Week 7- Business Structures and Agency

Conflicts of interest -

the agent should not put themselves in a position where the best interests of the principal are in conflict with the agent's own personal interests. If there is such a conflict of interest, the agent must make full disclosure to the principal. Example, the agent should not sell their own property to the principal without informing the principal beforehand.

2. Partnership

A person is a partner in a partnership if they and at least one other person directly own and operate a business together. Partners generally have 'mutual agency'. *Each partner is both the principal and the agent of the other partners. *This means that each partner is liable for the actions, contracts and debts of the other partners. A partnership is NOT a separate legal entity. Each partner has unlimited personal liability for the debts of the partnership - mutual liability. There are no formal steps that need to be taken to form a partnership. A partnership is 'the relation which subsists between persons carrying on a business in common with a view of profit'. If each of the elements of this definition is satisfied a partnership exists, regardless of the stated intentions of the parties. A partnership can exist then, even if the parties don't realise it or if they try to call it something else. Persons: There can be no more than 20 partners (subject to certain exceptions). Carrying on a business: There must be some continuity or repetition of trading activities. In common: Each person must be acting on behalf of the others as well as on their own behalf. With a view of profit: If the persons are carrying on a business together for a non-profit purpose they will have formed an unincorporated association rather than a partnership

1.Sole trader

A person is a sole trader if they directly own and operate the business by themselves. A sole trader: may engage employees but they are the sole owner of the business, has sole responsibility for raising the funds to start the business, has sole control over the operation of the business, and is entitled to all of the profits of the business.

What is an agent?

A person who acts on behalf of another in dealing with a third party is called an agent and the person they are acting for is called the principal. Core to how our legal system treats this relation we have Principle has authority over the agent , The agent binds the principle, Agent negotiates with third party to form a contract NEED TO DETERMINE WHO IS WHO TO START WITH

4. Trust

A trust arises whenever a person (individual or corporation), called the trustee, owns property for the benefit of one or more other people, called the beneficiaries. A trust is NOT a separate legal entity. The trustee is the legal owner of the trust property and the beneficiaries are the equitable owners. The trust property can be a single asset or an entire business. The person who sets up the trust is known as the settlor; they can be the original owner of the trust property. The trustee can be a company. The trustee may or may not be one of the beneficiaries. The terms of the trust may be set out in writing in a trust deed. Because the trustee owns the trust property on behalf of the beneficiaries, the trust property is not available to the trustee's creditors in the event of bankruptcy (if trustee is an individual) or liquidation (if trustee is a company). Trusts are mainly used as a way of distributing wealth to family members, or as a tax effective way of conducting a business. The trustee has a fiduciary obligation to look after the trust property for the beneficiaries. The trustee distributes the income arising from the trust property to the beneficiaries.

Partnership Advantages and Disadvatages

Advantages: Few formalities - ease and low cost of formation More people to contribute ideas, skills and capital Privacy - partnerships do not have to be registered with any government authority Disadvantages: Unlimited personal liability Lack total control as an owner Mutual agency combined with unlimited liability, makes it important to only be a partner with people you trust

Company Advantages and Disadvantages

Advantages: Separate legal entity Limited liability Perpetual succession (unlimited life) More sources of capital Expert managers to run the business Shares can be transferred (esp. in public company) Disadvantages: Costs of establishment and ongoing fees - can be expensive Limited rights as an owner Onerous administrative requirements Lack of privacy due to reporting and disclosure requirements to government Legal responsibilities imposed on company directors

Implied actual authority

Agency can also arise by implication. For example: when two people go into business as partners, there is an implied grant of authority by each partner to the other authorising them to act on behalf of each other in relation to matters incidental to the partnership business. Whenever an agent is expressly authorised to act on behalf of a principal there is a grant of implied authority to do all things incidental to carrying out the main task.

Indemnity

All agents are entitled to be indemnified by the principal, that is, to be reimbursed for payments made, expenses incurred and liabilities assumed while carrying out the principal's instructions.

Liability of the agent pt 2

An agent will be liable to the third party for breach of warranty of authority if all of the following requirements are satisfied: The agent claimed that they were making the contract on behalf of the principal; and The agent did not in fact have authority to act on behalf of the principal; and The third party relied upon the agent's representation, and would not have entered into the contract in the absence of the representation.

Apparent authority-IMPORTANT

An agent will have apparent authority to act on behalf of the principal if: 1. The third party did not know that the agent did not have actual authority.- customer must know the agent to have authority 2. The principal 'held out' the agent as having authority to act on the principal's behalf; for example, by appointing the agent to a particular position, or by having held the agent out as having authority in the past- must do something to make 'me' think that the agent has authority 3. The third party relied upon that holding out, and reasonably assumed that the agent had actual authority- if something is too true to be real it's unlikely that person has authority (barman sells owners Ferrari for $100) If all three requirements are satisfied, the principal will be legally bound by the actions of the agent, even if the principal expressly told the agent that the agent was not to enter into such a contract or act in that manner on the principal's behalf.

