Small businesses make up the vast majority of economic activity in Australia. This chapter outlines the main legal issues confronted when commencing, operating and dissolving a small business. The Law Handbook also contains other information relevant to business, such as employment, tax and dealing with customers.
Reading this chapter will only give you a guide and is not a substitute for obtaining professional advice suited to individual situations. Advice can be obtained from a private lawyer or an accountant regarding most aspects of running a small business.
The Department of State Development has a number of video resources and workbooks which may help those going into business.
The Department also operates a Small Business Contact Service to provide referrals to the most appropriate sources of business information and advice, phone: 1300 142 820.
Setting up and running a business is a competitive and complex task governed by numerous regulations and statutes. Studies have shown that perhaps half of all new businesses fail within five years of starting.
Understanding some of laws that govern businesses can help avoid some common problems.
Who Regulates Businesses?
The Australian Securities and Investments Commission ("ASIC") is responsible for the administration of the following Commonwealth legislation:
- Corporations Act 2001 (Cth), which governs all types of companies, from incorporation through to winding up, as well as financial services;
- Business Names Registration Act 2011 (Cth)
- for laws relating to unconscionable conduct and consumer protection in relation to financial services (Division 2 of Part 2 of the Australian Securities and Investments Commission Act 2001 (Cth)); and
- laws relating to insurance and superannuation (s 12A(1) of the Australian Securities and Investments Commission Act 2001 (Cth)).
ASIC has a national Enforcement Directorate that has staff located in each region including South Australia. The Enforcement Directorate is responsible for investigating contraventions of the Corporations Act 2001(Cth) and the Corporations Law, other offence allegedly committed by directors or promoters of companies and contravention of laws relating to financial services, insurance and superannuation. Complaints by aggrieved members of the public may be made in writing or in person to any office of ASIC, via ASIC's InfoLine or email.
The Australian Competition and Consumer Commission ("ACCC") administers the Competition and Consumer Act 2010 (Cth) which regulates the commercial operations of corporations and in particular such matters as warranties, price fixing, market manipulation and misleading conduct on the part of companies. The ACCC also conducts investigations and receives complaints about corporate type matters directly from members of the public.
Consumer and Business Services is a State Government department that also regulates the activities of companies in relation to fair trading.
You can either start your own business from scratch, or buy an existing business or franchise.
Whichever you decide, you will need to work out the most suitable business structure for your type of business. Each has its advantages and disadvantages but it is something that you need to think about before you begin.
You may want to operate as a sole trader or partnership to reduce the administrative costs and simplify matters. Trusts are also sometimes used as a way of holding a business. Further information about how each of these structures work are set out under the following headings:
As a business grows or if the enterprise is more complex or ambitious, a company might be more suitable. Further information about companies and how they are run can be found here:
Purchasers of businesses and franchises have certain protections under the law, and there is further information here:
If an entity carrying on a business wishes to use a trading name that is not exactly the same as the owner's or a company name, the name must be registered on the national Business Names Register which is administered by the Australian Securities and Investment Commission (ASIC) under the Business Names Registration Act 2011 (Cth). For more information, visit the ASIC website. Registration can be done online through ASIC Connect .
An Australian Business Number is required to register a business name, and this number must be used on any tax invoice issued by the business, and is also required to claim certain rebates. For further information about ABNs see the Register for an Australian Business Number page on the business.gov.au website.
However, registration of a business name does not give proprietary rights in the name itself. Whilst no-one else can register the same or similar business name, care should be taken to protect the name as a trade mark, to prevent others from using it as their own trading name. See the section on Intellectual property.
The Business Names Register allows a person dealing with the business to search and find who is responsible for the business, and to check if the company is still operating, and detailed information about the business can be obtained either free or for a small fee from ASIC.
The law also protects consumers by requiring that certain services only be provided by qualified people.
Anyone practising and charging a fee as a lawyer, doctor, architect or psychologist must have appropriate tertiary qualifications and satisfy registration procedures.
The Australian Business Licence Information Service can provide information on what licences and particular type of business may require. Consumer and Business Services can also advise on which trades require licences.
The following trades are usually required to be licensed:
- land agents
- land sales representatives
- gas fitters
- second-hand motor vehicle dealers
- security and investigation agents
- tax agents
South Australian Health Commission approvals are needed for various food business and a liquor licence is needed if liquor is sold.
Sometimes an unqualified or unlicensed person may be promised a fee despite not having a licence or qualification. However, a person commits an offence and payment cannot be recovered (even if a good quality service is provided and the person was promised payment) if that person does not have the necessary qualification, licence or registration.
There are several different ways that a business can be owned, and each has its own benefits and disadvantages.
It is important to ensure that whichever structure is chosen, the business name must be registered and must comply with relevant licensing requirements. See Registration and Licensing for more information.
Other aspects to consider are considered in more detail in the following headings:
An individual person can own and operate a business. There is no special procedure to set up as a sole trader, other than the requirement to register a business name under the Business Names Registration Act 2011(Cth) if the name of the business is not exactly the same as the individual's name.
