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Description
Flashcards by Gilbert Serem, updated more than 1 year ago
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Created by Gilbert Serem
almost 9 years ago
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| Question | Answer |
| Sole proprietorship | 1.An individual who owns a business enterprise as a principal. 2.Business is not a separate legal entity 3. Receives profits not wages (pays tax on profits at individual tax rate) Law 4.Subject to CCA and ACL (Consumer legislation) 5.Registration for GST (must register if annual turnover is more than $75,000) |
| Sole proprietorship: advantages and disadvantages | Advantages 1.Easy to set up 2.Minimal regulation 3.Greater privacy Disadvantages 1.Difficulty of raising capital 2.Higher tax rate for individuals v companies rate 3.Unlimited liability |
| Partnership: A Definition | 1.Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. The tests for determining if a partnership exists are whether: 2.a business is conducted with a view to profit (to share profit). |
| Partnership: statutory rules | Created and regulated by agreement; supplemented by Partnership Act of relevant state. 1.What is not of itself a partnership: joint ownership of property Davis v Davis [1894] 2.sharing of gross returns Cribb v Korn (1911) 3.receipt of a share of profits but it is prima facie evidence that person is a partner |
| Partnership agreements | 1.Can be express or implied 2.Express agreements (in a written form) can resolve a lot of potential problems Agreements can determine: 1.The very existence and membership of the partnership 2.Rights, liabilities and contributions of each partner 3.The genuineness of the partnership for taxation purposes |
| Partnership: Legal significance | 1.Partners have no separate legal entity from the partnership 2.Partners have unlimited liability 3.Partners are both principals and agents for each others – their actions bind other partners 4.The partnership may enter into contracts and be sued 5.Partners do not receive a salary and cannot be employees |
| Partnerships: Regulation | 1.Partnership regulation is determined by state and territory legislation. 2.Common law applies to partnerships 3.A partnership cannot be contrary to public policy 4.Partnerships may be between 2 and 20 people. Once a partnership is of more than 20 people, it normally must incorporate: Corporations Act 2001 (Cth) s 115. Though there are many exceptions with professions 5.Must register a business |
| Limited Liability Partnerships | 1.Allows for non-participating, working or general partners 3.Must have at least one general partner with unlimited liability 4.Offers a simpler means of limiting personal liability, without the expense of registering and meeting the regulatory requirements of a company 5.Allows for more confidentiality than a company 6.Losses sustained by the partnership not distributed to partners Now taxed like companies 7.Main advantage of limited liability partnerships is that silent (non-participating) partners who do not take part in the management can be designated as ‘limited partners’ 8.Allows for silent partners (non participating) to invest without taking part in management |
| Joint and Several Liability of Partners | 1.Joint liability for contract debts or court judgments mean that all partners are liable together, but must be sued in one action. 2.Several liability means that partners are liable altogether and individually – each partner could be sued one by one. |
| Misapplication of money or property | 1. The Acts make partners liable as a firm for a misapplication of money or property received by a partner, or by the firm, from a third party. The firm must pay back any money that has wrongfully been taken. 2. If a partner is a trustee and improperly uses trust property in the business, or on account of the partnership, the other partners will only be liable if they had notice of the breach of trust. |
| Partnerships: Property | 1.Partners may wish to lend their personal property to the partnership, or perhaps allow for some partners to have a greater claim over certain property, or to use property. 2.Property bought by the partnership belongs to the partnership and must only be used for the partnership. 3. Land held by the partnership belongs to the partners but is subject to legitimate claims by other parties, such as creditors. |
| Partnerships: Partner’s rights and duties | 1.Partners are entitled to share equally in the capital and profits of the business; they must contribute equally towards any losses by the firm, whether of capital or otherwise. 2.Partners are entitled to indemnification (compensation) for any payments or personal liabilities incurred in the ordinary and proper conduct of the business of the firm, or for anything necessarily done in the interests of the business or property of the firm. 3.Partners who lend to the partnership more than their required contribution of capital are entitled to interest. |
| Partnerships: Partner’s rights and duties | 1.Partners are not entitled to any payment of interest on their required capital contributions until the profits of the firm have been assessed. 2.Every partner may take part in the management of the partnership business. 3.No partner is entitled to payment for working in the partnership business. 4.No new partner can be admitted without the agreement of all the existing partners 5.Partners cannot be expelled from the partnership unless the partnership agreement allows for this. |
| Partnerships: Partner’s rights and duties | 1.Differences of opinion between partners as to ordinary matters connected with the partnership business (such as the purchase of equipment) may be decided by a majority of the partners, but no change may be made in the nature of the partnership business (such as a change to the type of business conducted) without the consent of all existing partners. 2.The partnership books are to be kept at the place of business of the partnership, and every partner has the right to access, inspect and copy those records. 3.All members of the partnership have a right to participate in the management of the business. |
| Partnerships: Partner’s fiduciary duties | The relationship between partners is fiduciary: the standard of honesty and proper dealing that partners should display to each other is similar to that between a trustee and beneficiary. 1.Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or their legal representative. 3.Every partner must account to the firm for any benefit or profit derived from their use of the partnership property, name or business connection 4.A partner cannot, without the consent of the other partners, carry on any business of the same nature that competes with the firm. |
