1.3 SOLE TRADERSThe simplest form of Business structure is the sole trader. The meaning of a sole trader: a single person undertaking a business activity or enterprise for profit.The Features of a Sole Trader:∙Limited life∙Limited access to finance∙Unlimited LiabilityFormation: is simple and inexpensive and may require compliance with the following:∙Section 5 - Business Names Act 1962∙ABN : Australian Business Number under the GST Legislation1.4 ASSOCIATIONSPeople in our society come together in associations for many and varied reasons. An association is a body of two or more persons coming together in an organization to promote either social or economic goals or interests. Associations may or may not include carrying on business with a view to making a profit. Economic goals clearly involve profit-motivated undertaking, while social goals include many things ranging from cultural, scientific, political, religious sporting and recreational endeavours. Associations historically have been both incorporated and unincorporated. Until theC18th favoured groups and associations were incorporated or given corporate status at the prerogative of the crown. In the late C18th and early C19th legislation was introduced to prohibit certain associations for fear that these groups would disturb the peace. It was in those times that it became accepted that people had freedom to associate.While many groups formed into unincorporated associations their legal status was in limbo, because while they were not unlawful they were not legally recognised. In short they had no legal status. It was difficult to use the legal system against the associations and at the same time the associations could not assert or exercise their rights within the legal system. The common law position of unincorporated associations has changed very little since their initial development, save for imposing some risk on their officers.Associations can also incorporate by registration under various legislative provisions, including the Associations Incorporation Act 1981 (Vic) and other state equivalents.Associations may also register as Non-profit, that is, charitable Companies under Sect 150 (Company limited by guarantee) of the Corporations Act 2001. A partnership (orfirm) by contrast, is also an unincorporated association but under the definition in the Partnership Act 1958 is set up to make a profit.Unincorporated AssociationsDefinition of Unincorporated Association:There are a number of definitions of associations that can equally apply to incorporated as well as unincorporated associations. The Vic Associations Incorporation Act 1981 Sect 3 defines "association" as association, society, club, institution or body formed or carried on for any lawful purpose and having not less than 5 members. There are more expansive definitions in the equivalent state legislation, which add the following, "but not for pecuniary gain to its members". You can consult Sievers, Associations Legislation in Australia and New Zealand for further discussion on definitions. There are also common law definitions and these can be found in Wise Vs Perpetual Trustees Ltd [1903] AC 139, which defines a club. Lawton L J in Conservative Central Office V Burrell [1982] 2 All ER 1 defined Unincorporated association as, two or more persons bound together for one or more common purposes, not being business purposes, by mutual undertakings, each having mutual duties and undertakings, in an organization which has rules which identify in whom control of it and its funds rests and on what terms and which can be joined or left at will. The bond of union between the members of an unincorporated association has to be contractual.The HC in Cameron V Hogan [1934] 51 CLR 358 defined an unincorporated association as follows;"they are for the most part bodies of persons who have combined to further some common end or interest which is social, sporting, political, scientific, religious, artistic or humanitarian in character or otherwise stand apart from private gain or material advantage".The Legal Status of Unincorporated Associations:Unincorporated associations have no legal status, they are legal non-entities, which means these associations have no separate legal existence in the eyes of the law. They do not exist separately in law from their members, so on the formation of an association or a club, it does not have an independent existence.Note: a number of cases relevant to Associations can be found in Chapter 9 of Latimer and other general business texts.Activity M1-RA 1Can an unincorporated association sign a contract or own property? Why or why not?1.5 JOINT VENTURESS.A.Williston, "Treaties on the Law of Contract"Definition of Joint Venture: ...an association of persons, natural or corporate, who agree by contract to engage in some common, usually ad hoc undertaking for joint profit by combining their respective resources without, however, forming a partnership in the legal sense, or corporation; their venture each of whom is both principle and agent as to the others within the scope of the venture over which each venturer exercise some degree of control.Corporations Regulations: Reg 7.6.01(7): In this regulation: Business Joint Venture means a contractual agreement between 2 or more parties for the purpose of carrying on a business undertaking.Also see Definition of Joint Venture at:- Section 4J Trade Practices Act- ITAA – has its own definitionFormation and Governing Law: A Joint Venture itself is not a separate legal entity. Characteristic of a Joint Venture:- Joint ventures hold property interests as tenants in common- Their