ASIC is responsible for the registration of business names under the Act, and useful information about what is required to register is available on ASIC website on the Business Names page.
A person running a business as a sole trader becomes personally responsible for any debts and obligations arising from the business, which is the main disadvantage of this structure. However, it is very easy to set up, and the ongoing administrative requirements are minimal compared to other methods of holding.
All of the income from the business and expenses are, for tax purposes, assessed in the name of that owner. If the turnover of the business exceeds $75 000, it must be registered for the GST. Check www.ato.gov.au for further information.
A partnership is formed when between two and twenty people agree in writing or verbally to jointly carrying on a business in common with a view to a profit. Each partner is liable for the actions of the other partners. The Partnership Act 1891(SA) sets out the circumstances where the law assumes that people are in 'partnership'. Even if there is no intention to form a partnership, a number of people co-operating in a venture may be legally regarded as partners.
The Partnership Act 1891(SA) also specifies various rights and duties of partners. These include:
- each partner has an equal say in controlling the business unless they otherwise agree
- each partner can enter into a contract or create a liability which is binding on other partners as though they had created the contract or liability. Another person who deals with one partner can presume that all the partners will be equally and totally liable for anything that is promised.
- if a partner dies the partnership is dissolved, unless otherwise agreed
- all partners will share profits and losses equally, unless otherwise agreed
- one partner cannot be expelled by the other partners unless otherwise agreed
- a partner is only responsible for partnership debts and liabilities that arise after the person becomes a partner
- a partner who properly retires from a partnership remains liable for debts and liabilities incurred by the partnership before the retirement. A partner who does not formally retire will continue to be responsible for debts incurred after the retirement, see resignation of a partner
- if a partner is unable to pay her or his debts, or becomes insolvent, the partnership is terminated.
Some of the above assumptions can be altered by written, verbal or implied agreement between the partners. It is therefore advisable to have a written partnership agreement prepared by a lawyer. An agreement should state who the partners are and what share they each own of the partnership's capital as well as how much income each partner can draw and how much of the debts each will pay. The agreement may also specify that a particular partner is a 'silent partner' who contributes capital and shares in the income but does not otherwise assist in operating the business, although having the same responsibilities as the other partners.
Carrying on of business does not usually extend to hobbies conducted jointly by friends or joint family arrangements, such as the ownership of a car.
A partnership may be used to distribute the income of the business to the members of a family to minimise income tax. However, the Australian Taxation Office can require partners to prove they exercise real and effective control over the assets and profits of the partnership. The presence of a partnership agreement prepared by a lawyer and signed at the commencement of the partnership may assist as evidence of a genuine partnership.
A joint venture is not the same as a partnership. A joint venture is usually established for the purpose of a single purpose or project or a defined period of time, and is not considered to be a single separate entity which means that liability falls on each individual (although this may be varied by agreement). Joint venturers share in the product of the venture, whereas a partner will share in the profit, and joint venturers can (subject to agreement) sell their interest in the venture freely. Joint ventures are entirely governed by the common law (there is no specific legislation), and given the subtle differences which could give rise to a partnership, legal advice should be sought before business is commenced to avoid disputes about control and liability.
A trust is formed when a person (trustee) holds property as the legal owner for the benefit of someone else beneficiary. The trustee controls the property and is its legal owner. However, the trustee is obliged to use the trust property to benefit the beneficiary. A beneficiary can demand that the trustee explain her or his or actions and show that the trustee has been acting in the best interests of the beneficiary.
A formal declaration of trust should be prepared by a lawyer saying that the capital of a business is owned by a trustee. Any person or company may be a trustee and is usually the controlling interest of the business. The declaration of trust will also explain that the trustee will use the income of the business to benefit the beneficiaries of the trust. The beneficiaries of a trust must be able to be identified.
A trust allows the trustee to distribute the income of a business in any way to minimise the income tax liability of beneficiaries. The trust must submit a tax return every year. The trust must pay a high rate of tax on any income that is not distributed before the end of a financial year. The trust does not pay income tax on income it distributes to beneficiaries who must lodge their own tax returns.
A company may be formed under the Corporations Act 2001(Cth) to run a business. The major advantage of forming a company is that on incorporation it becomes a separate, independent legal entity, distinct from its members, directors, employees and agents. Therefore a company is capable of suing and being sued in its own name, and it can hold property and earn income in its own name.
A company must have at least one member (shareholder). The company's members own the company's capital. Members may receive a dividend on their shares but are not responsible for the company's debts. A dividend is a form of income paid to a member from the net trading profit (if any) of a company. If the company is wound up and the debts have been paid, the members are entitled to any capital that is left in proportion to their share holdings. Members can call general meetings on a specific issue and a majority vote will usually bind the company.