| Leaving a partnership | 1.Expulsion: The majority members of a partnership can expel a member of the partnership only if the partnership agreement allows them to do so 2.Assignment: It is possible for a partner to assign their share in the partnership, or part of it, to another person: Federal 3.Commissioner of Taxation v Everett (1980) Incoming and outgoing partners’ liability: A person newly admitted to an existing partnership is not liable to creditors for prior debts incurred by the partnership (though this may be made a condition of joining). 3.Creditors and the public should be made aware that a partner has left and no longer has authority. |
| Dissolving a partnership | 1.Dissolving a partnership refers to the ending of a partnership, after which winding up takes place; this is the distribution of the remaining assets and obligations. When a partner leaves or joins a partnership, the effect is to dissolve the earlier partnership. 2.This can be overcome by the partners having a partnership agreement 3.A partnership that is to operate for a fixed term is dissolved when that term expires |
| Dissolving a partnership | 1.Bankruptcy and death: In the absence of any agreement, a partnership will be dissolved by the death or bankruptcy of a partner. 2.Illegal partnerships: A partnership may also be dissolved where the nature of the partnership becomes illegal, or when it is unlawful for the particular members of the partnership to continue the business. 3.Dissolution by court: A court can dissolve a partnership if one of the partners is of unsound mind, engages in illegal conduct or where the partnership business cannot be carried on except at a loss. |
| Partnerships: Advantages | 1.The pooling of resources and skills is a major advantage of the partnership form. There is far less formality in the partnership form. 2.The partnership form promotes flexibility. There is a greater degree of privacy, as accounts do not have to be disclosed or audited 3.Income splitting has made genuine partnerships a popular form of business organisation, since tax is assessed on each individual partner’s income. 4.Partnerships are generally easy to finish and dismantle. |
| Partnerships: Disadvantages | 1.Partners have unlimited liability 2.The limit of 20 members on a partnership, unless it falls under one of the exceptions in s 115 of the Corporations Act 3.Partners are not separate from the partnership 4.Partners are liable for any debts or liabilities incurred during their time as a partner 3.If there is a breakdown in relations between partners, an application to the court might be necessary to dissolve the partnership. 4.Partners cannot transfer their share of the partnership, by sale or otherwise, unless the other partners agree 5.The intimacy and agency relationship inherent in a partnership means that one partner may be responsible for another partner’s negligence |
| Trusts: A Definition | A trust is an equitable obligation that rests on a person (the trustee) who is personally responsible to deal with specified property (the trust property) for the benefit of another person or persons (the beneficiary/ies) . |
| Trusts: A Definition | 1.Has origins in equity law 2.Parties are settlor, trustee, beneficiary 2.1settlor creates trust by settling property upon 2.2trustee for the benefit of 2.3beneficiaries 3.Critical feature is intention to create trust 4.The trust is not a legal person – trustee is legal owner of trust property, beneficiaries hold equitable title i.e. their interest protected by equity |
| 1.Trusts | 1.A business can be administered through a trust, but trusts were not invented for that purpose. 2.As settlor, a person can vest assets of their own into a trust fund, appoint themselves as the trustee of the fund for the purpose of running a business, and appoint themselves, with others, as the beneficiaries 3.Note however that one person cannot be settlor, trustee and sole beneficiary. There must be other beneficiaries to make the trust structure work |
| 2.Trusts | 1.A trust does not need to be formally created but it serves the interests of each of the parties to the trust to create a ‘deed of trust’, especially when the trust is formed to operate a business. 2.As the ‘deed of trust’ is a legal document, it should be created by a lawyer or accountant. 3.The operations of the business will have to be outlined in the trust deed. |
| Trading Trusts | 1.Not a separate legal entity 2.Uses the trust relationship of Settlor – Trustee - Beneficiary 3.Sole proprietor disposes of business to a trustee, usually corporation 4.Driven by tax considerations 5.Beneficiaries are proprietor and family members who receive income of business through a distribution by trustee |
| Family Trusts | 1.A family may transfer a business to a trust, usually with the trust deed expressly giving control to a parent as trustee to manage the business. 2.Allows for splitting tax income between different family members, thereby minimising taxation. 3.Taxation law has intervened to reduce the attractiveness of this form of trust e.g. by prescribing that beneficiaries must be adults, not children, and by taxing beneficiaries at the highest marginal rate of tax. |
| Trustees: Obligations and duties | 1.Regulated by state legislation (in WA, by Trustees Act 1962) 2.Appointment -any legal person may be appointed -usually by settlor in deed -appointee can disclaim 3.Duties -overriding fiduciary obligation to beneficiary/ies -Includes: -gathering assets of trust -carrying out provisions of trust -completing all duties personally -maintaining and caring for trust property -keeping accounts -informing beneficiaries of matters relating to trust property -acting impartially between beneficiaries |
| Trustees: Powers | 1.Powers -according to deed and the court and supplemented by legislation -powers in deed are express and implied 2.Courts have the power under equity law to remove a trustee, if this is required in the best interests of the trust. |
| Trustees: Rights and liabilities | 1.Carry out duties – otherwise a breach of trust subject to compensating the trust 2.Rights of trustees: -reimbursement for expenses incurred in carrying out the duties of the trust -indemnity from debts incurred on behalf of the trust -according to Trustee legislation |
| Rights of beneficiaries | 1.beneficiaries of full legal capacity can agree to terminate the trust 2.can compel performance of trust or prevent breach but lose the right if they have consented to breach 3.to information and to inspection of trust documents 4.to recover and trace trust property. |
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