Aspects Of Limited Liability Corporation Law In Business
Task: Prepare a report exploring the various aspects of limited liability corporation law in the companies.
The main objective of the present study is related to the discussion about the statement “despite being regarded as the several benefits of incorporation, the advantages of limited liability corporation law in the companies may prove misleading, and therefore it is balanced by the weaknesses of incorporation”. In this aspect, the study contains a discussion of the relevance of the cited statement by giving justification, examples, and legal case laws.
Analysis of statement
Meaning of incorporation: Incorporation of a company is referred to as a procedure of legal formation of a corporate entity. In Australia, company structure is considered as one of the best business structure. It is because the company is a distinct legal organization and possess limited liability corporation law that creates it an attractive option for the business to increase their operations. Although, the incorporation of the company is relative more comprehensive as compared to other business structure and usually required more to follow with its legal duties (Graham, 2019). Further, Australians Securities and Investment Commission observe and regulate the procedure of incorporation of the company. For the incorporation of the company, as per Section 117 (1) of the Corporation Act 2001, it is required to apply with ASIC. Further, section 117(2) of the cited Act, prescribed that for the incorporation of the company, it is required that –
- Ascertainment of type of company which is required to be incorporated.
- Ascertainment of the suitable structure by the company for internal governance.
- Obtain the consent from the probable director and secretary.
- Selection of name.
- Location of registered office of the company.
- Location of the main place of business.
- Agreement concerning share structure and members.
- Application to ASIC and payment of fee-related to registration.
- Obtain a certificate of registration.
After completion of the above aspect on limited liability corporation law, and complying with relevant rules and regulation, section 119, states that, the existence of the company started from the starting day of its registration.
Advantages of incorporation
In this aspect, some of the advantages of incorporation as a company are described below –
Limited liability corporation law – It has been noticed that the company has its legal existence; thus; it is liable for its debt. This suggests that any claim that could be created against the company could be settled by using a cash reserve of other assets of the company (Pisacane, 2017). In the legal case, Salomon v Salomon & Co Ltd (1897), it was held by the court that, the debt of the company is its own, and not any other people. Shareholders or the directors would not be personally liable for any claim made against the company. This is not similar in case of a sole trader, where they are personally liable for settlement of claims and debts of the business. Although, if there is any duty violated by the director or they provide any personal guarantee to an agreement, then in such case, they may be personally liable (Anderson, 2017). In the legal case Lee v Lee’s farming Ltd (1965), the company was formed by Lee, and he was entered into a contract with the company. In this limited liability corporation law, he killed himself, and his wife for getting money to show that he was under the contract of employment with the company (Kanchi. 2015). Since the company is a separate legal entity, therefore it was held by the court that it could enter into the contract of employment.
The attraction of the investors, consumers, and suppliers – In case business has some growth strategy that needs investment by the third party. Then in such case, investors are usually taking an interest in the investment in the company (Fordham, Robinson, and Blackwell, 2017). It can be said that the company is considered an attractive investment structure by the investors due to –
- It provides security to the investor by limited liability corporation law.
- It provides flexibility to an investor concerning the purchase and selling of shares.
- It provides transparency to business operations, as the company is required to keep its latest information on the public ASIC register.
In assertion to the above aspect on limited liability corporation law, a registered company reflects that business is running its activities on a larger scale. Consumers are also feeling more confident at the time they enter into a deal with the company. It could also facilitate some businesses to procure a contract.
Efficiencies in Tax – The rate of tax charged on the company is fixed, notwithstanding the amount of earnings. On the other hand, for individual or sold trader, tax is levied on the marginal rate, based on their level of income. Moreover, the company could also take advantages in related to setoff of losses in tax from one business another income generated by others. It may also carry losses forwards into the future period (Adams, Freedman, and Prassl, 2018).
Avoidance of conflicts – Registration of the company could support in avoidance of any issues between business owners. The number of shares held by shareholder ascertain about the possession of ownership in the company. The shareholder’s relation is governed by the shareholder agreement document. It is created at the time of registration of the company. It assists in providing primary security at the time of disputes in the company, especially when any shareholder leaves the organization. (Chamberlain, and Anseeuw, 2017).