In addition to having at least one member, the common form of family company called a proprietary limited company (or Pty Ltd) must also have at least one director (who can be the same person as the member). Directors owe certain duties to the company, and the law in this area is quite complex. It i very important to properly understand the duties of a director before agreeing to become one as breaches of the duties can attract both civil and criminal penalties. For further information, see company directors.
Large public companies (usually listed on the Australian Stock Exchange or ASX) are required to have at least three directors and at least two of them must ordinarily reside in Australia [s 201A].
A company must have a Constitution (formerly known as the Memorandum and Articles of Association) that sets out the rules by which the company must be run. Unless a company makes its own Constitution, the Corporations Act 2001 (Cth) contains sections setting out the rules that the company must obey. These are known as Replaceable Rules. It is possible to adopt rules that control or abolish members' voting powers or that give certain members preferential rights to take shares issued by the company. Shareholders may also sign a shareholders agreement which may give additional protection for minority shareholders, as well as setting out rights for the transfer of shares and other matters affecting the relationship.
Companies pay company income tax on profits currently at a flat rate of 30%. Members pay personal income tax on any dividends received. If the dividends are franked by the company, the member does not pay tax on the dividend as the company has paid the tax already.
How is a company incorporated?
A company is incorporated by lodging the required documents and fee with the Australian Securities and Investments Commission ("ASIC").
Detailed information about the steps required to incorporate a company are set out on the ASIC website (click here). Certain preliminary matters need to be attended to prior to incorporation, and it is prudent to obtain advice from either a lawyer or an accountant to ensure that the correct process is followed.
The advantage of conducting business via a company is that the liability of members (or shareholders), unlike in a partnership, is limited to the amount, if any, which remains unpaid on the shares of the company which they own although in the case of a proprietary or family company, most credit providers (including suppliers) require personal guarantees from the directors before they give credit or lend money to the company. The other main advantage is the tax benefits as the company tax rate is considerably less than the personal income tax rate for people in the higher tax brackets.
It is a criminal offence for any person to contravene a provision of the Corporations Act 2001 (Cth) [s 1311].
Generally, the day to day affairs of a company are controlled by the directors, not the members. The directors must act in the best interests of the company at all times and cannot act in their own self interest at the expense of the company. Company directors have many responsibilities to the company and have received notoriety in recent years with some spectacular business failures.
Many directors do not fully understand their responsibilities. It is not possible to be a company director without being fully responsible for that company. The responsibilities and duties of company directors are contained in the Corporations Act 2001 (Cth) and in common law principles. All references in this part are to this legislation unless otherwise stated, see also corporate crime.
ASIC has some important information for prospective and current directors of companies to assist in understanding not only the obligations to the company and its shareholders, also the administrative obligations including advising of changes of address or changes to officeholders. Visit the ASIC page Running a Company - Company Office Holder Duties
Anyone who is in the management of a company may be regarded as a director, even if that person has not formally been appointed as such [Corporations Act 2001 (Cth) s 9 — definition of "director")]. If the directors of a company are accustomed to act in accordance with the instructions or wishes of a particular person, that person is also a director. However, a person does not become a director simply because the directors act on her or his professional advice.
A director automatically ceases to be a director if the person becomes disqualified from managing corporations under Part 2D.6 Corporations Act 2001 (Cth) unless ASIC or the Court allows them to manage [s 203B].Section 206B of the Corporations Act 2001 (Cth) sets out the circumstances in which a person becomes automatically disqualified which includes being convicted of certain types of offences involving fraud or the management of a company or contraventions of the Corporations Act 2001 (Cth) (and its predecessors). A person who is bankrupt or subject to an arrangement under Part X of the Bankruptcy Act 1966 (Cth) may also be disqualified from managing a corporation [s 206B(3), s206B(4)]. In addition ASIC or the Court can make an order disqualifying a person from being a director [Corporations Act 2001 (Cth) s 206C — s 206F].
The Corporations Act 2001 (Cth) requires that a company director or other officer exercise their powers and discharge their duties with care and diligence [s 180]. This duty is subject to a business judgment rule that requires a director making a business judgment to:
- make the judgment in good faith and for a proper purpose;
- not to have a material personal interest in the subject matter of the judgment;
- inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate;
- rationally believe that the judgment is in the best interests of the corporation.
In addition, directors and other officers of companies must exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose [s 181]. They are prohibited from improperly using their position to gain an advantage for themselves or someone else or to cause detriment to the corporation [s 182] and are prohibited from using information obtained as a consequence of their role with the company to gain an advantage for themselves or someone else or to cause detriment to the corporation [s 183]. These last two provisions also apply to employees of the company.
All of the provisions give rise to civil obligations. They are also civil penalty provisions. In a case where a court determines that a civil penalty provision has been contravened, it must make a declaration to that effect and may order the person pay the Commonwealth a pecuniary penalty of up to $200,000 and may order the person compensate the company for any loss as a result of the contravention [Part 9.4B]. The court may also disqualify the person from managing corporations for a period the court considers appropriate [s 206C].
