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Enterprise Law
Tutorial 4 (Week 4): Starting and Running a Business I:
Business Structures
Problem questions
The following questions are for class discussion or group-work, as your
tutor directs. Please prepare answers before attending the class. Note
that it may not be possible to cover all questions within class time.
1. What are the main benefits of incorporating your business (registering a

corporation as the owner of your business)?

30% tax rate I would argue is probably the most important
Limited liablility for members / shareholders the separate legal personality
that companies enjoy
Ongoing life of the corporation, as opposed to individual /sole traders and
also partnerships (ie, the perpetual succession corporations have)
2. What is insolvent trading? What are the penalties for insolvent trading? (Hint:

see [18.1030] of the textbook). Consider whether Dick Smith Electronics may
have engaged in insolvent trading particularly in the lead-up to Christmas
2015, before being placed into voluntary administration early in 2016?
This question touches upon directors duties particularly about how they can
help with prevention of insolvent trading. One might ask whether just prior to
Christmas 2015 the directors of Dick Smithat least had reasonable grounds
for suspecting either that the company was insolvent then, or would become
so, contrary to s 588G(1)(c). Contravention can carry fines and even jail terms
(this bit is covered in [18.1010] I think the cross-reference to [18.940] on p
542 of the textbook may be a mistake). Could DS argue that there was a
reasonable expectation that the company either was solvent or would remain
so? The intention with this question is basically just to acknowledge that there
are directors duties and that breaching them can carry both civil and criminal
penalties the directors duty to avoid insolvent trading being one that
potentially carries both. This point augments the online lecture materials and
you might like to look briefly over the other duties for your own future sense
of that types of duties are covered . The key point to this question (apart from
it being of general recent interest in a current affairs sense too) is that there
are consquences for breaching directors duties that can, and have for some in
the past (eg, the HIH directors spring to mind), extend to jail terms. The
broader point is also to reinforce the point from the first classes about the
importance of businesses being aware that they operate in a legally regulated
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environment.
3. What are the main benefits of choosing a franchise model for a new business?

Use of an existing business model that is usually successful

A blue-print to follow in terms of how you should run your business / what
to do in certain situations, which can be beneficial, particularly for a first
timer.
Ability to produce a product and use a brand that customers already
recognise.
4. What are some of the negatives of a franchise model? As part of your answer

you might consider what has recently been happening with 7-Eleven
franchises underpaying workers. What does this situation tell you about some
of the difficulties franchisees can find themselves in?
Lack of control over the direction of the business (cant branch out into
new areas, or take advantage of new opportunities that are outside the
scope of the franchise). What if you want to make a change to the menu
of your KFC or McDonalds franchise see how far you get with that!
Having to pay fees to the franchisor e.g. franchise fee, marketing fees,
percentage of profits, etc. The franchisor also usually has control over
when upgrades to the store fitout need to be made, and that could easily
come at a time when the franchisee doesnt have the funds available
The 7-Eleven situation may have arisen at least in part from the parent
companys fees and other calls on their franchisees ie, it may (at least
partly) have come out of potentially difficult areas of the franchise model
itself, rather than necessarily being only due to the franchisees of
individual stores trying to enrich themselves at the expense of employees
(not that it excuses their response, but it can give us an example of
problems that can arise with franchises).
5. NB. This question relates to the special topic on Partnership Law, which has

the dual function of giving a little more detail on partnership law itself, but
also of demonstrating the sort of materials lawyers use the so-called blackletter law of cases and legislation - and showing how a lawyer would use
them in their work. Jemima and Ali have been running a business together
called IC2U since July 2015. It sells ice-creams at markets and other events,
mostly on the weekends. Jemima owns the van they use and Ali pays for the
stock. They share the profits from IC2U 60/40, with Jemima taking 60%
because she owns the van and has agreed to do the accounts for the
business. They have never put their arrangement into writing because
theyve decided they dont want to have any legal connections between
them. In early November 2015, Jemima disappeared, taking the van with her,
and leaving the stock of ice-cream behind in her garage. Ali soon discovers
that Jemima had run up a lot of debts. Jemimas debts are as follows:

$1750 for repairs to the van after Jemima damaged it when she took it
on a holiday in May 2015, prior to starting IC2U with Ali. Ali had asked
about the van when they started out, but Jemima said theres nothing
owing on it anymore I own it outright so we can use it for the
business, no problems.

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$850 for a marketing wrap that had been placed on the van, showing
the IC2U logo and various slogans for the business.

$2400 for IC2Us logo design and a large stock of flyers and other
marketing material that had been printed for the business.