liability is several- Venturers can dispose of their interest (subject to agreement) whereas in Partnership partners can only assign their interest- Manager appointed by Co-venturers to venture- Venturers not agents for each other / Compare with Partnership- Ventures can receive share of profits in kindAdvantages of Joint venture:1. Joint venturers are not agents for each other. Compare to agency principles in s9 of Partnership Act2. More favourable tax treatments on venturers accounts under Div 330 of ITAA 19973. Joint ventures can dispose of share of product in any chosen manner, subject to agreement4. Easier to transfer or assign interest, without consent5. Where no fiduciary relationship and no agency relationship allows venturers to compete against each other6. Foreign Companies may get certain tax advantages in joint venture7. Joint venture is not recognised as quasi entity of firmWhat is the legal status of a joint venture:1. Is it a separate legal entity?2. Can it be a partnership?3. Can it be a corporation?1.6 TRUSTSDefinition: “... an obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of another person (the beneficiary) or for the advancement of certain purposes”Types of Trusts:∙Express Trusts∙Non - Express TrustsLegal requirements to create a trust:Property Law Act 1958 - s53Unit Trusts: collective investments or Managed InvestmentsDefinition: “....as one which derives income, often from the carrying on of a business, under a deed which contemplates “capital” being represented by units, usually of an equal size, where the number of units held determines the entitlement of the unit holder to an annual distribution of net income and to their interest in the assets of the trust....."Managed Investments are regulated under the Corporations Act 2001 Chapter 5C sections 601EA – 601QB – See s9 Corporations Law for Definition of Managed Investment Scheme.Forms of Managed Investment:- Mortgage Trust- Property Trust- Equity Trust- Cash Management TrustBenefits of unit trust investment.Trustee and Trustee Companies Act 1995Trustee Power, Duties & Liability:∙Must know trust instrument∙Duty to act bona fide, that is, in good faith and in the interests of the beneficiaries∙Duty to keep accounts and provide information to beneficiaries∙Duty against delegationLiability of Trustee: Trustee is personally liable for all dealings entered into on behalf of the trust, although the trustee has a right of indemnity.Activity M1-RA 3Who is the legal owner of the assets of the trust?1.7 PARTNERSHIPSThe Law of PartnershipPartnership is the primary unincorporated form of association used for business activities. It is commonly used in certain professions such as law and accounting and thus warrants examination by way of comparison with the registered company. General principles:1. Partnerships are not a separate legal entity2. Partners have unlimited liability3. Generally there is no requirement to registerPartnership Act 1958 (Vic) –See Partnership Act 1958 at .au or see Support Materials: Business Names Act and Partnership Act in the Resources section of this unit.What is a Partnership?Section 5(1) of Partnership ActPartnership is the relation which subsists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership within the meaning of Part 5.Note: Tax Commissioner takes different view of Partnership for tax purposesSect 4. Def of Business; includes every trade occupation and profession.Sect 4. Def of Business; includes every trade occupation and profession.Three elements of Definition of Partnership:Many cases that consider the elements of what constitutes the definition of partnership can be found in Chapter 9 of Latimer.Element 1. A business must be carried on.Smith v Anderson [1880] 5 Ch 247French v Styring [1857] 2 CB (NS) 351Turnbull v Ah Mouy [1871] 2 AJR 40Checker Taxi Cab Co Ltd v Stone [1930] NZLR 169Element 2. Business must be carried on in common.Keith Spicer v Mansell [1970] 1 WLR 333Lang v James Morrison & Co [1911] 13 CLRKeith Murphy v Custom Credit Corporation Ltd [1992] 6 WAR 332Amadio Pty Ltd v Henderson [1998] 81 FCR 149Element 3. View to profit:Keith Spicer v Mansell [1970] 1 WLR 333Section 6: Rules for determining the existence of a Partnership.(Many cases that consider the rules for determining the existence of partnership can be found in Chapter 9 of Latimer)Rule 1. Co-ownership of propertyDavis v Davis [1894] 1 Ch 393Rule 2. Sharing of Gross ReturnsCribb v Korn [1911] 12 CLR 205Rule 3. Sharing of Profits and LossesCox v Hickman [1860] 8 HL Cas 268Re: Ruddock [1879] 5 VLR 51Walker V Hirsch [1884] 27 Ch D 460Re: Megeuand; Ex parte Delhosse [1878] 7 Ch D 511Formation of PartnershipBusiness Names Act 1962(ABN) Australian Business Number - under the new tax systemIf there is a Partnership Deed the Instruments Act 1958 may require that it be in writingSect 115 Corporation Law Restrictions on size of partnerships to no more than 20 persons. The 20 persons rule was abolished in the UK in 2004.Reg 2A.1.01 Part 2A.1 Size of Partnerships or Associations. Corporations Act 2001 s115(2). Professions that can have more that 20 partners.- Accountants 1000- Lawyers 400- Architects, pharmacists, vets 100- Actuaries, stockbrokers, doctors 50Salaried PartnerLynch v Stiff [1944] 68 CLR 428Dormant PartnerLimited Liability PartnershipsPartnership Act 1958 amended introducing limited liability Partnership on 12th August, 1992A limited Partnership must apply and be registered under the Act. – Sect 54A limited Partnership consists of two types of partners.