The Corporations Act 2001 (Cth) also sets out criminal offences where a director or other officer acts recklessly or is intentionally dishonest in their failure to exercise their powers and discharge their duties in good faith and in the best interests of the company or for a proper purpose. Similarly, criminal offences are created where a person recklessly or intentionally dishonestly misuses their position or information they have gained through their position with the company [s 184].
Directors have a duty to make full and frank disclosure of information within their knowledge to enable shareholders to make properly informed judgments on any matter [s 191].
Each decision of a director can be scrutinised against what could have been done to most benefit the company by that director. Breaches of this duty allow a company to sue the director for damages suffered. This general duty includes the following specific duties.
Directors are under a duty to exercise discretion. This means they must use their independent, informed judgment in managing a company. Directors can delegate their discretion on certain matters and delegation can be valid if done carefully in the best interest of the company.
Directors are under a duty, and have a right, to deliberate. This means they must make a positive effort to be involved in, discuss, consider and use their discretion in acting on company matters.
Directors are under a duty to exercise power for proper purposes. A power that is exercised for a wrongful purpose is invalid. For example, a director may be acting with an improper purpose if new shares are issued, the company is restructured or gifts are made from the company's resources, to increase the power of that director. Acts performed for an improper purpose may be declared invalid, for example, issuing shares to defeat a takeover or to retain control of the company.
Directors are under a duty to avoid conflict of interest. A director usually cannot use an opportunity that arises in the course of business to profit personally at the expense of the company. In addition, a director cannot compete with the company, use the company's property for personal purposes or enter into contracts for the supply goods or services for the company unless making full disclosure to the company.
A director must also avoid any appearance, or mere potential, for a conflict to be perceived or to occur. Should a conflict of interest arise, a director must disclose the interest to the company. A director who does not declare a personal interest in an issue affecting the company commits an offence. If an interest is declared, the other directors may ask that person not to vote on the issue.
A director may be personally liable while acting on behalf of a company for any injuries suffered by people. Similarly a director may personally commit a crime even though acting for a company.
Directors have particular responsibilities in situations where the company is unable to pay its debts, when the company is placed in external administration, receivership, under official management or in liquidation or where a compromise or arrangement is entered into with its creditors. These include:
- a duty to prevent insolvent trading by the company [s 588G]. Directors who breach this duty may find themselves subject to Corporations Act 2001 (Cth) the civil penalty provisions of the . In some cases criminal liability may also arise. Directors allow a company to incur a debt which would make it insolvent or who fail to prevent an insolvent company from incurring a debt may find themselves civilly liable for the debt. A director's civil liability to pay the debt needs to be proved on the balance of probabilities. A director has a defence if it is proved that when the debt was incurred, the director had reasonable grounds to expect and did expect that the company would be able to pay all its debts as and when they became due.
- duties to assist external administrators by providing a report as to affairs and books and records of the company and other information as requested. Failure to comply with these requirements may be an offence under various provisions of Part 5.8 of the Corporations Act 2001(Cth) depending on the circumstances, including s 590 which makes it an offence to fail to deliver up property of the company or to fraudulently conceal property or a debt due to the company or to fraudulently dispose of property.
- Fraudulent incurring of debts or entering into a contract for the purpose of defrauding creditors is an offence [s 592]. The court may order the person to be personally responsible for payment of the debt [s 593].
There are many offences under the Corporations Act 2001 (Cth). The following is a list of the most common types of offences:
- failure by companies to file the appropriate returns ASIC
- failure by directors to disclose any conflict of interest they may have involving transactions of the company
- improper use of position by a director or officer of the corporation (for example, the secretary) to gain an advantage for her or himself or to a person other than the corporation
- dishonest conduct on the part of a director or officer of the corporation with respect to the discharge of her or his duties
- managing a corporation whilst disqualified from doing so under the Corporations Act 2001(Cth)
- misleading or false statements by promoters of companies to potential investors or failure to disclose information in accordance with the Corporations Act 2001(Cth) requirements
- share hawking by an unlicensed person
- failure of a securities or investment adviser to act honestly and in the best interests of the client
- market manipulation in relation to securities traded on the Australian Stock Exchange
- insider trading, that is dealing in securities whilst in possession of price sensitive information that is not generally available
Most of these breaches attract significant penalties under the Corporations Act 2001 (Cth) . Whilst there is some overlap between of breaches of the Corporations Act 2001(Cth) and the Criminal Law Consolidation Act 1935 (SA), a prosecution will be usually be brought under only one Act, not both.
In addition, certain contraventions, such as the failure by a director of a company to take all reasonable steps to ensure that their company keeps proper accounting records and directors failing to prevent their company trading whilst insolvent, constitute civil contraventions for which a court may impose a pecuniary penalty of up to $200 000, prohibit the person from managing a corporation and order he person to pay compensation.
There is no definite method to ascertain the takings or profits of an existing business.
