Dozed is a sole trader incorporated a company named ‘Sleepy Head Pity Ltd’ five years later after hole insured the business against fire or burglars to Risk Ltd. In February 2013, the company want to purchase the business from Dozed and the purchase price is consists of company shares and debentures secured over the assets of the company. Dozed became a shareholder and secured director of Sleepy Head Pity Ltd, workers compensation insurance taken out by him with Combo Ltd. In June 201 3, theft happened in company and Dozed got hurt when he try to find some stock back.
The company is insolvent and has liquidation due to financial crisis. Legal issues: Sleepy Head Pity Ltd is insolvent and cannot pay their unsecured creditors. Liquidator states that Dozens claim has been rejected. Insurance company also reject Dozens claim about his medical costs and company also won’t get the claim on their stolen stocks. Relevant case law: According to the case Salomon v Salomon & Company Ltd [1897] AC 21, one of the central principles of company law is company is a separate legal entity and is separate from its shareholders, directors and founder.
As decision states n Mascara v Northern Assurance Co Ltd [1925] AC 6192, there is a distinction between personal and company assets. Lee v Lee’s Air Farming Ltd [1961] AC 123 shows that a controlling shareholder or a director can contract with the company. Legal principles and legal reasons: Dozed can enforce his charge (security) against Sleepy Head Pity Ltd. The company actually can be treated as a separate legal entity from its members. The process of registration under the Corporations Act can be applied to distinguish whether the company set up legally and has separate independent personality.
As Sleepy Head Pity Ltd is validly registered with ASIA, it is in accordance with law process and is a legal entity. The company actually became a ‘person’ legally and different from Dozed. It has own rights and obligations and takes responsibilities with independent capital. The company and its members are two entities, adjusting company structure has no internal relationship with existence of company. Once the company independent on property, management, rights and responsibilities, it possess corporate personality no matter how many people control or own it.
In Salmon’s case, Salomon not only the only shareholder but also as a secured creditor with secured debentures, he has dual roles in his company, when they do the liquidation, company must pay the debts as an independent entity take responsibility of its property, Salomon can get claims as a secured creditor. In this case, Dozed is same like Salomon has dual roles in company. Because Sleepy is an separate legal entity, the debts under company’s name should be pay back by company, not by the founder or shareholders or anyone else, regardless of whether the shareholder is also a creditor.
Above all, Dozed as an secured creditor can get claims when company during liquidation process. Dozed can enforce the claim of Sleepy Head Pity Ltd against Risk Ltd to recover the value of the goods stolen if he transferred insurance to company. Dozed insure the business when he is a sole trader, the insurance policy is held by Dozed but he had no ‘insurable interest’ in Sleepy Head Pity Ltd. If Dozed did not transfer the insurance after he sale his business, the company’s assets are belong to company, not owned by creditors or shareholders.
The company as a separate legal entity not has any insurance policy with Risk Ltd under company’s name. In Section 124, a company can own its property in its own right and is a separate legal entity. In this case, company not insured with Risk Ltd against fire and theft because Dozed only insured his business when it is not a company. Therefore, the company cannot get claims from Risk Ltd to recover the stolen goods. Dozed can enforce his claim against Combo Ltd for the payment of his medical bills.
The company is a separate legal person distinct from its members, so it can have contract with its members, even if the member act in dual capacities as shareholder and creditor. Sleepy Head Pity Ltd had workers compensation insurance policy with Combo Ltd after incorporation, and Dozed is one of the company’s employees. It means the company already has contractual relationship with Dozed that insure the time he is at work. Dozed get injured when he retrieve goods on a ladder, Combo Ltd should give the claims of his medical costs because he has workers compensation insurance.
Question 2 In this case, we need to find out the best business structure suitable for Lee. Because he is plan to expand his business, look at each business structure to get a best one for him. There are four major business structures, sole trader, readership, company and trust. Sole trader is simple for director to control and as a sole business owner of entire money and business. That’s why Lee can use his own profit to buy himself a car and home. There are minimal statutory or legal requirements that need to be adhered to when a person is a sole trader.
However, if Lee’s business goes bankruptcy, he will lose everything including his own house and car. Lee has unlimited liabilities and also tax issues need to consider. A sole trader is taxable on the actual profits of the business as part of his personal income tax return at he personal rate of income and not just on the funds you withdraw. The ability to raise capital is limited. Partnership is belonging to two or more person engaging in business together. It is referred to as a ‘strategic alliance’.
All the partners share the responsibilities and risks even the liabilities involved in running a business. The partnership pays no tax though it must still lodge a tax return. However, when complications arise, without a partnership agreement, partnership can be difficult to dissolve, each partner is jointly and severally liable for the partnership’s debt. Partners also bears unlimited liabilities and will lose their own assets as it is with sole proprietorships. Company may cost Lee hundred dollars for the registration and other professional fees.
Once set up, a company is classified in law as a separate legal entity from its owners and shareholders. This effectively means in most circumstances, the shareholders of a company have limited liability from all the debts of the company. If the business goes broke they can only lose the value of the capital they have invested. Company in general also tends to give a better impression of an established business. The owner of a company can be easily identified and some record of the performance of the company is usually publicly available from the Companies Registration Office.
This does give a level of comfort to anyone who may wish to deal with the company. There are many tax advantages to a company. For example, money not withdrawn in the form of wages, is subject to corporation tax. There are also incentive schemes where new start up company is exempt from corporation tax and very large tax savings for corporate pension schemes. A trust is one of the most complex structures, as law does not recognize it as a gal entity. It can be a legal obligation binding a person to deal with property of others.
Most legal dealings are with the trustee who control the assets and complies with the terms of the trust deed and applicable law. There are different types which have been tailored to numerous purposes, and they are uniquely appropriate in some cases. In this case, Lee is going to marry and has children soon, so it will cost a lot of money to create a wedding and raise children. The best business structure for him to change may company. It is a common route when a new business is ensure of how large it will grow and whether the saving will outweigh the costs.
The following reasons are why he can thinks about being a company. Firstly, in some sectors, such as IT, it is hard to obtain contracts unless he trade through a company. Second, if he is taking risks such as ordering a large amount of stock for an order that could be cancelled, then there can eve a real benefit in the limited liability offered by trading as a company. Lee’s family won’t be affected by the liabilities. His own personal possessions are generally protected from any claim against the company.
Thirdly, there is more flexibility in handling Lee’s remuneration in such a way as to minimize the tax liability. This has become more apparent, making company an increasingly attractive option.
