole trader. 1. Its an easy form to set up. 2. Requires minimum capital structure 3.Legal formalities are very low in this case as this form has no legal entity 4. 1. It has no legal entity 2. Owner of business has unlimited liability regarding, debts, losses and other liabilities of business. 3. Business survives till the owner survives. 4. . Partnership Firm It is the form of business which is created when two or more persons join together with a common aim of running a business. They share the profit and losses as well as rights and liabilities of business either equally or as per the partnership agreement. A legal agreement named as partnership Agreement is made between the partners to run a partnership business. This agreement contains all the clauses regarding how the business will be operated, what will be the rights and duties of every partner. 1. Easy and cost effective set up of firm. 2. Better capital structure and borrowing power is available due to more than one owner. 3. Polling of knowledge, power, technology, shills and resources less than one roof is available. 1.Liabilities of partners are unlimited related to all business transaction. 2. Personal disputes are the big issue in the partnership firms. 3. Risk of dissolution of firm is high. Limited Liability Company (LLP) This the new form of business structure and mostly used in todays era. It is hybrid structure combining the features of both partnership as well as corporation. As the name indicates, it offers the limited liabilities to the owners reading the business debts, losses and liabilities. 1. It is simple as well as flexible form of organization. 2.It offers limited liability concept to owners. 3.Limited legal as well as administrative liability. 4.It combines the best features of both partnership as well as corporation. 1. It is the new form so reliability is low in this form. 2. Capital borrowings are not available under LLC. 3. It is not a cost effective formation. 4. Sate fees are high which is to be paid annually for running LLC. Company/ Corporation It is the most legal as well as reliable form of business. The owner of corporation is the shareholders while all day to day functions are carried out by directors. This form is not depending on any person, it has perpetual life. (Business.gov, 2016) 1.It is the most appropriate form for raising investment capital. 2.Owners are not personally liable for the debts of company. 3. It has unlimited life span. 4. Various tax benefits are available under this form. 5. Transfer of ownership is easy 1. Formation of company is costly. 2. Legal formalities are very high to run and manage the company. 3. All financial affairs of company are answerable to public. 4. Closure of business is very typical. The above table demonstrates the all forms of business organization and their benefits and disadvantages. On the basis of above information, I will suggest to kate that she should form an LLC as this is the new form of organization better than partnership and less complex than company. Presently Kate is running as sole trader business so expansion as LLC will be the best possible option due to following reason- There will be no unlimited liability in LLC Formation and running of LLC is cost effective as well as less complex. Legal formalities are limited. It will be easy to shift from sole trading to LLC Legal entity will be available in LLC form of organization. It is flexible to run LLC. Following factors will influence my advice- Capacity of taking liability by the owners is important while selecting the business structure. Capital requirement and raising capacity is the second consideration Purpose of business and expansion plan in future also influence the form of business. Tax liability is different under various forms of organization so considering the tax implication is also important. Management of business is also important part of business; sole trading business has the utmost control while in other management power is distributed. Cost of forming business also matters in forming any organization structure. (Legal vision, 2016) 2. In the given case study Myra is the single shareholder as well as director of Kids Clothes Pty Ltd. There are total 10 employees in the company. Due to loss in the company, Mayra paid bonus to herself and transferred all assets of company to the new company name Kids Pty Ltd. Employees remains in the old company and company owes thousand dollars for each employees. The possible legal grounds that employees have to claim their entitlements are as follows- It is well settled from the facts of the case that the control or ownership had changed as the assets of Kids Clothes Pty Ltd had been transferred to Kids Pty Ltd. In such a case, Myra, with the consent of employees should have terminated the services of the employees and initiate a new employment in the new company. In case where the employees do not consent to continue or transfer their services in the new company, the employees will be entitled to severance pay, service pay or such compensation by whatever name called, as the labour laws for the time being in force had set for the purposes.(Alrc.gov, 2016) Further, in the present case, on observation of the details it is clear that Myra is the single shareholder as well as sole director, which means that the complete ownership and management lies in the single hands of her. Therefore, while paying large bonus to herself prior to the transfer of assets, it is clear that the intention behind such an action of her was to provide a fraudulent preference over payment of liabilities while settlement at the time of assets as in case where such transaction would not had taken effect, the employees and the secured creditors of the company would have had a preferential right of payment over the unsecured liabilities and the shareholders, namely Myra, of the company. Hence, while providing of the bonus, the director (Myra herself) had not taken a prudent decision and that the same in not in the interest of the company as a whole but in the favour of herself which unveils the feature of corporate or separate legal entity of the company, i.e. the c ompany has a separate entity from the owners or directors. Myra is the shareholder and also holds managerial powers through holding directorship in the entity. The shareholder of a company is personally liable only to the extent of the unpaid or outstanding amount on the shares held or in case of company not having share capital, the amount of guarantee undertaken to be paid at the time of winding up. Further, the director of a company is meant to be the working parts of the company as the company executes its actions through the directors and that they are required to exercise due diligence and competence while executing their duties. Therefore, in case of any fraudulent act by the company, though it is well settled law that the company shall be held to be in default for the same and any suit, wherein laid by the victim shall be in the name of the company, neither in the name of shareholders nor the directors, but where it can be established that the default had been done due to the negligence of directors, they would be supposed to make th e same good. Hence, in the instant case, Myra no action resides in the hands of the employees against Myra in the position of shareholder, but she can be held liable as in the designation of the director. The responsibility of the employees would be the prove that the current position of the entity is due to the negligence or undue advantages taken by Myra creating a situation of conflict of interest of personal benefits and companys benefits. The same could be established through the very fact that the company had been a profitable unit but became a loss making entity and also while the same was transferred to another concern, Myra took out the funds in the form of bonus. Therefore, where it can be established, Myra could be held personally liable. (Iclg, 2016) References Alrc.gov.au. (2016).8. Australian remedies: misappropriation and other defaults | ALRC. 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