A purchaser can ask to look at the accounts, owner's tax returns and references from suppliers, creditors, the bank and accountant.
If a company owns the business, basic information regarding the company and its owners and directors can be obtained from the Australian Securities and Investments Commission. Before buying a business, it is best to spend a period of time running the business with the owner to gain familiarity with its operations.
In South Australia, a contract for the sale of a business where the purchase price paid is less than $300,000 (exclusive of GST) is governed by the Land and Business (Sale and Conveyancing) Act 1994 (SA). The Act sets out a number of protections for purchasers. Independent legal advice should be sought to ensure that all aspects of the sale are handled correctly, and is essential if the sale price exceeds $300,000.
The contract will provide for a settlement date when both parties finalise their obligations as set out in the contract. The vendor must usually hand over all the books of accounts, receipts and employee records regarding leave, superannuation, wages and Return to Work records. Usually, the parties agree that the vendor will dismiss employees. The employees may be able to claim redundancy packages from the vendor. These might be substantial, especially if there are employees with long service leave entitlements. A purchaser may choose to re-employ the workers or employ new workers instead. However, if the employees retain continuity of employment with the new owner, the sale price should be adjusted accordingly. The purchaser has no obligation to re-employ the workers, unless this is specified in the sale contract.
The contract will usually state that the stock will be valued on a day before settlement. The vendor and purchaser can either agree on the value or a licensed valuer may be employed. A purchaser should ensure before settlement that they have the relevant price lists to check the valuation. A purchaser is then obliged to pay for the stock at settlement. Accordingly, sufficient funds should be set aside, over and above the purchase price of the goodwill and plant of the business, to pay for the stock. Most contracts specify that the purchaser will also pay stamp duty that is assessed on the value of the business.
If the premises are leased the contract will usually provide that an assignment of the lease is arranged before settlement. If so, both parties should notify the landlord immediately after signing the contract, if not beforehand. A contract should be made conditional upon the assignment being approved. The landlord may reject an assignment to a purchaser on reasonable grounds such as the purchaser's bad credit record, lack of business experience, dishonesty or lack of business references. The lease usually sets out the type of information required by the landlord to assess an application for an assignment.
A purchaser must ensure that an assignment of lease or a new lease is signed by the vendor and the landlord and given to the purchaser at or prior to settlement. The purchaser should also obtain written confirmation from the landlord that the vendor is not in breach of the lease on the date of settlement. If the vendor is, the purchaser becomes responsible for the breaches. A landlord is not obliged to release the vendor from the lease and may demand that the vendor remain liable to the landlord if the purchaser defaults before the end of the original lease. If the purchaser does default, the vendor cannot move back into the premises unless both the purchaser and landlord agree.
Additional requirements for information and the procedure are set out in Part 7 of the Retail and Commercial Leases Act 1995 (SA).
Sometimes the plant of a business may be leased or obtained on hire purchase from a finance company. The contract will usually say that the plant will be assigned to the purchaser. The vendor should advise the finance company as soon as the purchaser agrees to buy so that they can check the purchaser's credit details before approving the assignment of lease. A purchaser should clarify whether the plant is leased with no right of purchase or whether the plant can be purchased after a certain period. Additional information about any plant and equipment that is subject to a security interest and owned by the business or the company that owns the business can be obtained from the Personal Property Securities Register.
Where a business operates using a registered business name the contract will usually state that a transfer of the registered business name must be signed by the vendor and given to the purchaser at settlement. If this clause is not in the contract, the purchaser has no right to use the registered name and the vendor can continue to use the name or sell it to the purchaser or to anyone else.
Under the Land and Business (Sale and Conveyancing) Act 1994 (SA) anyone selling a business for less than $300 000 (exclusive of GST) must give the purchaser a Form 2 [ss 5,7,8,10]. A Form 2 must be given even if the purchaser does not want it. However, a lawyer's certificate that the purchaser has declined a Form 2 after the consequences have been explained will avoid this requirement. A Form 2 states the gross income, purchases and operating expenses from which the net profit of the business for the last twelve months can be calculated. After receiving the Form 2, or from the time the last party executes the sale agreement (whichever is latest), the purchaser has five days to cool off. The maximum deposit that can be asked for is 10% of the purchase price. A purchaser wanting to cool off must give written notice to the vendor or the vendor's agent before the five days elapse. The contract is then rescinded and the deposit must be refunded. If after cooling off the purchaser reconsiders and wants to buy the business it is likely that the person selling the business must serve a new Form 2 and the five day cooling off period starts running again.
The sale contract may provide that after the cooling off period expires a more substantial deposit must be paid. There is then no limit on the amount of the deposit, as long as both parties agree.
When buying a franchise the purchaser (franchisee) pays for all the normal aspects of a business and also the right to use the name, trademark or logo used by the businesses in that franchise group for a certain period.
