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Business and Company Law

Answers – Tutorial Two

Part B

Unit Coordinator: Dr. Tushar Das       

Reference:      Australian       Corporate       Law    

6th       Edition

Jason   Harris  •          Anil     Hargovan                    •          Michael           Adams

1. What are the main characteristics of running the business in the form of a sole trader?

Answer

A sole trader is a person carrying on a business as an independent individual.

Ease of establishment as there are no specific laws governing a sole trader. 

Control over the business operation is solely in the hand of the sole trader 

Risk of personal liability as the sole trader is personally liable for all the debts of the business and that liability is unlimited.

Fundraising is difficult as the sole trader only has access to limited resources to fund their business and growth.

Taxation: The sole trader is liable for payment of tax on income earned. Financial privacy is an advantage as the profit and financial affairs of the company do not need to be disclosed to the public.

• Identify at least three differences between partnerships and joint ventures.

Some of the differences between partnerships and joint ventures are:

The activities of the partnership are usually continuous and indefinite, whereas joint ventures are usually formed to undertake commercial activities that have a finite life.

Partners share in the profit, whereas joint venturers share in the product or the result of the joint venture.

Partnerships are loosely governed by the provisions of the Partnership Act, whereas there is no specific body of legislation that generally governs the formation or operation of joint ventures.

• What is the definition of a partnership? Choose the most appropriate       response.

*b. A partnership is the combination of several people who carry on a business in common with a view to profit

• Explain the concept of limited liability. 

Limited liability is one of the great benefits of having companies. Such a concept limits the liability of the members of the company. Members of limited liability companies are only liable to pay a certain amount based on their investment in the company. For example, in a company limited by shares, the members are only liable to the unpaid amount of their shares. As a consequence, members are not usually liable for the debts of the company. 

• What are the essential elements for the creation of a trust?

Answer

There are several elements required to create a trust:

Settlor: This person creates the trust. However, a trust can be created in a variety of ways. While all express trusts must have a settlor, there may be trusts created unintentionally (implied trusts), such as a constructive trust, where the need for a settlor does not arise.

Trust property: The trust property can be any type of property, such as money, shares or intellectual property.

Trustee: The trustee is the legal owner of the trust property and he/she manages the trust property.

Beneficiary: The beneficiary is the person who benefits from the trust property. The beneficiary is the equitable owner of the trust property and has the right to compel the trustee to manage the property in accordance with the terms of the trust deed.

6. Faith Ltd is the trustee of James Trust. The trust property is worth $500,000. Faith Ltd runs an internet café on behalf of the trust. The trust deed notes that the trustee can only enter into contracts in relation to running the internet café. However, Faith Ltd, on behalf of the trust, entered into several transactions worth $300,000. These transactions were in relation to building a railway in India. Faith Ltd pays the $300,000.

Advise Faith Ltd on its right of indemnification from the trust property.

Answer

Issue: Can Faith Ltd be indemnified from the trust property?

. A trustee has a right of indemnification from the trust property, if the trustee did not breach his/her duties toward the trust. A trustee must comply with the terms of the trust agreement.

Application: Faith Ltd did not comply with the terms of the trust agreement. The trust deed specifically noted that the trustee can only enter into contracts in relation to running the internet café. In this case, Faith Ltd entered into transactions in relation to building a railway in India.

Conclusion: As a result, Faith Ltd has no right of indemnification from the trust property.