∙General Partner- manager business of firm and has unlimited liability∙Limited partner- investor - takes no part in management. Liabilitylimited to amount contributed to the capital of the firm.Sect 62 deals with liability where a general partner becomes a limited partner.NB: England: Limited Liability Partnership Act 2000 (UK)New Part V was added to the Partnership Act with the: Partnership (Venture Capital Funds) Act 2003Commenced on the 2nd of December 2003∙broadly the act provides for the registration of Incorporated Limited Liability Partnerships (ILP) to be formed and registered under the act.∙the ILP only applies to capital venture partnerships also registered under the Venture Capital Act 2002 (Cth) – See section 88Sect 83 provides that incorporated limited Partnerships is formed and registered under this part.Sect 84: provides that incorporated limited Partnerships is a body corporate with legal personality (separate legal entity) and perpetual succession, common seal, can sue and be sued.Sect 85: provides that incorporated limited Partnerships must have at least one limited Partner (which can be a Company), and at least 1 but not more than 20 general partners (any of who can be Companies)Sect 86: There must be at all times a written Partnership agreement in force. Thus Partnership agreement operates as a contract between incorporated limited Partnership and each partner.Sect 96: Relationship of partners to others:- general partner not agent of limited partner so their acts do not bind limited partner - limited partner not agent of general partnerSect 96: Relationship of partners to others:∙general partner not agent of limited partner so their acts do not bind limited partner∙limited partner not agent of general partnerSect 98:- limited partners must not take part in management of the business of the ILP and if the do their acts will bind the ILP, but their liability will be limited to whose debts that the ILP cannot satisfy.Victoria and NSW to date have 3 types of Partnership- general partnerships- Limited Liability Partnerships- Incorporated Limited Partnerships.Activity M1-RA 4a) What are some of the important indicators of a partnership? See s.6, Partnership Actb) What was the outcome and reasons for the decision in Cribb v Korn (See Latimer or Baxt)c) What is the difference between a ‘general partnership’ and a ‘limited partnership’?When are limited partnerships usually used?Agency and Partnership:Section 9 Power of partner to bind the firmEvery partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.Elements of s91. Business of the kind carried on by the firm.Mann v D'Arcy [1968] 2 All ER 172Mercantile Credits v Garrod [1962] 3 All ER 11032. Business carried on “in the usual way”Goldberg v Jenkins [1889] 15 VLR 36Higgins v Beauchamp [1914] 3 KB 11923. Knowledge of the third party.Activity M1-RA 5Consider the facts of Mercantile Credit v Garrod [1962] 2 All ER 1103G&P were partners in a garage which let lock-up garages and repaired cars. G was a passive partner. There was a term in the partnership agreement that the firm would not buy or sell cars. Without authority, P sold a Mercedes Benz to Mercantile Credit (MC). P had no title to the car. When MC sued for the return of the money the question was raised: Was G liable as a partner?A Case Study Example:Partners Liability for contract:Sect 13 - contracts or debtsSect 16 – tort liabilityActivity M1-RA 6If the contract binds the partnership, but the assets of the partnership are insufficient to pay the contract price, what happens?What is the consequence of liability being ‘joint’?See s.13Partners Liability for Torts :Partners Liability for TortsSection 14 Wrongful Acts – TortsLiability of the firm for wrongs(1) Subject to sub-section (2), where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her co-partners loss or injury is caused to any person not being a partner in the firm or any penalty is incurred the firm is liable therefore to the same extent as the partner so acting or omitting to act.National Bank v Batty [1986] 60 ALJR 379Polkinghorne v Holland & Whittington [1934] 8 ALR 140Petrou v Hatzigeorgiou [1991] Aust Torts Reports- 81-071Walker v European Electronic Pty Ltd (in Liq) [1990] 23 NSWLR 1Dubai Aluminium Company v Salaam [1998] TLR 543Activity M1-RA 7Liability of tortious actions is ‘joint and several’ – what does this mean? Activity M1-RA 8Case example:Polkinghorne v Holland (1934) 51 CLR 143There were three partners in a legal practice: Thomas, his son Harold and Louis. P. was one of Thomas long-time clients but Harold had been assisting her recently – regarding investment of her money. Harold suggested she alter her investment strategy and put the money in two companies which he knewwere ‘shell’ companies. He then suggested she become a director of one of the companies and guarantee its overdraft in exchange for shares. She lost all her money. Thomas had disappeared by then.Were the remaining partners liable? What would they argue? What do you think the court’s decision was?See Latimer Chapter 10Relations of Partners Between ThemselvesPartners Fiduciary Duties:Partners are in a fiduciary relationship with each other before, during and after the partnership as ended. In their relationship partners are bound to exercise the utmost good faith in their dealings with each other. The right and duties of the partners amongst themselves are usually set out in the terms of the partnership agreement and covers various items from capital contributions, sharing of profits and losses, management issues, drawings, duration of partnership etc.If no time is fixed for the Partnership or the time fixed for the Partnership has expired and the Partnership continues it is a Partnership at will.。