HI6027 Business And Corporation Law

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HI6027 Business And Corporation Law

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HI6027 Business And Corporation Law

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Course Code: HI6027
University: Holmes Institute

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Country: Australia

Discuss about the Corporations Law Advice to Dr John Jeckle.

In the given case study, Dr John Jeckle has been working with twenty five of his colleagues to form a genetically modified corn cobs which has the taste of chocolate. This project has already incurred a lot of money and still needs a lot more for the research and development purposes. In the initial testing, the rats’ internal organs melted. But, if the same becomes successful, a number of people would want to invest in this venture.
Whether Dr. John Jeckle should opt for a public company form or whether Dr. John Jeckle should opt for a Proprietary (Private) company form?
Before an individual can initiate any business, a crucial decision has to be taken regarding the business structure of their future organization. A number of factors have to be analyzed while taking the decision regarding the choice of business structure. It can be to save the taxes, or to raise money from the public. Based on these decisions, an individual chooses from sole proprietorship, partnership, trust or corporation (Gibson & Fraser, 2014).
One of the most preferred types of business structure is corporation, even when it is the most complex, as well as, expensive form of business structure. A corporation has a separate status from its founders, and enjoys a status of independent legal entity. Due to this status, a corporation can file tax on their behalf, sue and even be sued by a party. One of the major reasons for opting for this business structure is the protection from liabilities to the owner of the corporation, in case the corporation goes bankrupt. This is due to the separate status of a corporation from its owners (Latimer, 2012).
Another plus point in opting for a corporation form of business structure is that the corporations are allowed to raise the money from public. A corporation is allowed to raise funds, sell sticks and even offer different categories of shares. The existence of a company in continues indefinitely, and unlike partnership, the same is not ended with the death or insanity of its owners (Find Law, 2017).
In Australia, the corporations are formed, governed and wrapped up through the Corporations Act, 2001 (CA), which is an act of the Commonwealth (Australasian Legal Information Institute, 2017). As per this act, a corporation is a legal entity, which is different from its shareholders and directors. And in the nation, the companies are regulated by the Australian Securities and Investments Commission, i.e., ASIC. The companies have their own set of rules, which are contained in the constitution of a company (Australian Government, 2017). And in case a company does not have a constitution, the replaceable rules can instead be opted for (Register a Company, 2017).
Section 112 of the CA provides that there are two kinds of companies, which can be formed in the nation, the first being the public company and the second being the proprietary company (Australian Government, 2017). There is a further classification for the public companies, which include

No liability company: The companies in Australia can be registered under this category only when there is a presence of share capital in the company, the sole object of the constitution of the company has mining objective, and there is no contractual right of the company as per its constitution regarding the recovery of calls made on the shares from its shareholders, who have failed to pay them. Section 112(2) of the CA requires that the constitution has to clearly provide that the objective of the company is solely mining (ICNL, 2017).
Companies limited by guarantee: In these types of companies, the members take guarantee for a certain sum or amount of money in case the company winds up. So, the liability of the shareholder only arises in the case of winding up of the company. And, unlike the companies which are limited by shares, these companies have no capital (James, 2008).
Companies limited by Shares: Under these form of companies, the liability of the shareholders limited to the nominal. And even the number of shareholders is limited. The nominal capital denotes the capital with which the incorporation of companies took place. The liability is also for the amount which is unpaid on the shares held by such shareholder (Cassidy, 2006).
Unlimited companies with share capital: A company where the members have no limits placed upon the individual liability which they have, and which has to be contributed towards the company’s debt. This type of company is exempted from reduction of capital as per section 258A of the CA (WIPO, 2015). this forms as the only advantage of this type of company as the money cannot be taken out of the capital of the company.

Even the proprietary companies have been divided into two subcategories, which include companies limited by share and the companies unlimited but with share capital (Australian Government, 2017). The public companies are usually opted as the choice of company due to the prohibition upon the proprietary companies from raising the funds from general public by issuing share capital (Australian Institute of Company Directors, 2016). A proprietary company cannot have over fifty non-employee members and it also cannot do anything which requires the issuance of a prospectus. The minimum number of individual which are required in this form of company is one (Akers, 2017). A company which fails to qualify the requirements put forward for the proprietary companies is formed as a public company.
A number of companies which have been registered in Australia are registered under the second form, i.e., as proprietary companies and in cases of small businesses, they are opted as being the first choice. A proprietary company is deemed as small only when it fulfills certain requirements (James, 2008). In Australia, a public company needs to have a minimum of three directors, and two of these three directors, have to ordinarily reside in the nation.
The type of the structure of the company depends upon the financial situation of the company, the level of control, and the particular circumstances of the case. So, if a business wants to borrow the funds from public, list shares over the stock exchange, easily transfer the share and its ownership, or wants a large capital base, the public company is the suitable choice for such business. A proprietary company is needed for people opting for small business, where the potential investors can be shareholders of the company and where the control of the company is restricted to a maximum of twenty members. A small proprietary company also has the advantages of tax. For a proprietary company to be deemed as small, the following criteria have to be met:

Number of employees at the end of financial year has to be lower than fifty;
The gross operating revenue of the company has to be below $10 million for a financial year; and
The assets of the company at the end of financial year have to be under $ 5 million (Finance, 2007).

