Business and Commercial Lawyers

There are generally two ways of publicly financing a business, one of which is equity financing. Under this arrangement, an entity sells ownership interests of the business activity to a select number of investors(private companies) or to the public(public companies) which will then be used  as the capital for business operations. In return, investors are rewarded in the form of dividends which may increase or decrease in value depending on the profit made by the company.

In Australia, a private company or proprietary company can have as many 50 shareholders, while public companies on the other hand can have a limitless number. However, a company that has a high percentage of ownership interest disposed may have the interests of the entity or entities who  established  the company brushed aside as the control may reside with the investors, who are treated  as co-owners of the company.

For example, a company that is 51% owned by a number of shareholders can steer a company into the direction they wish, even if it is against the wishes of the director or chairman of the board, should they stand united.

Types of shares in equity financing

The following are example of shares that are offered in an equity-financed company:

• ordinary shares – the most common type of share made available to the public
• preference shares – shares that draw a fixed annual dividend and have preference over any other type of share. This kind of share also gives the shareholder voting rights in most cases.
• contributing shares – shares that draw dividends equal to the amount paid for the share in the company
• bonus issues – shares that are freely given to the company’s shareholders that is proportional to the number of shares they currently hold. For example, shares are given to stakeholders in a company that is part of a demerger.
• rights issues – rights entitling current shareholders to acquire additional shares in the company

Conclusion

If you are unsure as to how equity financing works or what the best capital raising arrangement is for your business, contact a registered business and commercial lawyer for legal assistance and advice for financing strategies and other business-related matter.

The success and failure of businesses are decided before operations are even started. That said, it is imperative for an entity to not only give importance in deciding which industry one will participate in and how day-to-day operations will be carried out, but to also give ample time in deciding which business structure is most beneficial in respect of the activity.

While not ignored, selecting the optimum business structure is not given the consideration it should by an entity which which may prove costly in the long run as the structure chosen will determine the following:

• the amount of taxes  paid by an entity and how its paid
• which ATO provisions are applicable including concessions, deductions and offsets
• superannuation obligations
• record-keeping requirements to successfully comply
• an entity’s liability for the operation of the business

Types of business structures in Australia

In Australia, there are generally four types of business structures which an entity may operate as, this includes:

• sole traders or sole proprietorship
• partnerships
• companies
• trusts

Each business structure has its own pros and cons and its efficacy will be determined by the circumstances of an entity’s business activity.

Sole traders
A business being operated as a sole proprietorship is owned and operation by the same entity where there is no legal distinction between the owner and the business. The entity is entitled to all the profits made by the activity, and consequently since the entity has total control of the business, he or she will be liable to pay for debts or losses should the business fail to make profit.

Under this business structure, the entity will continue to be regarded as an individual where income derived from the business must be declared along with other sources of income for that financial year.

Partnerships
A partnership is a business that is owned and operated by at least two different individuals. Entities that own a portion of the business activity are known as partners or members. Entities within the partnership receive the income jointly where the amount of money received or entitled is typically apportioned to the capital provided to give life to the business. Assets owned by the partnership are also jointly shared by all members as well all legal responsibilities that is in relation to the partnership.

That said, liabilities are also shared by partners where a particular entity may be liable for debts and other expenses even in situations where the entity was not the cause of it.

Companies
A business being conducted as a company allows an entity or entities to classified as a separate legal entity from the business unlike sole traders and partnerships. Unlike partnerships, the company itself will be liable to pay the debts and other liabilities incurred by the company in its operation. That said, assets of the company and the owners’ are treated separately as well.

A company – should it choose to offer shares to the public – can generate income from the disposal or trade of company stakes, allowing for a greater access to capital.  However, the costs to set-up and run the company will be considerably higher as its structure is highly complex and tax reporting requirements will be considerably more onerous.

Companies in Australia are taxed on its net profit for that income year at a flat rate of 30%, which could be favourable or detrimental, all depending on the business’ own circumstances.

Trusts
For a business to operate as a trust, an entity must be the trustee – the entity responsible for the distribution of the income to the trust’s beneficiaries as well as the management of the assets owned by the trust. There several types of trust in Australia such as:

• discretionary trusts
• fixed trusts
• unit trusts
• hybrid trusts and;
• superannuation managed funds

Contrary to popular belief, a trustee is not entity in itself but is an agreement between the trustee and the trust’s beneficiaries. Having said that, a trustee will often be liable for losses incurred; however, the liability against a trustee will be limited tremendously if the trustee is a company and not an individual.