Public Company

Any company that is not a proprietary company is a public company. Public companies can be listed on the stock exchange or can be unlisted. They are distinguished (usually) by the abbreviation 'Ltd' in the company name. They must hold an annual general meeting every year. They must have at least 3 directors.

Liability of the agent pt 1

As a general rule, any deal negotiated by the agent on behalf of the principal is between the principal and the third party. The agent is merely an intermediary and is not personally liable. An agent will be personally liable to the 3rd party where: *Intentional liability *Undisclosed principal *Breach of warranty of authority (focus of BSB111)

Examples of principal agent

Employer and employee Seller and auctioneer Client and solicitor / real-estate agent / stock broker Corporation and director Partner and partner

Authority by ratification

Even if an agent acts without actual or apparent authority it is still possible for the principal, upon later learning of the agent's action, to ratify that action by authorising it retrospectively. As long as the principal ratifies the agent's act within a reasonable time of the act, it is as if the agent was acting with the principal's actual authority at the time. Bolton Partners v Lambert

Concluding the agency - termination by the parties

The agent completes the tasks they were appointed by the principal to complete. The duration of the appointment established by the principal (if any) expires. The principal and the agent agree to terminate the relationship. The principal dismisses the agent because they have breached the contract between them or breached any of the duties owed by the agent to the principal. The principal revokes or limits the authority of the agent to act on their behalf

The agents duties

The agent owes a range of duties to the principal: *Duty to follow instructions *Duty to communicate information *Duty to act personally *Duty of care (carry out instructions with due care and skill) *Duty to act in the best interests of the principal *Avoid conflict of interest; make full disclosure *Not receive a secret commission *Duty of confidentiality *Duty to account

Partnership vs joint ventures

a joint venture is a contract between two or more parties to cooperate in some project or undertaking. Members of a joint venture are not partners and do not have mutual liability. Important that the joint venture agreement is drafted carefully because if the arrangement satisfies the elements of a partnership, it would be regarded as one, regardless of what the parties call it.

Secret commission -

payment made by the third party to the agent without the principal's knowledge and permission and intended to induce the agent for acting on behalf of the principal in a way that favours the third party.

Private (or proprietary) company

privately owned company with less than 50 non-employee shareholders and is prohibited from selling its shares to the public. It is distinguished by 'Pty Ltd'. Only requires one director. Possible for a proprietary company to have a single director and a single shareholder who are the same person.

Selecting a business structure- consequences

The person's choice of business structure will have important consequences in terms of: the ease and cost of setting up the business, their legal and financial liability, the way they pay tax, their ability to raise finance, and their ongoing regulatory obligations

3. Company

A corporation is an artificial legal person separate from its owners and able to make contracts, own property and be a party to litigation in its own name. A company is a type of corporation; one incorporated under and regulated by the Corporations Act 2001 (Cth). A company is created by registration by the Australian Securities and Investments Commission (ASIC). A company must have: *at least one owner or member (called a shareholder), and *at least one director, who is responsible for managing the company's business. It is possible for the director and the shareholder to be the same person, although in larger companies there is a separation of ownership and control.

Company- Seperate Legal Personality and Limited Liability

Separate legal personality: A company - can incur debts in its own name, can hold property in its own name, can be the plaintiff or the defendant in legal proceedings, continues unchanged even if the owners sell it to another person, and can enter into legal relationships with the owners. Limited liability: The owners are not liable for any debts or other obligations of the company beyond the subscription price of their shares. Look at slide 22-

Written Partnership Agreement

Should set out: The names of, the partners and the name of the partnership, the nature of the business, the term of the partnership, each partner's contribution, sharing of profits and losses, authority of partners, decision-making, duties and obligations, admitting new partners, withdrawal or death of a partner, dispute resolution

Remuneration

The remuneration may be a flat fee, a commission based upon the application of a formula to a transaction amount, or some other arrangement

Advantages and Disadvantages of being a Sole Trader

The sole trader has unlimited personal liability for the debts and other legal obligations of the business. There are no formal legal requirements that need to be satisfied to establish this type of business structure. Advantages: Very little formalities to comply with Full ownership means the owner makes all decisions and gets all profits Disadvantages: Personally liable for any business debts (unlimited liability) Limited sources of capital One person may not have all the skills needed to be successful

Selecting a business structure

When starting a new business one of the most important legal questions a person will have to answer for themselves is which business structure they will adopt. The most common types of business structure are: the sole trader, the partnership, the trust and the company. These business structures are not always mutually exclusive

Express actual authority

The principal can expressly authorise the agent, in writing or verbally, to act on the principal's behalf. The authorisation should clearly state the duration of the agent's appointment, the precise scope of the agent's authority and (if relevant) the agent's entitlement to any commission or payment.