Good Information Articles

Business & Commercial - Type Of Practice Structure

Sole Practitioner

This is an easy structure to establish. It is also cheap. An individual will need to register a business name under the Business Names Act and to register for an Australian Business Number and for the GST with the Australian Taxation Office. There are, however, disadvantages. If the surveyor/inspector dies, the business may also come to an end. There is no separate business structure that will survive. Liability is also personal and unlimited. Creditors will have recourse against all assets of the sole trader professional including business assets (plant and equipment) and personal assets (car, house and furniture). On the other hand, the sole trader professional has considerable control. Do what he/she likes.

Partnership

The advantage of partnership over sole proprietorship is that it has the combined financial resources of the partners plus the accumulated experience of more than one person. Generally, however, partners face unlimited personal liability created by any or all of them. Partnerships, unlike companies, do not create separate legal entities. Partners can therefore be sued and are equally liable for debts created by any partner. The partnership itself does not pay tax (although it does lodge a tax return). Tax is paid by the individual partners in their own returns.

Private Corporation

Although there are different types of companies, the most common proprietary (private) or public company is one limited by shares. The company is incorporated with a share capital which is often divided into shares of different classes. The liability of the shareholders is normally limited to the amount unpaid on their shares, if any. The shares are the personal property of the members and are freely transferable. This means that transfer of businesses and succession planning is relatively easy subject to income tax considerations and capital gains tax considerations. To be a proprietary company, the number of shareholders must be limited to 50. The great advantage of conducting a profession via a company is that the corporate organization is a separate legal entity which can possibly deflect liability from individual directors and shareholders and thereby protect their personal assets. Third parties are generally limited to suing corporations and to only recovering whatever assets are owned by that corporation. Occasionally, however, directors can be sued individually as aiding and abetting their company. An example would be an action against a company of building surveyors for alleged breach of the Trade Practices Act where the directors were also sued for aiding and abetting that breach. In those circumstances, the assets of the directors may be threatened unless they had also effected directors and officers insurance.

Directors' Duties

Companies have been known to English and Australian law for hundreds of years. For most of that time, the courts were reluctant to penetrate the corporate veil and hold individual directors, senior officers and even shareholders responsible for losses generated by those companies. Company creditors, employees, lenders and financiers were left without any remedy when unscrupulous company promoters walked away from hopelessly insolvent companies which had been asset stripped. Towards the end of the 20th century, Anglo-Australian law in Britain, America, Canada, India and Australia have gradually developed increasingly stringent duties which are now enshrined in Australia under the Corporations Act 2001 and at common law. Directors now owe a variety of duties such as:

- to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise;

- to make judgments in good faith for proper purposes; to avoid conflicts of interest;

- to inform themselves about the subject matter of business decisions;

- to only exercise their powers and duties in good faith and in the best interests of the corporation and its shareholders as a whole;

- not improperly to use their position to gain advantage for themselves or for someone else or cause detriment to their corporation;

- not improperly use corporate information to gain an advantage for themselves or for someone else or to cause detriment to the corporation;

- to ensure proper financial records are kept;

- to prevent the company trading once there is reasonable cause to suspect that the company cannot pay its debts; and

- to only ensure dividends are paid out of profits.

These duties are enforced by the Australian Securities and Investment Commission, by the Australian Taxation Office, and, in extreme cases, by the Directors or Public Prosecution of the Australian States, Territories and Federal Government. In other words, being a modern company director is no longer the cushy job of the past nor is it a simple means of evading legitimate third party liability.

Company Winding Up/Insolvency

People and businesses get into financial difficulties if their income (or their insurance?) does not cover their expenditure and they cannot pay their debts or legal judgments.

Company winding up and the bankruptcy of individuals are both based on the same principles. Many procedures are similar.

There are advantages of bankruptcy to creditors.

- Impartial and efficient administration; - Greater returns to creditors; - Discovery and distribution of undeclared assets.

There are advantages of bankruptcy to the bankrupt:

- Protection from harassment by creditors; - If the bankrupt is not fraudulent and is co-operative, there will be a release from financial liabilities and obligations and the chance for a new start.

Acts of Bankruptcy

To start bankruptcy proceedings or to wind up company, a creditor must establish that the debtor is insolvent. This is established by proof that the debtor has committed an "act of bankruptcy". Such acts are set out in the Bankruptcy Act for individuals and in the Corporations Act for companies and include becoming inaccessible to creditors, the debtor is unable to pay any court judgment, or fails to pay a debt under the bankruptcy notice.

Effects of Bankruptcy

The effects of bankruptcy in Australia are harsh:

- The bankrupt is divested of virtually all property including hobbies, books (other than work-related books) and jewellery;

- An undischarged bankrupt cannot obtain credit or enter into commercial transactions for $3,000.00 or more without disclosing that he or she is an undischarged bankrupt;

- The bankrupt cannot leave Australia without the permission of the trustee in bankruptcy; and

- A bankrupt may not be a director of a company or a member of a local authority. Some professions (e.g. law), also prevent bankrupts from practicing without special permission.

Transfers to Defeat Creditors

Often, persons facing bankruptcy try to transfer property to family members or friends rather than to general creditors.

Such transfers of property are void against the trustee if the bankrupt's main purpose in transferring the property was to defeat creditors by preventing, hindering or delaying the transferred property from being available to creditors. There has been much litigation in Australia over the last 30 years in this area against former bankrupts such as Alan Bond, the late Christopher Skase, Warren Oates and Rodney Adler.

Transfers of property are not void against the trustee if the purchaser:

- gave consideration of at least market value; - did not know that the bankrupt's main purpose was to defeat creditors; - could not have inferred that the bankrupt was, or was about to become, insolvent.

Transfers to relatives, transfer made by deed to spouses and to de facto spouses, transfers made where there is a promise to marry or where love or affection exist, have no value as consideration and are void against the trustee.

Exempt Property

Bankrupts are deemed to be left with the resources necessary to live only an "ordinary" lifestyle. Exempt property includes:

- household property such as limited furniture, cutlery, crockery etc; - some personal property which has sentimental value; tools of trade used by the bankrupt earning income by personal exertion; - transport asset but only valued up to approximately $6,500.00; and - policies of life insurance or superannuation.

Termination of Bankruptcy

The bankrupt is automatically discharged after three years if there are no objections. The effective discharge from bankruptcy is to release the bankrupt from all debts provable in the bankruptcy - this does not include new debts incurred after the initial act of bankruptcy.

Victorian courts can also annul a bankruptcy on the grounds of abuse of process even if the debtor is technically insolvent. This power prevents debtors from using bankruptcy as the reason for not repaying their debts so that they can maintain an expensive lifestyle.

Bankruptcy is not to be taken lightly.

Michael Pickering is a solicitor employed at LAC Lawyers Melbourne http://www.laclawyers.com.au. He has nearly 20 years experience as a lawyer.

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