Unlike the other business structures, the beneficiaries of the trust are the entities liable to pay taxes for income or assets received from the trust where any distribution given by the trust must be included in a beneficiary’s annual income tax return. A trust of any sort will only be liable to pay taxes to the ATO is when it has any undistributed income for that financial year.

If you are unsure of what the business structure to apply for your business or have any concerns that is related to Australian business law, contact a business and commercial lawyer for legal assistance and advice.

Regardless of the type of business activity being operated, business structure and the industry it belongs in, there are essentially only two types of businesses in the world which are:

• Public companies and;
• Private companies

Private Companies

Also commonly referred to as proprietary companies, private companies are enterprises that have its interests held by a relatively small number of shareholders and its shares or stakes are not made available to the general public. Rather, it is traded, offered or exchanged to other entities privately.

In Australia, a privately held company is allowed to have a maximum of 50 shareholders and have a sole director who must be a resident of the Commonwealth. Typically, private companies are small-to-medium enterprises(SMEs) where the directors are also the owners of the company and the shareholders, family members or associates of the owner.

Since private companies do not trade shares and do not acquire gains or securities from its sale, their reporting obligations are generally less onerous. That said, private companies are not required to disclose or publish their financial statements to the public and only relevant government agencies (e.g. Australian Taxation Office) have the authority to access the information.

Public Companies

The vast majority of the largest companies in Australia are public companies where shares are traded publicly and are offered to the general public for acquisition. Through this, an enterprise is able to generate capital for itself enabling it to expand or improve its business operations.

Public companies have more than 50 shareholders and must at least have three directors, two of whom should be Australian residents. While the general business operations of the company are managed by the directors, the entity that has the utmost authority in a public company is the board directors which have the power to appoint or dismiss a director.

Unlike private companies, publicly-traded companies are required by law to disclose financial information including a detailed performance of the company for that income year.

Business and Commercial Law is the body law that regulates and governs actions of all business entities in the Commonwealth. It’s existence is indispensable and necessary as it ensures that business activities of an entity are done ethically and does not come at the expense of other entities and Australian community in general.

Scope

The operation of businesses in any country is arguably the most integral part of its progress. That said, it would only be logical that the body of law for such will be comprehensive, broad and elaborate to ensure that every relevant matter is taken into consideration.

Business and commercial law in Australia includes:

• regulation of hiring practices
• regulation of work environment(e.g. safety)
• regulation of business dealings and transactions with other entities
• registration of entities in the Australian Business Register(ABR)
• acquisitions and business expansion
• demergers
• eligibility and utilisation of deductions and offsets
• eligibility and utilisation of business credits
• operation hours
• industry standards and practices
• legal obligations to employees(e.g. superannuation)
• legal obligations to the Government(e.g. withholding tax, good and services tax, etc.)
• consumer protection
• codes of conduct and;
• administrative penalties and charges

How it is applied?

• It  is important to take note that the application of some business laws may be different depending on:
• the entity type(company, individual)
• the entity size(small entity, medium, business entity)
• the territory where business operations are done and;
• the nationality of the entity(resident, foreign)

Business is the backbone of society and without it, any form of advancement just a mere afterthought and life, unimaginable. It is no coincidence that the world’s richest and most powerful countries have the biggest and most successful businesses. That said, it is essential for the government to create laws to regulate these entities, ensuring that the operations of a particular business does not come at the expense of another entity or is detrimental to society in general.

While the business and commercial laws of Australia are clearly defined and well though-out, it is still a very complicated matter that often requires assistance from professionals to gain a clear understanding. There have been countless entities in the past, and present, that think that more money could be saved by not having a business lawyer. Unfortunately, most of these entities have encountered or will encounter an obstacle that will force them to make a quick, uneducated judgement call that is likely to have dire repercussions which not includes substantial amounts due penalties and charges but may even mean incarceration.

Having a Business Lawyer on hand allows an entity to ensure that they will always have sufficient knowledge of Australian business and commercial laws, from keeping-up with ATO standards and requirements, to the intricate nature of acquisitions and demergers.

Most importantly, business lawyers save an entity time and money as they could also assist with selecting the optimum business structure, in respect of the business industry, as well other financial arrangements to ensure growth and sustainability without violating any of the Commonwealth’s laws or breaching agreements with other business entities.

