Company Law

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Company Law

Question One:

The best case to rely upon in solving the case is that of Salomon v Salomon & Co. Ltd (1897).  This is because the case of Dozey is similar to that of Salomon of operating a sole trade business and later operating as a limited company. Based on this Act, the debts of the company are a liability of the company rather than the members of the company (Harris & Hargovan, 2013). In addition, if a company signs contracts with creditors it means that creditors can only sue the company instead of the company shareholders. The liability of Dozey as a shareholder is limited. A company may decide to contract with its shareholders if required and can employ individuals to run the business (Vickery & Flood, 2012). This means that Dozey is entitled to be regarded as a worker of the company in his ability as the director of the company. This Act states that a company must sue only in its name for any wrong done against it. It holds that if any wrong is committed against the company, only the company has the power to sue in order to recover any losses made (Harris & Hargovan, 2013). The company has the power to own assets while shareholders do not have proprietary interests in these assets (Harris, Hargovan & Adams, 2009). The ‘Sleepy Head’ business is already an asset of the company and not Dozey from the time contracts were entered into between Dozey and the company. Based on this information and principles of the Salomon v Salomon & Co. Ltd (1897) Act, the following advice can be given to Dozey.

a). Dozey enforcing charge against Sleepy Head Pty Ltd

Dozey has a right to place a charge against Sleepy Head Pty Ltd. The accident occurred while Dozey was at work that is he hurt his back while doing work-related duties. All employees in Australia are protected by Employer’s Act (Harris, Hargovan & Adams, 2009). Employers have legal obligations to ensure a healthy and safe workplace. Employees have rights and responsibilities for their welfare, as well as, that of their colleagues. Employees have a right to work in a healthy and safe environment, and this is provided by law and generally they cannot be removed or changed by their employers. The most vital of the rights include having any risks to safety and health controlled, being given individual safety and protective equipment free of charge, and a right to leave work without any discipline if they have reasonable concerns on their safety (Verma & Gray, 2009). In addition, employees have the right to tell their employers about any safety and healthy concerns that they may have. Falling off the ladder is not an exception to these rights, and, therefore, Dozey deserves to be compensated. Although the company is a separate entity, it however, has a legal obligation of ensuring that its employees are protected. Dozey and the company are two separate entities. The business does not belong to him as he is only a member. Dozey has a right to sue the Sleepy Head Pty Ltd for the Medical costs incurred.

b). Dozey enforcing claim of Sleepy Head Pty Ltd against Risk Ltd to recover the value of the goods stolen

When a company acquires a legal position, it attains a legal entity that is distinct and separate from its members (Taylor, 2010). A company, therefore, is not a trustee or an agent for its shareholders. This implies that a company that has compiled with the conditions of incorporation of companies provided in the Company Act is legal entity distinct and separate from its members. It does not matter whether all company shares are owned by one individual or by the required persons in order to enable the legal formation of the company. When a company is legally incorporated it should be treated as an independent entity with liabilities and rights appropriate to the company (Harris & Hargovan, 2013). The intentions of those who attempt to promote the company are not necessary in discussing what the liabilities and rights are. This Act states that a company must sue only in its name for any wrong done against it. It holds that if any wrong is committed against the company, only the company has the power to sue in order to recover any losses made (Harris & Hargovan, 2013). This means that Dozey has no right to enforce a claim of Sleepy Head Pty Ltd against Risk Ltd to recover the value of the goods stolen. This right only belongs to the company.

c). Dozey Enforcing his claim against Compo Ltd for the payment of his medical bills.

A company may decide to contract with its shareholders if required and can employ individuals to run the business. Dozey and the company are two separate entities (Taylor, 2010). Although Dozey has incurred medical costs because of the accident, he is not the lone who entered into a contract with Compo Ltd. Sleepy Head Pty Ltd is the entity that entered into contact with Compo Ltd on compensation insurance policy, and is treated as a separate and distinct entity from its employees. However, Sleepy Head Pty Ltd has the right to enforce a claim against Compo Ltd for the loss that one of its employees (Dozey) has incurred.

Question Two:

Sole Proprietorship

Lee’s business is sole proprietorship. This is the most common and simplest structure chosen to commence a business. This type of business is unincorporated and is run and owned by one person with no separate rights (distinction) between the individual and the business (Vossestein, 2010). The owner is entitled to all profits. For this reason, Lee has a right to buy himself an expensive home, car and an investment property. In the same way, the owner is responsible for all the losses, debts, and liabilities of the business. One of the advantages of sole proprietorship is that of easy tax preparation. The business is not taxed separately meaning that fulfilling the tax report requirements is easy for sole proprietors. In addition, the rates of tax are also the lowest of all forms of business structures (Davies, 2010).