Further, the rights and duties of the shareholders are also regulated by this document, along with some vital business functions such as manner of issue of shares, payment of dividend, conflict addressed, and some others. The example of avoidance of conflict could be identified in the legal case Gilford Motor Co. Ltd v Horne (1933). In this case of limited liability corporation law, it was held by the court that, the company was a sham incorporated for the avoidance of contractual obligation of Horne.
Succession – Company has perpetual succession unless it is wound up. If there is a death of shareholder and director, then they could be replaced as the requirement, and business could continue to engage in trading (Baum, Caglayan, and Rashid, 2017).
Based on the above aspects, it can be asserted that the company could be the best manner for the expansion of business and support for ensuing success. It would not limit the liability but also a lower rate of tax that would turn the business into a more lucrative venture (Clark Jand Hickok, 2016).
Disadvantages of incorporation
Duties of the director – Before registration of the company, it is essential that prospective directors could understand their obligations in an entire manner (Donner, 2016). Section 180 to 183 of Corporation Act 2001, defines some duties of directors, which are required to the company by them. In case of limited liability corporation law, if director violates any duties, then as per Corporations Act 2001, they are personally liable for the debt incurred by the company or they may be restricted from the management of another company or maybe imprisoned for five years as per section 184 of the cited Act (General duties of directors. 2019). It is unlikely that directors would not run into any issue is they actively participate in the business, understand their legal duties, and arranged legal compliance (Baxt, 2017). In the legal case, Erlanger v New Sombrero Phosphate Company (1978), it was stated by the court, that promoters of the company possess fiduciary duty such as they should act in the best benefit of the company, avoid conflict of interest, and should not generate secret profits.
Compliance with obligations – In this aspect of limited liability corporation law, it is the responsibility of directors that the company is complying with all relevant rules and regulations incorporated in the Corporation Act 2001. Concerning this, some of the significant obligations include –
- Maintenance of financial records up to date.
- Ensuring the company is compiled with good governance in business functions (Bilchitz, and Ausserladscheider Jonas, 2016).
- Any changes within the company should be notified to the ASIC.
- It is required to pay the prescribed fee to ASIC.
Significant expenses – Incorporation of company required payment of $495 to government and additional fee in case of any professional advice obtained from lawyer or experts. Further, an annual fee of $267 applicable to the companies, as well as, continuous accounting cost for maintenance of proper books of account is required. Therefore, it can be asserted that the company is required to incur a significant amount of expenses.
Analysis of the viability of a given statement
The given statement on limited liability corporation law shows that incorporation of the company has certain benefits, although the benefits may prove to be misleading and compensated by the disadvantages of incorporation. The cited statement is true to a certain extent. Every business form has some kind of pros and cons, as an individual cannot select the type of business form without getting affected by the negative aspect, same would be applicable in case of incorporation (Boardman, and Raftos, 2016).
It has been noticed that the company has a separate legal entity, which is the company is personally liable for their debt; however, this benefit could not be achieved at the time of lifting of the corporate veil. According to the legal concept personality of a corporation is separates from its shareholders and secured them for protection of personal liability for the debt and other obligation of the company (Sridhar, 2018). In contrary to this, by the lifting of corporate veil concept, shareholders of the company are liable for the debt of the company despite the provision related to the limited liability corporation law or separate legal entity. The company could work only by a human agent that incorporates it. In this aspect, lifting of corporate veil referred to the probability of looking behind the framework of the company to hold member’s liable (Priya, Susmitha, and Thenmozhi, 2018). In the legal case, Life Insurance corporations of India v escorts Ltd, it was held by the court it is not essential as well as desirable to classify the classes of case in which the lifting of veil was permissible, it is based on the relevant regulatory rules and regulations and other provisions, the object would seek to be achieved, the impact on the parties, public interest, or conduct. There are several cases, in which directors of the company was personally liable for any fraudulent conduct by company, this assists towards the imposition of personal liability towards directors. Based on this, it can be asserted that, although limited liability corporation law is one of the main advantages for which owner expand its business by way of incorporation of companies, because of the lifting of the corporate veil, their liability may be unlimited. They would be held liable for the debt of the company (Woon, 2019).