The franchise rights usually cost several thousand dollars. In addition, a portion of every months takings are paid to the franchisor as a royalty or commission. The franchisor may require all orders and customer payments be directed to the franchisor who will then deduct the agreed royalty and pay the balance to the franchisee. The franchisee may be required to conform to stringent rules on how to keep records, clothing, shop layout, vehicle displays, opening hours, personal appearance, price control, choice of suppliers and giving the franchisor monthly financial statements. Franchisors strictly enforce these rules and it is no excuse to say that they are petty.
If the franchise runs down from lack of promotion by the franchisor it may be difficult to sue for neglect. Usually the franchise agreement does not obligate a franchisor to maintain the standards and market share of the franchise. It is arguable that the franchisor may implicitly owe the franchisee a duty of care although a court is yet to decide this. Therefore a purchaser should consider that a franchisor may neglect the franchise after the purchaser's money has been received and there may be no claim.
To help avoid problems a purchaser may be able to insist on the franchisor accepting some obligations. A purchaser should ensure that the franchisor promises not to sell excessive numbers of franchises and maintains a specific market area for each franchise business purchased. Sometimes a franchisor will guarantee a minimum income for say the first six months and agree to pay the franchisee any shortfall of income. The franchisor does not have to provide this guarantee but may if asked. It is a good idea to obtain a guarantee for protection from exaggerated promises of the value of the franchise.
The franchisor should agree to continually ensure that other franchisees comply with their obligations and to provide regular training and assistance to franchisees. The franchisor should state what promotions will be undertaken and for what period, especially if the franchisee is paying a promotional levy.
A franchisee can assign the balance of the term of a franchise agreement to a new franchisee. The franchisor must consent to the new franchisee in much the same way as a landlord must consent to a new lessee. However a franchisor does not have to give reasonable grounds for refusing an assignment unless the franchise agreement states the franchisor must.
The main source of regulation for franchises is the Franchising Code of Conduct, which regulates the conduct of franchisors. The new Code which commenced on 1 January 2015, applies to all franchises renewed extended or transferred after that date, as well as new franchises. The Code is regulated by the Australian Competition and Consumer Commission. For further detailed information regarding franchises visit the Franchising page on the ACCC website.
This section contains useful information about some aspects of running a small business. However, it is not a substitute for obtaining professional advice applicable to your own situation.
Insurance is essential, irrespective of the type business structure (company, sole trader or partnership) that is used to run a business.
Advice should be sought from a reputable insurance broker, as there are often industry-specific options available as a package. Without insurance, a business may find itself unable to cope when things go wrong, whether or not it is a problem with a customer or supplier, or if plant and equipment or business premises are damaged.
Some types of insurance are mandatory, like paying workers compensation premiums through the Return to Work scheme.
See the section on Insurance for more information about insurance generally.
Sometimes there is pressure from other businesses to provide credit, that is to enter into an arrangement whereby payment for goods or services is deferred. Whilst this is quite common, for obvious reasons it carries the risk of never being paid. In some circumstances a licence is needed to act as a credit provider, see Credit although this generally only applies when supplying goods or services to a consumer.
However, a business can legally demand payment in advance of delivery by either cash or bank cheque, generally known as COD (cash on delivery). Given the high level of debt, it may be advisable not to give credit as a matter of policy as debt recovery often fails to meet creditors' expectations.
There are ways to deal with business customers who ask to establish an “account”, including:
- Asking for a personal guarantee from the director of a corporate customer;
- Including a retention of title clause (ROT) in supply terms and conditions;
- Supplying goods on a consignment arrangement if appropriate;
- Following up payments early and imposing conditions on supply if payments are not made.
Additional details about these methods is discussed in more detail below.
If you are the business owner, you can check to see if your customer is run by a company, by visiting either http://www.abr.business.gov.au/ or the ASIC register, which includes a database of companies and business names. More information about business names is available on the ASIC website.
If your customer is a company, you can ask the directors to provide a personal guarantee the payment of any debt owed to your business. That way if the company is wound up, you have recourse to the assets of the directors instead. Care should be taken with the wording of the guarantee, and it is best to get professional advice to ensure that the guarantee is enforceable.
If you are a director and are being asked by your supplier to sign a personal guarantee, don’t be surprised. Obtain independent legal advice about the effect of the guarantee, and ensure that you read and understand the terms of the guarantee carefully before signing. If you are not comfortable with signing a personal guarantee, then think about alternatives to ensure that your company can pay for goods and services. You could also negotiate the terms on which you agree to guarantee your company’s debts including:
- Offering a bank guarantee instead
- Limiting the amount for which you are liable, or the length of time that the guarantee lasts
- Making the guarantee limited to your time as a director (so that if you resign, you are no longer liable)
It is also important to keep records of the personal guarantees that you give as a director. If you decide to exit the company and resign as a director, you should ensure that you contact each creditor and ask for a written confirmation of your release from your obligations under the guarantee for further debts incurred by the company after your resignation.