Ali also finds an account book in Jemimas garage that shows Jemima was
keeping more of the profits from the business than they had agreed to it
is more like 80%.
a) Legally, what type of business relationship are Ali and Jemima in?
Consider the various types of business structure (as discussed in this
Module) and evaluate whether or not any of them apply to IC2U.
Jemima and Ali have been carrying on business together with the intention
of making a profit. This makes them partners under the law. It does not
matter that they do not have a written agreement, and in fact even
though they say they dont want to be legally involved like the Canny
Gabriel case, even contrary intentions as to what sort of relationship (or
having no relationship) will not mean there is no partnership where the
three elements are present, and there is no other business structure in
place to supersede it (ie, if a corporation has been formed) then the law
will still treat it as a partnership. The business appears to satisfy the 3
elements set out in the Partnership Act 1892 (NSW) s 1(1) and also
covered in the special topic for this week. They are:
1. carrying on an ongoing business as distinct from a single / one-off
venture they are not in the preparatory stages unlike the 2 restaurant
cases in the Special Topic notes;
2. both involved in the same business together satisfying the in
common element the businesses are not parallel (so unlike the
Checker Taxi case) and they are also both actually involved in it again
unlike the Dunn v DeGiorgio (AC/DC) case; and
3. the business is not a non-profit business they have the profit motive,
as distinct from a social, sporting, religious or charitable type of
organisation.
It is not a sole trader situation of course because there are two involved.
Its not a corporation because they havent been through the formalities of
incorporation.
b) Does Ali have to pay any or all of the debts Jemima has left behind? If
so, which ones does he have to pay and why?
Ali does have to pay the debts for the marketing wrap and the logo and
flyers, but importantly not for the repairs to the van, as they were caused
before the partnership formed. As there was no formal partnership
agreement, it can be a bit difficult to look at in terms of actual authority
(or absence of it) but as a partner Jemima does have the power to contract
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debts on behalf of the firm, which from a legal perspective is what has
happened here. The partners are liable for debts / liable to perform
contract obligations that apply to the firm as individuals as well as
together (joint and several), Ali is therefore personally liable to pay the
two debts identified above, because Jemima was effectively acting as
agent of the business when she incurred those debts. It would be within
the ordinary course of business like this one to spend a bit on flyers and
other marketing - & the third parties involved (the marketing and flyers
people) would be entitled to assume she acted on behalf of her firm in
making those contracts. However, importantly, Ali can seek
indemnification from Jemima if she can be found that is and he may be
able to recover part of his money in that way. Jemima is also probably in
breach of her fiduciary obligation to account fully and honestly under s 28.
c) If Jemima and Ali had formed a corporation through which to own and
run IC2U, how would your answer about these debts vary?
Yes, the corporation, the company would be liable for the marketing and
logo/flyer debts, although again not the repairs to the van. The limited
liability aspect of incorporation means they would only liable to the extent
of any unpaid amounts on their shares (if there were any), and that the
company would be liable for the debt, not Ali, or for that matter Jemima,
personally. Whether it would be worth suing what is presumably still a
small company would be something for the creditor to consider (would
they have enough capital to cover it) and whether it would push the
company into liquidation / insolvency is a further issue.
d) What share of the profits from IC2U was Ali entitled to and why?
50% under Partnership Act s 24(1) which has equal shares as the default
position if the partners dont specify otherwise. Here there is no written
agreement so the partners would be legally entitled to equal shares. Of
course theres no real chance of recovering them from Jemima unless she
can be located
e) IC2U was starting to get rather popular before Jemima left, and with
Summer coming up, Ali is considering whether he should continue with
the business. He wonders whether he should try to continue by himself,
perhaps with a rented van, or whether he should join in with another
friend, Jo, who has a suitable van and is looking for weekend work. What
advice would you give to Ali about suitable business structures he could
adopt if he does decide to keep IC2U going? Of those we have looked at
which one do you think would be the best for him?
If he were to be involved in a partnership in future possibly with his
friend Jo, Ali might do better to get a written partnership agreement. He
should know though that if he doesnt do anything, but starts carrying
on the business with Jo (and not treating Jo as an employee instead)
where they could be seen as carrying on a business in common with a
view to profit then Ali would again be in a partnership situation and it
would of course be better to have a written agreement as to issues like
contributions, division of profits etc unless they are happy with the
default agreements terms under s 24.
Sole trader would trader would still mean he is personally liable for
debts of the business, but there would be no risk of a partner running
up debts without his knowledge.
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A corporation would allow Ali to limit his personal exposure to liability

(and it is possible to have a single person corporation), but setting up
any corporation is more complex and brings with it other obligations like
AGMs, etc.
A trust does not appear to be a suitable structure for this kind of
business.
If IC2U becomes really popular, and has a well developed brand/
presence in the market, Ali might want to think about franchising as a
means of expanding his business without taking on as much of the risk
directly himself.

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Jennifer Ireland, University of Western Sydney, 2016