Further, it is given that the company is considered as one of the attractive points for investors for investing to earn a profit. In this aspect, it can be noticed that usually investor does not want to invest in newly formed companies. It is because investment in a newly incorporated company consists of enormous risk and uncertainty concerning permanency. It is required by the company to obtain a position in the market, and even, it should be a solicitor to capture eyes in the market (Arden, 2017). Obtaining investment from an investor may be time-consuming, as building the confidence among consumer for the start-up is not an easy task.
Along with this, identifying competitors is significantly essential for increasing and growing business, otherwise it would not achieve success. Moreover, consumers or supplier would also like to deal with local or existing business (Lo, 2017). In this aspect of limited liability corporation law, entering into a business contract with the supplier would not consider an easy task until the company creates a good brand image or position in the market, till the time it could not achieve desired results. Several times, companies are incorporated to satisfy the financing requirement by the issue of shares and debentures to outsiders. In this aspect, if the company is not capable of satisfying the minimum subscription of requirement, then it may assist in the failure of the company. Moreover, it has to comply with significant procedures for issue of shares in the market, which is considered a comprehensive task, and the company has to incur a significant amount of expenditure to accomplish this.
It has been stated that the company is required to pay tax at the fixed-rate, regardless of the amount of profit earned by it during the financial year. In this aspect, it can be noticed that income tax provisions do not differentiate tax rate on the companies that are generating a higher amount of income and that are earning lower profits, they have to pay similar tax with identical tax rate (Veldman, 2018). It can be said that it is not appropriate as sometimes; companies earning lower profit have to pay significant tax which reduces their profit as well. On the other hand, in case of individuals or sole proprietor tax is charged based on their level of income, by which tax is charged more on the person who is earning more amount of profit, and vice versa. Along with this, companies are not permitted to claim 50% capital gain tax exemption on capital gain profit, which is available to the individual or sole trader. Further, if a company incurred losses, this loss is associated with the company, and could not be set off from other personal income, unlike the sole proprietor and partnership firm. Therefore, those benefits which can be availed by individuals are not available to company structure (Joy, 2018).
Further, it has been stated in regards to the limited liability corporation law that the company is incorporated for the avoidance of conflict. In this aspect, several time directors of the company face conflicting interest. For example, sustainable practices may be essential for compliance with rules and regulations. Still, it may require spending of higher amount expenditure for development of such type of practices in the organization (Waqas, and Rehman, 2016). Moreover, directors of the company would not be capable of taking a quick decision because sometimes they have to obtain the permission of shareholders by calling meetings, which required significant time. By this, the company may lose the relevant contract, which creates a negative impact on the activities of an organization.
By considering the above analysis, it can be stated that incorporation ay provides several benefits. Still, such advantages may prove to be illusionary and so be balanced by disadvantages of the incorporation.
Although, it would be wrong to state that incorporation of the company only has disadvantages. On the other hand, it can be stated that it is based on the owner of the business; to the extent, they want to take the risk. It is because, as the passes of time, the company would be capable of building its image, and it assists towards significant benefits in the long term period. Along with this, it also has some disadvantages. Therefore it is required that individual should enter into such type of structure by considering its pros and cons (Chan, and Milne, 2019).
By considering the above analysis, it can be asserted that, notwithstanding of benefits of incorporation of the company, the limited liability corporation law advantage may be misleading. Therefore it is balanced by the weakness of incorporation. Incorporation of the company provides several benefits such as limited liability corporation law, separate legal entity, tax efficiency, the attraction of investors, and others. However, based on the above aspects, it can be concluded that such advantages are misleading because of the lifting of the corporate veil concept, taxation norms, and some other aspects. Therefore, it is suggested that, based on the capacity of risk-taking, an individual should enter into such type of business structure, as in the long term period, it may provide several benefits.
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