The Personal Property Securities Register commenced operation in Australia in January 2011. It marks a change in the way that security interests in personal property (not real property) are registered and affects the way that businesses borrow money, and lease or buy and sell goods. It replaces numerous registers, including the ASIC register of company charges, combining into one single register that is accessible via the internet at www.ppsr.gov.au. Some examples of personal property that can be used as collateral include:
- motor vehicles and watercraft
- manufactured items
- intellectual property
- household items
- accounts receivable
- certain types of statutory licences (eg fishing licences issued under Commonwealth legislation)
but does not include state based licences, or fixtures to land, or land itself. The legislation also specifically excludes liens, which usually arise at common law on default in payment, and not by prior agreement with the grantor.
In essence, the Register operates like a notice board, where “secured parties” (lenders or creditors) record their “security interest” with “grantors” (borrowers or debtors).
Once registration is effected, a security interest is said to be perfected and will gain priority over other later-in-time registrations. There are exceptions to this rule, most notably Purchase Money Security Interests, which are discussed in the context of Retention of Title arrangements below.
A security interest can be any type of obligation, but is usually an agreement to repay a debt that is secured over collateral (namely the personal property to which the security interest “attaches”). The agreement giving rise to the security interest must be evidenced in writing in order to be registered, so it is not possible to register an interest without the prior agreement of the grantor. Any registration that is considered by the Registrar to be vexatious or frivolous may be removed by the Registrar, and a registration can also be removed by the Registrar at the request of the grantor in appropriate cases.
Security interests may also be perfected without registration if the secured party takes possession of goods. In all other cases, the consequences of failing to register a security interest can be devastating, because if the grantor goes into liquidation and the security interest is not registered, the interest vests in the grantor. As a result, any title to the goods you supply to another company becomes meaningless – if you sell the goods on credit to another business that then goes into external administration, and there is an unregistered security interest, you will lose the goods.
Section 18 of the Sale of Goods Act 1895 (SA) sets out rules regarding when title to goods passes, including a rule that title passes if a contract is silent on the time of delivery or payment.
A well-drafted Retention of Title (ROT) clause ensures that title to goods is retained by the seller until the purchaser pays for them. Some ROT clauses include a right to enter onto premises and seize goods that have not been paid for, assuming that the goods can be identified. A lawyer should be retained to prepare an ROT clause, given that such clauses can be strictly construed and may have unintended consequences.
Since the commencement of the Personal Property Securities Act (PPSA) and Register (PPSR), retention of title clauses have taken on particular significance in business dealings.
If goods are supplied to businesses on an ROT basis, a supplier can obtain priority (known as a Purchase Money Security Interest or PMSI) over secured creditors as long as:
- the ROT arrangement is properly registered on the PPSR; and
- the ROT clause is well-drafted.
Registration of the ROT arrangement is particularly important to protect suppliers when purchasers of their goods default on payment, and prevents the default position under the PPSA where goods that are the subject of a security interest vest in the purchaser on the appointment of a liquidator, if the ROT clause is unregistered or if there is delay in registration [see s 588FL Corporations Act 2001 (Cth)].
The PPSA also creates a right to the proceeds where goods have been used and on-sold [s 32 PPSA], in cases where payment has not been made by the purchaser.
Given the importance of effective and timely registration of an ROT clause, professional advice should be sought to prepare supply terms and conditions, and then effect registration.
Further information can be obtained from the Personal Properties Securities Register at: ppsr.gov.au
Another way of supplying goods is on consignment, which is an arrangement whereby a business supplies goods to be sold by another business. The business selling the goods on behalf of the supplier does not own the goods, but rather holds them until sold and then pays the owner an agreed amount of the sale price. Artworks are often sold on consignment to galleries, although there are other industries that also use this type of arrangement.
A commercial consignment is considered to give rise to a security interest under the Personal Property Securities Act and as a result, businesses who supply goods on consignment are urged to register the security interest on the PPSR. There are certain requirements which must be fulfilled prior to registration of the interest, and professional advice should be sought.
If a commercial consignment is not registered on the PPSR and the company selling the goods is wound up, the goods may vest in the company and may not be able to be recovered from the liquidator.
Collecting debts from customers can be unpleasant and can often take considerable time away from the more productive aspects of running a business. Measures can be adopted to prevent problems arising the first place (see above under Granting Credit) and a well-run business will keep copies of any agreements, invoices or other document which show how much money is owed or the time date or circumstances of the debt.
Avoid entering into verbal agreements that might vary the terms on which goods are supplied, including extensions of time to pay. It is far better to have a written record of any agreement so that the business can easily prove any agreed final date for payment or other variation. Another way of dealing with customers who do not pay is withdrawing supply or only supplying goods COD.
Using debt collectors may be an attractive option if you do not have time to focus on debt collection. Debt collectors will generally charge a fee plus a commission of the debt recovered. Subscriptions are also offered for regular debt collection. Debt collectors will usually find out information such as the debtor’s or company’s registered address and will lodge a claim if the matter needs to go to court. The extra cost of debt collection cannot be claimed unless there was an express agreement that the debtor will be liable for the cost of debt collection.
