Chapter 7 Legal Consequences of Incorporation www learnnowbiz

Chapter 7 Legal Consequences of Incorporation www. learnnowbiz. com Corporate Governance 1

Sole Trader – a business owned by one person. • Simplest structure, low set up costs, few regulations. • Sole trader is personally liable to creditors. • Tax is paid at personal rates.

Partnership – a business usually owned by 2 to 20 persons • An association of persons who carry on a business with a view to a profit. Two types of partnership: General – No limited liability of partners. Limited – Two types of partners, general partners have no limited liability limited partners are only liable for debts to the extent of the capital invested as long as they do not participate in management.

Partnership Characteristics of partnerships: • Cannot sue or be sued. • Unlimited liability for general partners – creditors are able to access a partners personal assets to recovers debts. • Ability to own property. • Restricted to maximum of 20 partners. • Partners cannot transfer a partnership share without the consent of the other partners. • Few disclosure obligations.

Unincorporated Associations – Commonly used by clubs and associations and do not have a profit motive or distribute profit to members. • Profit must be used for the purpose of the association. • Not separate legal entities. • Members may be liable for the associations debts if authorisation for entering into the debt was not granted by members.

Incorporated Associations Non-profit associations may incorporate under state Association Incorporation Acts. • Provides for members to limit their liability and to contract in its own name and own property.

Companies – Legal entities formed by the process of incorporation. Owners of a company (shareholders) are liable for the debts of the company only to the extent that they have unpaid contributions on their shares. Such companies must include ‘Limited’ in their name.

Companies Advantages of Incorporation: • Limited liability. • Perpetual succession. • Transferability of membership interests. • Large numbers of members/investors are possible. • Company tax rates are lower than personal tax rates.

Companies Disadvantages of Incorporation: • Heavily regulated by the Corporations Act. • Directors liable for corporate debts while trading insolvent. • Company has continual disclosure and reporting obligations. • May be wound up if unable to pay its debts.

Types of Company Proprietary Companies • Cannot have more than 50 shareholders. • Cannot offer its shares to the public or list them on the ASX. • Commonly used for small businesses. • Exempt from many company law designed to protect public investors. • Must include Proprietary Limited in their name (Pty Ltd).

Types of Company Proprietary Companies Small proprietary companies are defined as companies that satisfy two of the following conditions: • Consolidated gross operating revenue of less than $25 million for the financial year. • Consolidated gross asset value of less than $12. 5 million at the end of the financial year. • Fewer than 50 employees at the end of the financial year. Large proprietary companies are those that do not satisfy at least two of the three conditions above. Still cannot have more than 50 shareholders and cannot offer their shares to the public.

Types of Company Public Companies A public company is one that offers its shares for sale to the general public, usually via listing its shares for sale on the ASX. • No limits to the number of shareholders a public company can have. • Subject to more regulation to protect public investors. • More stringent reporting and disclosure rules.

Registering a Company A company is formed and becomes a legal body corporate at the beginning of the day upon which the company is registered by ASIC. To register a company the following steps must be taken: • Decide on a business structure. • Choose a unique company name. • Decide whether to use replaceable rules, a company constitution or both. • Nominate and obtain consent from directors and secretaries. • Complete and lodge registration form with ASIC. Once it is registered ASIC will allocate it a unique 9 digit Australian Company Number (ACN).

Characteristics of Companies A company can execute a document by having it signed by or by common seal if the seal is affixed and witnessed by: • Two directors of the company. • A director and the company secretary. • For a company with a sole director who is also the company secretary, that director.

Pre-incorporation contracts Until the company is registered it has no legal existence to enter into contracts and the persons entering into the contract (the promoters) could be held personally liable. The Corporations Act addresses this problem.

Promoters’ Fiduciary Relationship Promoters are the people who act to bring about the formation and registration of a company. The promoters have a fiduciary relationship because they control the fate and direction of the new company. Liability of Promoters for Pre-Incorporation Contracts Under S 131, a promoter may face personal liability where: • The company is never registered. • The company is registered but does not ratify the contract. • The company ratifies the contract but later breaches it.

Limited Liability Consequences of the separate legal entity doctrine include: 1. Corporate capacity • A company’s obligations and liabilities are its own and not those of its participants • A company can sue and be sued in its own name. 2. Perpetual succession. A company is a continuing entity at law with its own identity independent of changes in its membership. It continues despite changes to its members until its existence ends upon winding up and deregistration. 3. A company’s property is not the property of its participants. 4. A company can contract with its own controlling participants.

Company Liability Civil Liability – Companies can be liable for torts and civil wrongs. • Vicarious liability – law of torts make an employer, whether company or not, liable for acts and omissions of its employees acting within the scope of their employment. • Direct liability – a company can also be treated as having primary or direct liability for a tort.

Company Liability Crime - Company’s can also commit crimes under statute and common law. • In respect of statute it is dependent on the particular jurisdiction. If the only penalty is prison a company cannot commit that crime. • In common law the company can be held liable if the acts of employees can be treated as the company’s acts and the intention in carrying them out can be treated as the company’s.