Business Entities Essay
The main structures that shall be examined in the context of this venture are: partnerships, joint ventures, companies, trusts and sole partnerships. For the purposes of the investments under consideration, there could be a number of structures that might be applicable for each but not all will be necessarily as efficient. The most probable structure that might be utilised to facilitate each investment is as follows – implement the retail business as a sole trader, farm as a partnership or joint venture, joint venture or company for the speculative mining venture and set up a trust or company for the long term investment portfolio. The rationale will be elucidated below. A Retail Business The retail business is usually associated with being a sole trader owing largely to the fact that there are few legal formalities, negligible costs and relatively simplified direction taxation associated with its establishment.
Further, any profits made will be used entirely at the sole trader’s discretion, so theoretically speaking, the father could install himself as the sole trader and distribute profits at his appraisement. The negatives, of course, lie in the fact that it would be difficult to raise a large amount of capital and, more importantly, should
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The advantages of operating as a partnership are that there are no partnership taxes to be paid, only individual income tax, the ability to borrow more capital than a sole trader and the fact that partnerships are informal and inexpensive to establish. On the downside, there is, similarly to a sole trader, unlimited liability for the partners and each partner is responsible for every other partner’s liability, should the business investment fail. There is also the same issue of the partnership being dissolved upon the death of either of the parents assuming they are both partners. As mentioned above, each of the partners is an agent for another, a situation which could be financially perilous given that the children may not have sufficient business acumen to conduct a farm and any failure will be felt by all the partners. One option, given these circumstances a limited liability partnership could be a viable alternative since these require a minimum of one general partner and one silent, thus the mother and father could be general partners and the children silent partners.
Consequently, they will have no role in the conduct of the partnership and no ability to bind the firm as would be normally the case. The alternative to operating in partnership would be to establish a joint venture – the parents could invest money in an another entity who concerns related to farming which has knowledge, equipment and infrastructure in place. The advantage of this is that despite a potentially exceedingly complex relationship being created, it is possible to arrange exactly how the association will operate, most of the details being settled in the agreement between the parties. Further, liability can be limited solely to the area of operation that the family would be engaged in, it being imperative to avoid partnership liability. Thus, the family could utilise any of the other joint venturers’ skills and assets and be only responsible for their own area yet also have the assistance of another party in whichever areas are deemed necessary for assistance and adding to the economies of scope associated with the farming project.
A Speculative Mining Venture Since the nature of the venture is fraught with risk, any structure that can reduce risk will be the best to adopt. The obvious choices here are to operate as either a company or as a joint venture. The benefits of the joint venture have been discussed above although the benefits are perhaps even more evident here, in that liability is strictly differentiated so given the high risk of the project. Conversely, since the risks are being shared, so are the profits so the returns will also be relatively lower, but the complimentary knowledge and resources should increase the potential for success. The main differentiation between this and a partnership is that with the joint venture the material will be shared rather than the profits which would cause a partnership to be created which would be undesirable owing to the speculative nature of the project, hence, higher risk for the family. The other obvious option, although not necessarily exclusive from the joint venture discussed prior, would be the formation of a company on the behalf of the family. An choice might be to give all six members of the family equal shares or give the parents a larger proportion of shares and distribute the remainder accordingly.
Given the risky nature of the venture it would be unlikely that a large number of third parties might want to invest but there is, at least, the ability with this structure to facilitate this easily. The most important aspect of the formation of the company, however, is the limited liability aspect. The inherent risk makes it crucial to limit the possible downsides to the largest realistic extent. The company also has other more general benefits to the family, the first of which being perpetual succession. The company does not die until it is deliberately wound up which is advantageous should anything unforeseen occur to the parents, who are presumably the directors of the company. An incorporated structure is also advantageous for acquiring financing although since it would be a small company, creditors would be likely to secure guarantees from the directors so limited liability would be essentially eliminated. The flexibility for a company is high, however, which is useful given the fact that it would be a family company, at least in its opening phase.
A variation on the company is the no-liability company (or NL company) which section 112 of the Corporations Act dictates must be a mining company and this purpose must be in the company’s constitution. As the name suggests, the company owes no liabilities but also lacks contractual rights to retract calls on shares. This set-up recognises the speculation associated with mining and thus minimises investor risks although obtaining debt financing might be challenging. A Long Term Investment Portfolio The most efficacious structure for this project would probably be to implement a trust, although a company would also conceivably work. There are basically two relevant trusts here, those being fixed, discretionary or unit trusts. A fixed trust will secure the entitlements of the beneficiaries in terms of interest or capital of the trust. The unit trust is basically a subsection of the fixed trust. The unit trust differs in that the proportionate interests of beneficiaries are measured in terms of the number and types of units held.
The discretionary trust allows the trustee to exercise a wide discretion as to beneficiaries and will minimise tax through judicious distribution between the children since they will have lower marginal tax rates. The trust, regardless of type, will not be flexible, however, there should be little difficulty in obtaining finance. It is not simple to create a trust, requiring a trust deed and frequently the formation of another company to act as trustee. The trustee will be liable primarily but there is a right of indemnity against the trust property. It has also been suggested that a company would also work in this instance and might actually be better in some regards, for example that the company is able to sue on its own behalf unlike a trust, should problems arise.
The company has costs associated with taxation and accounting issues but the trust is also expensive. The complexity of both trusts and companies is similar in the process of both commencement but also for the winding down, although this may not be an issue since the intention appears long term. With the company structure, a limited liability would be implemented and this would reduce business risks significantly although the trust is more aimed towards the long-term investment portfolio in question. Overall, it is probable that the trust would be adopted for this reason although, as aforementioned, a company would be formed to act as a trustee unless the parents were willing to perform this duty personally.