Franchising in Australia is governed by the Franchising Code of Conduct (“FCC”). This piece of legislation was design to protect potential franchisees from unscrupulous franchisors and requires the franchisor to disclose certain information to the franchisee so as to:

1. give to a prospective franchisee, or a franchisee proposing to enter into, renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; and
2. give a franchisee current information from the franchisor that is material to the running of the franchised business.

Disclosure Document

The FCC provides that prior to entering into a franchising agreement the franchisor must create a disclosure document for the franchise in accordance with the FCC. There are two forms of disclosure documents, one for franchises turning over less than $50,000.00 per annum and one for franchises turning over more than $50,000.00. The main difference being the level of disclosure required to be given.

A disclosure document should follow the format as provided for in the FCC. The front page will contain details of the franchisor along with the required warnings and provision of a 7 day cooling off period for new agreements.

Important aspects to consider include:

1. Establishment costs and ongoing fees charged by the franchisor;
2. The territory in which the franchisee may operate;
3. What goods the franchisee may supply;
4. What goods the franchisee is obligated to purchase from the franchisor;
5. Whether there are any existing leases;
6. Obligations on franchisee such as training;
7. Earnings information of the franchise

Franchising Agreement

A franchising agreement will be in the form of a contract and some of its terms and conditions will reflect the disclosure document. Whereas the disclosure document relates more to the onus placed on franchisors to disclose certain information, generally the terms of the franchising agreement relate more to the relationship between the franchisor and franchisee.

Important aspects to consider include:

1. Any fit-out costs;
2. Conduct of the business and franchisee;
3. Obligations to maintain books and records;
4. Insurance;
5. Guarantees;
6. Future sale of the franchise;
7. Termination;
8. Restraint of trade;

What you should receive from the Franchisor

Prior to signing any documents, the franchisor is required to give to the franchisee a copy of:

1. Franchise agreement in final form;
2. Disclosure document;
3. Franchising Code of Conduct;
4. Lease (if applicable)

What is a “Partnership”?

The term “Partnership” is defined in the Partnership Act 1892 (the “Act”) as the relationship that exists between persons carrying on business in common with a view of profit. From this definition, the essential elements of a partnership are:

1. Carrying on of business;
2. In common;
3. With a view to profit.

While the above elements provide guidance as to the essential elements found in a partnership, the Act provides further guidance as to the rules to be applied in determining whether a partnership does or does not exist. The rules relate to common ownership of property, sharing of gross profits and profit sharing.

Creation of a Partnership

There are no special rules in relation to the creation of a partnership. Parties can create a partnership either orally or by writing in the form of a deed or simple contract. It is important to note however that a partnership may also be inferred through the conduct of the parties.

In normal business, parties who wish to enter into partnership with one another would generally enter into a formal written partnership agreement. Such an agreement would include the details of the parties, the type of business that the partnership is to be engaged in, how profits will be shared, how the accounts will be administered, how the business is to be managed and the authority of the partners, how disputes between partners should be resolved and how the partnership can be dissolved. Without any form of agreement, the partnership will be governed by the terms of the Act.

Liability

Liabilities of partners in a partnership are joint and several. What this means is that the liabilities of the firm become the liability of the partners together (joint) or individually (several).

Fiduciary Relationship

Because the acts of a partner have the effect of binding all the other partners, the law recognises certain duties that each partner owes to the other. These duties include the following:

1. Full disclosure;
2. Account for any benefit derived without the consent of the other partners from any transaction concerning the partnership or for any use by the partner of partnership property, names or business connection;
3. Non competition

Dissolution of the Partnership

Subject to the terms of the partnership agreement, a partnership may be dissolved upon the happening of any of the following things:

1. The partnership was entered into for a limited period and that time has now expired; or
2. The partnership was entered into for a specific purpose and the purpose has been fulfilled; or
3. A partner has died;
4. Bankruptcy of a partner

A court may order the partnership to be dissolved on some grounds including:

1. Incapacity of a partner;
2. Where a partner is guilty of conduct that is calculated to affect the business prejudicially;
3. Where a partner has been persistently breaching the terms of the partnership agreement;
4. Where it is just and equitable.

Distribution of Assets on Dissolution of Partnership

Subject to the terms of the partnership agreement, the Act provides that the following rules apply to the settling of accounts of the partnership:

a. Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits.

b. The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

1. In paying the debts and liabilities of the firm to persons who are not partners therein.
2. In paying to each partner ratably what is due by the firm to the partner for advances as distinguished from capital.
3. In paying to each partner ratably what is due from the firm to the partner in respect of capital.
4. The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.