Tax implications of sole proprietorship

There are tax implications of sole proprietorship. Since the business is indistinguishable from its owner and operator, taxation on sole proprietorship is simple and easy. The income earned in the business is the income earned by the owner if the business. The business owner reports the income and/or losses and expenses from sole proprietorship by filling out the standard Form 1040 and Schedule C. The profits and losses are recorded on the Schedule C form filed with the 1040 form of the owner (Vossestein, 2010). The amount at the bottom line from the Schedule is transferred to the personal tax return of the owner. This is an attractive aspect since business losses suffered may offset income gained from other business sources.  A sole proprietor should fill these forms and use the Schedule SE to determine the self-employment tax he or she owes. Sole proprietors are not required to pay tax on themselves even though they should pay unemployment tax on any workers of the business. However, they do not enjoy unemployment benefits when the business suffers (Vossestein, 2010).

Advice

Lee wishes to expand his business. His income and tax are rising. There are challenges often faced by sole proprietors in relation to raising money. This is because investors will not frequently invest as sole proprietorship does not sell stock. In addition, banks and financial institutions in general are hesitant to lend funds to sole proprietors because of the supposed lack of credibility in relation to repayment if the business does not succeed. Lee should consider incorporating his business operation because of a number of reasons. When a company decides to incorporate, it means that it is creating another taxpayer. Generally, governments charge taxes on their corporations and their citizens. If a business is not incorporated, all that relates to liability and taxation rest with the business owner. Incorporating a business involves a legal jurisdiction with only a small fee involved. In addition, there are other government fees levied during the incorporation process. Lee should seek a professional to assist in the procedure in order to ensure that it is done in the right way. Incorporating a business means creating a new legal entity that is a new corporate body with new presence and ‘soul’. Incorporation offers many benefits even if the business is owned by a single individual. These benefits include substantial tax benefits particularly when one sells a business, protection of personal liability to a large extent, greater control in transferring of ownership (Cahn, A., & Donald, 2010). Incorporation ensures a higher flexibility in individual financial planning, a company survives human death unlike in sole proprietorship, and it is easier to bring in partners and investors. This is appropriate for Lee as he might even incorporate his wife and kids into the business as partners.

The number one reason why people incorporate is because of the aspect of protecting one’s personal assets including their houses, cars, homes, or even bank accounts except when the owner as pledged the property as collateral. In this case, Lee will be able to protect his expensive home, car and an investment property. Incorporation is best way of protecting individual assets that one can get into the business (Cahn, A., & Donald, 2010). There are, however, other liabilities that one may not be unable to avoid by incorporating a business. For instance, if Lee fails to remit particular taxes, he could he held responsible as the company’s director. Company shareholders are not necessarily held accountable. Incorporation provides a possible tax shelter. There are various tax options that are available to corporations, and which are not available to partnerships of proprietorships. Through incorporating, Lee can create several profit-sharing, stocks, and pension plans that are favorable to the corporation owners. In most instances, a corporation can deduct one’s insurance and health premiums where this is not possible with sole trade business. In addition, one can pay salary to members of family, thereby reducing the overall tax burden of the family. When family members are shareholders to the business, they can benefit from lower capital gains taxes when they trade their shares (Hannigan, 2012).  A corporation is more attractive to investors when the corporation wishes to raise capital as the investors can buy shares of stock thus allowing the owner to raise the required funds without incurring any debts. The owner, in this case Lee can, therefore, avoid interest payments. Corporation shares can be distributed easily to members of family and other people and companies (Kraakman, 2009). This makes family and estate planning easier. Therefore, Lee should incorporate his business for purposes of growth and expansion.

 

References

 

Cahn, A., & Donald, D. C. (2010). Comparative company law: Text and cases on the laws governing corporations in Germany, the UK and the USA. Cambridge [etc.: Cambridge University Press.

Davies, P. L. (2010). Introduction to company law. Oxford: Oxford University Press.

Hannigan, B. (2012). Company law. Oxford, U. K: Oxford University Press.

Harris, J. R., Hargovan, A., & Adams, M. A. (2009). Australian corporate law. Chatswood, N.S.W: LexisNexis Butterworths.

Kraakman, R. H. (2009). The anatomy of corporate law: A comparative and functional approach. Oxford: Oxford University Press.

Taylor, J. (2010). A Social History of Company Law: Great Britain And The Australian Colonies, 1854-1920. Business History, 52(5), 857-858.

Verma, S., & Gray, S. (2009). The Development Of Company Law In India: The Case Of The Companies Act 1956. Critical Perspectives on Accounting, 20(1), 110-135.

Vickery, R., & Flood, M. A. (2012). Australian business law: Compliance and practice. Frenchs Forest, N.S.W: Pearson Australia.

Vossestein, G. J. (2010). Modernization of European company law and corporate governance: Some considerations on its legal limits. Austin: Wolters Kluwer Law & Business.

 

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