A proprietary limited company is distinct from its operators, owners and managers and has a separate legal existence. Hence, it can enter into contracts and own or sell the properties and assets. Even though the proprietary companies are restricted from offering the shares to the general public, the shares can be offered to the employees of the company or to the employees of its subsidiary company, and even to the existing shareholders of the company. And in case these requirements are not fulfilled, by an order of ASIC the company may have to be converted compulsorily to the public company (Cassidy, 2006).
In order to take a decision regarding the opted form of company in the nation, the elements present in two forms of companies need to be compared. So, on one hand, the proprietary companies are required to have one director who has to compulsorily reside in the nation, in public companies, this requirement is of three directors, where two have to be residing in the nation. The proprietary companies need to appoint a secretary. And like the directors, the company secretary has to be at least of 18 years of age so as to hold this position. Conversely, for the public companies, the same person can be director of the company and the secretary of it as well. The company secretary is deemed as an officer under the CA and has the responsibilities as stated in the act. And the directors of the company are also required to fulfill the responsibilities which are contained in the CA (Federal Register of Legislation, 2017).
There are certain advantages in opting for proprietary companies, in comparison to the public companies. These include the limited liability of the shareholders to the amount of capital which they have subscribed or the amount of debts which have been personally guaranteed by them. The directors and shareholders of the company can be employed under normal wage conditions and salary, and they are only taxed for the income at personal rates. Also, the personal assets of the shareholders have no threat of being confiscated and hence, do not have to bear the financial debts of loss incurred by the company. The company continues even beyond the shareholders’ death. And the company is taxed at a flat rate of 30%. In comparison to the other type of companies, the transfer of ownership is considerably easier in this (Finance, 2007).
However, there are certain disadvantages for option for this form of a company and these include the requirement of record keeping. This is in addition to the formation of such companies being a complex task, also requires a lot of paper, and incurs time and money. The ASIC and CA provide a number of provisions which have to be strictly adhered to and this often makes an individual opt for other form of business structure. The funds cannot be raised from the general public (Finance, 2007).
In this case, Dr John Jeckle should opt for a proprietary form of company as his business structure. This is because he and twenty five of his colleagues want to form a company. And to form a proprietary company a minimum of 1 and a maximum of 50 people are needed. So, this falls within the range of requirement of a proprietary company. Secondly, by forming a proprietary company which is limited by shares, he would be able to raise the capital from the individuals who are already the member of the company. Even though a restriction may be placed over the issuance of shares to the public, but in case he really needs to raise funds from the public, the company can be converted into a public company as the transfer of ownership is considerably easy in the proprietary companies.
Further, by forming a proprietary company which is limited by share capital, instead of opting for an unlimited company, Dr John Jeckle would be able to restrict his liabilities. Hence, the incident where the rats’ internal organs were melted, would not be his liability and instead the liability of the company. In addition to this, Dr John Jeckle works at the Imagine Medical College which is located in Australia, hence, the requirement of one member residing in the nation is also fulfilled. Furthermore, he is not required to get more members, as the minimum range is fulfilled. While forming the proprietary company, he can invite the potential shareholders to be the shareholder of the company. This would allow him to raise money for the research and development, without converting the company. Lastly, instead of opting for a public company, by sleeted the form of proprietary company, the control would remain in his hands, in comparison to a public company.
Hence, it is advised to Dr John Jeckle that he should opt for a proprietary company and that too which is limited by share capital. This is because on the basis of the analysis of his case, this form suits his requirements to the utmost. And in future, he would have the option of converting the proprietary company into a public company.
Akers, H. (2017). The Disadvantages of a Proprietary Company. Retrieved from: https://smallbusiness.chron.com/disadvantages-proprietary-company-19243.html
Australasian Legal Information Institute. (2017). Corporations Act 2001. Retrieved from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions
Australian Government. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605
Australian Institute of Company Directors. (2016). Organisation definitions. Retrieved from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions
Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.
Federal Register of Legislation. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605
Finance. (2007). Proprietary limited company. Retrieved from: https://finance.nine.com.au/2016/10/04/13/57/proprietary-limited-company
Find Law. (2017). What Does it Mean that Corporations Have ‘Perpetual Existence’? Retrieved from: https://smallbusiness.findlaw.com/incorporation-and-legal-structures/what-does-it-mean-that-corporations-have-perpetual-existence.html
Gibson, A., & Fraser, D. (2014). Business Law 2014 (8th ed.). Melbourne: Pearson Education Australia.
ICNL. (2017). Corporations Act 2001. Retrieved from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf
James. (2008). Six Different Types of Public and Proprietary Companies. Retrieved from: https://www.jamescox.com.au/six-different-types-of-public-and-proprietary-companies/
Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.
Register a Company. (2017). Company basics. Retrieved from: https://www.registeracompany.com.au/faq/company-basics.cfm
WIPO. (2015). Corporations Act 2001. Retrieved from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817

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