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Corporate Law: Australian Case Study

Updated on June 29, 2017

The corporation laws in Australia are, by and large, borrowed from the UK Company Law. Its legal structure entails a unitary national statute which is the Corporations Act 2001. This particular statute is under the authority of the Australian Securities and Investments Commission (ASIC). However, all corporation legislations are reported to the Treasurer with references being made to the judgment of the courts as is the case in the United Kingdom.

In the Australian context, the term "corporation" is defined as a totally separate legal entity and one that is created by charter, legislation or prescription just like in the English law. However, the corporation sole is exclusion in terms of this definition of a corporation. In Australia, as it is in the rest of the world, a sole trader operates a business structure that is the simplest of them all. This is because it has the most inexpensive set up structure as it has fewer tax and legal formalities. In cases where the business name is different from the name of the owner, the registration of the business name must be done with ASIC. a sole trader operates his/her business as an individual including its control and management and can make any decisions she deems fit without any consultations from third parties. Therefore, all the debts that are incurred by the business are borne by the owner since s/he is legally responsible for the business and has a personal liability to any debts incurred thereof no matter the extent of the debts as there are no set limits.

Corporate Business Structures: A Comparison

The first scenario involves a case of a successful sole proprietor, Kate, who needs to explore options available to her to expand her business into a profitable venture that will be in line with the Australian corporate law and one that will present her with the best business corporate solution. The best thing to consider is whether it will be beneficial to trade as a company or as an individual. The decision has ramifications for taxation, legal and financial responsibilities, not to mention the amount of paperwork that will need to be completed. The structure to be chosen will entirely depend on the current personal situation and projected future plans. The most appropriate business structure to adopt will depend on a number of considerations which include tax implications, ownership, legal entity and liability.

A partnership will be disadvantageous for her since partnerships operate, more or less, under the same principles as those of sole proprietorships. This will not offer her the best chance for business development that she intends to have because some of her rights as a sole trader will be usurped by her partners who will now be involved in any decisions affecting the running and management of the business. However, she will enjoy a slight advantage when it comes to loss making because all partners are liable to contribute. This is not a significant advantage since she is not in the business to make losses but profits. These profits will however not be enjoyed fully because each member has a share in the business profits. She will now have the opportunity of considering the other option of moving into the limited liability company by considering arguments for and against such a decision. This is because choosing the wrong business structure could see her paying more taxes than necessary. She can choose to operate a limited company for the sole purpose of attracting potential customers who only do business with companies as opposed to sole traders. However, operating limited companies will also attract more expenses including higher accountancy fees, penalties for wrong entries and more rules and regulations. Others will include the payment of corporation taxes, recorded business transactions, including dividends and loans. A Pty company will pay tax at the corporate rate of 30% but a sole trader will only pay tax depending on their personal marginal rate because income derived from the business is considered as the trader’s assessable income (John, 2008).

The Corporations Act provides that the majority of decisions on the operations of a company be made by the directors. The Act also provides for decisions that can be made by shareholders. This is a restriction she has to contend with since no such restrictions are placed on the sole trader, who has the leeway of making all the decisions about the business. Pty companies also have restrictrictions in terms of liabilities. It is limited to the shareholder to the extent of the unpaid capital of shares owned (John, 2008). If a shareholder does not have any debts in relation to his/ser shares then their liability is zero. If, for example, a company incurs a debt no creditor can recover the debt from the shareholder. This is also the case with directors unless the company has been given the go ahead to trade after insolvency. But for the sole trader the the debt is not limited. Loans that are in respect to their particular businesses will be secured by their personal assets including property and homes. Christina started a business of selling handcrafts at craft fairs and through the Internet as a sole trader the income was small but it grew steadily and hit the threshold where corporation tax was more preferable than income tax and then she decided to register a limited company. She has not yet started operations yet but she now has a business name and she is now considering separating the business risk from her family to a limited company.

Employee Entitlement Claims versus Company and Directors

The second case scenario pits employees against the directors and the company in claiming for their entitlements in terms accumulated holiday, superannuation, long service and leave claims. The company in question, Kids Clothes Pty Limited and its sole director Myra, has ten employees and has transferred its assets to another company. The director has, however, retained the employees in the company though the company is technically regarded as insolvent. How are the employees supposed to get their entitlements and what legal actions can they take on the director personally? The law and economics theory demonstrates that employees are powerless against nonpayment of their entitlements and this has made the federal government to introduce legislation to empower the commissioner to recover such dues from directors personally (Anderson, 2008).However this has proved quite ineffective owing to the separate legal entity principle which protects such directors from bearing liability for corporate debts. But this corporate veil can be lifted to ensure that the service of employees to such companies does not go to waste.

In Australian law, the limited liability company is regarded as a separate entity which has all the rights and obligations to like any other individual and has a right be sued or can sue (Corkery & Bruce, 2008).

However, the shareholders of the company or the owners can limit their personal liability and are not liable for any liabilities incurred by the company. This then becomes problematic to the employees because they have no legal grounds whatsoever to sue the directors for compensation as a result of losses made by the company. In cases of insolvency, it means that your employment has been terminated but if the company is still in administration then an administrator will be appointed to oversee if the business can be sustained or can be transferred in part or whole to a new buyer. But here is a case where the company has not been transferred but only its assets. The problem arises here because the company has not been transferred and the employees are still part of this particular company and have no interest in the other company since it is not their employer. This means that the company still exists and therefore it should be in administration since it is technically out of operations. In an administration, employees cannot make any legal claims without the consent of the courts or the appointed administrator (Dale, 2000). The director of the company has put the employees in a precarious position and only an administrator can be able to ascertain the level of compensation the employees can have. It is therefore in the interest of the employees to seek the guidance of an administrator who will within a 14 day period ascertain whether the employees need to be offloaded with costs and this will then make the employees to enjoy the status of ordinary creditors and will be treated the same way as any other creditors and suppliers. But in case the administrator chooses that the employees be retained after the 14 day window period they are regarded as preferential creditors where they will stand a better chance of recovering the said entitlements if and when the time comes.

The Australian government offers financial assistance to cover certain employment entitlements but not all. This is a safety net scheme aimed at cushioning the distressed employees and includes unpaid wages of up to 13 weeks, unpaid annual leave and long service leave, redundancy pay and payment in lieu of notice. However, unpaid superannuation guarantee contributions are not claimable and can only be pursued through the Australian Taxation office. However in the present case the director will not be liable for any compensation as the law protects her. However the Explanatory Memorandum For Insolvency Legislation Amendment Bill 1993 (Cth) was for the purpose of improving the powers of the commissioner to recover such dues (Ronald, 2002). It had the intention of making directors liable for unremitted amounts so as to confront the problems of debt escalations.

Conclusion

There is a raging public policy argument to the effect that the Commissioner of Taxation should be able to collect taxes efficiently including the recovery of unremitted taxes but employees are left powerless at the hands of merciless directors in respect to nonpayment of their entitlements as opposed to the taxation authorities. They do not have the ability to diversify their risk factors of nonpayment. If for instance, their employer becomes insolvent they suffer tremendously by first and foremost losing their jobs in addition to losing their accrued benefits. It remains to be seen if the threat of personal liability on directors will act as a deterrent measure to curb this injustice.

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