Companies Sole Trader Things Need Consider

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Companies Sole Trader Things Need Consider

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Question:

Discuss About The Companies Sole Trader Things Need Consider?

Answer:
Introducation

A company is a business entity which is framed once a company is registered as per the statutory requirements of lay down by ASIC. A sole trader ship is a business wherein the owner and management lies in the hands of one person and there is no requirement of any kind of registration, but, a partnership is a business wherein two or more people join together with a common objective and with the aim to earn profits and share losses. (Gov, 2017)
However, it is found that a company as a business structure is found to be preferable because of several reasons: (Cleardocs, 2010)
Limited Liability – In a company, the liability of the shareholders is limited to the extent of their value of the shares. Thus, in case the company incur any liability then the shareholders will only liable to pay to a limited extend;
However, in case of a sole trader ship or the partnership, the liability is not limited but the sole traders or the partner are liable to face the liability to the fullest. The chances of bankruptcy is very high when the business is not able to meet its financial constrains.
Loan – In a company, loan can be secured on the assets of the company and at times upon the guarantee of the directors. thus, the personal assets of the shareholders or the directors are not at risk;

But, in case a loan is to be taken by a sole trader or a partnership then it is the assets of the sole trader or the partners which are at risk and thus makes them less favorable when compared with a company
Capital rising – In case of a company, the capital rasping is easy as the company can offer its shares and thus raise capital. But, in case of a sole trader ship, raising capital requires taking loan from banks and other financial institution which requires lots of paper work and is expensive; (Price, 2014)
Tax – The tax rate for a company is 28%-30% flat. A sole trader pays tax as per their marginal rates. Whereas in the case of a partnership each partner is liable to pay their own tax on their partnership income. Thus, there is no personal tax that is imposed on the shareholders and the same is borne by the company as a separate legal entity.
Retain profits – The company has the power to retain profits which can later be used for the growth of the company, but, the same is not permissible in case of a partnership or a sole trader.
Separate legal entity – The Company has a separate legal entity, thus, the directors and shareholders are not same as a company and the acts of the company is its own (Salomon vA Salomon & Co Ltd [1896]). But, in case of partnership and the sole trader the acts of the partnership or sole trader are not separate but are considered the acts of the partnership or the trade ship
Now, Richard has a grove and has purchased his neighbor’s adjoining property with a view to expansion. His two sons, David and Liam, want to establish business and need finance to expand the business.
Sole trader ship is not possible as it can be operated only when there is a single person but now including David and Liam and Richard, there are three people who intend to establish a business.
Also, they need require capital for expansion. Thus, operating by way of a company is a better choice and it provides tax gains which is not present in case of a partnership.
Thus, operating by way of a company is a better choice.
The next issue is the requirements that must be met in order to register the company.

Law and application
In order to register any company the main requirements that must be met are: (ASIC, 2017)
The first step is that the intended party must make sure that the company is a right choice of business establishment.
A company can be private or public. A private company is a company wherein the liability is limited to the extent of the shareholdings of the holders.
It is submitted that Richard, David and Liam after considering the benefits of the company establishes that the company is the best kind of business structure that must be operated by them;

The company name must be selected – When the name is to be selected then the main requirements that must be observed are:
It must not be identical to some other name;
Some of the terms cannot be a business name, that is, incorporated, royal, trust, bank, etc.
Any name that misleads the people regarding the activity of the company is not permitted or if illegal or offensive.
A company must show its legal status, that is, whether it is Proprietary Limited or ‘Proprietary’.

How the company will operate must be decided, that is, by replaceable rules or constitution, or by both.

A proprietary company must have at least 50 non-employee and the company can either be unlimited with share capital or limited by shares.
Every officer of the company must comply with the obligations as an officeholder, that is, he must make all the financial statements, must update ASIC whenever any changes are made, pay requisite fees, etc.
Written consent from director, secretary and member must be attained that they are fulfilling the respective positions.

The company must then be registered either with the help of private service providers (PSPs) or by lodging the application with ASIC.
Form 201 must be filed with ASIC for the registration of the company.

Once the application is processed then ACN and certificate of registration is provided.
A corporate key is also provided.
Once the company is registered then the name must be displayed on the business, its documents.

Thus, the above steps must be compl with for registration.
Now, the name Ridali can be use as the company name provided it is not identical to any other name. The name “Rich’s Guaranteed Olives” cannot be used as a company name as it misguide people that the company is provided guaranteed olives.

Applicable law
As soon as a company is registered, it is considered as a separate legal entity in the eyes of law. The company is an artificial legal person and has the capacity to sue or being sued in its individual capacity. But, since a company does not have a heart of its own thus it requires natural person who represent the company and take actions on behalf of the company. The directors are the authored person and have the ability to manage the affairs of the company. There are series of duties that must be complied with by these officers. Since there is separation of ownership with the separation of power to manage the affairs the company, thus, Statutory Derivative Action (‘SDA’), are established to bring the balance amid the two powers. (Hofmann, 2005)
When the company is not willing to bring an action on its own wrongs that are committed by the company itself, the SDA authorizes the shareholder and officers to bring an action against such wrongful acts (Westgold Resources NL v Precious Metals Australia Ltd [2002].
As per section 236 of the Act, any member or former member; any person who is entitled to be the member or anybody corporate or officer or former officer are authorized to bring proceedings on company’s behalf provided the requirements of section 237 are comply with. (Willcocks, 2001)
Section 82A of the Act submits that an employee or former employee of is also considered as an officer of the company and thus is authorized to bring the SDA. (Macmillan, 2003)
As per section 237 of the Act, the applicant must satisfy to the court that are full chances that the company itself will not take any actions for the wrongful proceedings; that the applicant is acting in good faith (Swansson v Pratt [2002]); that if the leave is approved then it is in the best interest of the company and there is a serious issue that needs to be tried.
It is necessary that if all the criteria are met, then, the court may grant the application for SDA.
Many a times the company’s separate legal entity principle is disregarded and the distinction amid its officers and the company is set aside and the acts of the company are held to be the acts of the officers. This is called lifting of corporate veil and is normally done in order to bring fairness in the matter. Some of the instances wherein veil is considered to be pierced are:
In case of subsidiary actions – If it is found that any subsidiary is involved in any tortuous action then the liability arose because of such tortuous act will fall upon the holding company if the holding company is controlling the actions of the subsidiary (CSRLIMITED & ANOR -v- YOUNG (1998). Also, if the subsidiary company is the agent of the holding company then in such situation, the holding company will be held answerable for all the actions of the subsidiary (Smith, Stone and Knight Limited v Birmingham, 1939).
In cases of façade or sham – Further, when company is made with the aim to incur any kind of sham or façade, that is, the company is established to hide the true intentions, then the company can be disregarded and the officers can be held directly liable for the accounting of the company.
Action of Terry against CMS
It is submitted that Terry is an employee of Cosmo Mining Services Pty Ltd (CMS) which is the subsidiary of Cosmo Mine Ltd (CM). Recently, it was found that the CMS’s mining activities have contaminated a nearby river which supplies the water to the 2 mine and Gunbarrel. Now, a number of Gunbarrel residents and former employees, including Terry, have contracted cancer because they drank the contaminated water.
Now, it is necessary that actions must be taken by the company shareholders itself against the action of CMS. If no action is undertaken than Terry can take a SDA action alginate CMS. As per section 82A, Terry is the former officer of CMS. Thus, if Terry comply with the requirements of section 237 of the Act then he can apply for the proceedings of SDA.
It is submitted that there are full chances that CMS will not any action alginate its own wrongdoings. Also, Terry is acting in good faith and if the leave is approved then it is in the best inters of the company itself and it is a serious issue that needs to be tried as it is hampering the hazards of many people.
Thus, Terry can take SDA action against CMS.
Terrey action against CM
Now, CM is the holding company of CMS. CSM is involved in a tortuous actions and thus the liability of its negligence will fall upon CM as CM is controlling the actions of CMS. Thus, CMS is an implied agent of CM. thus, by applying the rules of CSR LIMITED & ANOR -v- YOUNG and Smith, Stone and Knight Limited v Birmingham, it is submitted that Terry can hold CM liable for the actions of CMS.
Terry action against Lazarus Pty Ltd
Now, Lazarus Pty Ltd is formed by CMS shareholders so that the business of CMS can be sold to Lazarus Pty Ltd and CMS can be wound up in order to shed away its liability. Thus, it is an action of sham as the true purpose of creating Lazarus Pty Ltd is to protect CMS from its liability.

Conclusion
Thus, Terry by complying with the requirements of section 237 of the Act, can take SDA action against CM. Also, the veil can lifted and CM can be held directly liable for the acts of CMS as CMS is an agent of CM. Also, the establishment of Lazarus Pty Ltd can be disregarded as it is an action of sham and façade.

Reference List
Fiona Macmillan (2003) International business Law, Volumes 2-2002, Hart Publishing.
Melissa Hofmann (2005) ‘The Statutory Derivative Action in Australia: An Empirical Review of its Use and Effectiveness in Australia in Comparison to the United States, Canada and Singapore’ Bond University.
CSR LIMITED & ANOR -v- YOUNG (1998).
Smith, Stone and Knight Limited v Birmingham (1939).
Salomon v A Salomon & Co Ltd [1896] UKHL 1.
Swansson v Pratt [2002] NSWSC 583.
Westgold Resources NL v Precious Metals Australia Ltd [2002] WASC 221
ASIC (2017) Steps to register a company (online). Available at: https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/. Accessed on 4th October 2017.
Cleardocs (2010) Companies vs Sole Traders: Things you need to consider (online). Available at: https://www.cleardocs.com/clearlaw/business-structuring/companies-vs-sole-traders.html. Accessed on 4th October 2017.
Gov (2017) Business structure (online). Available at: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure. Accessed on 4th October 2017.
James price (2014) Pros and cons of business structures: Sole Traders, civil-engineering and Partnerships (online). Available at: https://www.jpabusiness.com.au/blog/james-price/2014/04/13/pros-and-cons-of-business-structures-sole-traders-companies-and-partnerships. Accessed on 4th October 2017.
Peter Willcocks (2001) Shareholders’ Rights: Statutory Derviative Actions (online). Available at: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/November_2001,_Lawyers_Education_Channel,_Shareholders__Rights__Statutory_Derviative_Actions.html. Accessed on 4th October 201

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