Another option for businesses is to on-sell debts to a third party for collection.
Businesses enter into contracts almost as a matter of course. Contracts are valid whether they are written or verbal. Unsigned contracts (that is agreements that are reduced to writing but never signed) whilst not carrying a lot of force may assist a Court in deciding what terms were agreed.
A contract may also be binding even if you think you had not yet reached final agreement on terms. One critical aspect is the conduct of the parties, and if the parties perform under the proposed agreement, there is likely to be an inference that they intended to be bound. And if there are problems with establishing that there was a finalised agreement, that does not mean that the other party is prevented from claiming losses suffered.
Further information about the characteristics of a contract is set out in Making a Contract . Under the Australian Consumer Law (ACL), in certain cases business have the same rights as individual consumers under consumer guarantees. The exception is where the goods are purchased for:
- To use up in trade or commerce, either in manufacture or treating or repairing other goods.
In addition, the amount paid or payable by the business for the goods cannot not exceed $40,000, or the goods must be of a kind ordinarily acquired for personal, domestic or household use or consumption. There are varying interpretations by courts of the meaning of goods of a kind ordinarily acquired for “personal, domestic or household use or consumption.” Items costing more than $40 000 such as agricultural machinery, or aircraft would obviously be excluded, but in the case of carpet (domestic quality but installed in a night club) or an alarm system which could either be used in business premises or domestically, the situation is not so clear cut.
If you are supplying goods or services to individual consumers and you have written terms and conditions that are not usually negotiated with your customer, you should have the terms and conditions reviewed by a lawyer to ensure that the agreement does not contain unfair contract terms.
More detail is set out under Consumer Protection and in the section entitled Exclusion Clauses.
Pursuant to ss 23 - 28 of the ACL, a term of a consumer contract is void if it is unfair. A consumer contract is a type of standard-form contract, where the supply of goods or services, or grant or sale of an interest in land, is to a consumer for wholly or predominantly personal, domestic or household purposes. A standard form contract is one where a consumer is not given the opportunity to negotiate the terms. More information is set out in the section called Unfair Contract Terms.
A business may try to exclude or limit liability for things that might go wrong by including an exclusion or limitation of liability clause within a contract with another business. In certain cases, businesses will use an exclusion clause to allocate risk and work out who is responsible for insuring that risk.
A Court will interpret an exclusion clause in business to business contracts like any other clause, according to its plain and ordinary meaning, as long as it is properly incorporated into the terms of the contract .
If any onerous clause, such as an exclusion clause, is not drawn to the attention of the contracting party, there is a danger that the clause will be unenforceable. Therefore, it is important to ensure that all terms and conditions are brought to the attention of the other business, and that business given an opportunity to accept or reject the clause. Merely having printed terms and conditions that are not available at the commencement of the contract may not be sufficient.
In situations where an exclusion clause is ambiguous, or the weaker party is in need of protection, the Court will interpret the clause in accordance with the contra proferentum rule, that is, against the party that seeks to rely on it.
Businesses should also take care when goods and services they supply come under the consumer guarantees provision of the Australian Consumer Law.
Section 64 of the Australian Consumer Law (ACL) renders void any term of a contract that purports to exclude, restrict or modify a consumer’s rights to rely on the consumer guarantee regime.
Section 64A ACL permits modification of rights in certain circumstances, by allowing a supplier to limit the remedies available to the consumer if, and only if, the contract is for goods or services that are not ordinarily for personal, domestic or household use. So, if a business is supplying business type products to another business, the supplier can rely on the S64A. The limits on the remedies include replacement, repair or payment of the cost of replacement or repair (for goods) or supplying the services again or paying for them to be supplied again (for services). Section 64A(3) also imposes a reasonableness test regarding the imposition of the clause, and the supplier bears the onus of proving ‘reasonableness’.
Professional advice should be sought to ensure that standard form contracts that include exclusion or limitation clauses, whether used for business to consumer transactions or business to business transactions, do not breach the Australian Consumer Law.
 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500
The Offices of the South Australian and Australian Small Business Commissioners were established to advocate for the interests and concerns of small businesses and to assist in the resolution of business-to-business and business-to-government disputes.
Office of the South Australian Small Business Commissioner
The Office of the South Australian Small Business Commissioner (SASBC) was established by the Small Business Commissioner Act 2011 (SA). The first Commissioner was appointed by the Governor on 29 March 2012.
Section 5 of the Act sets out the functions of the Commissioner, which include to:
- receive and investigate complaints by and on behalf of small businesses in their dealings with other businesses, state or local government bodies;
- facilitate the resolution of such complaints through measures such as mediation or representations to the other businesses, state or local government bodies;
- provide information to small businesses to assist them to make decisions about their dealings;
- create and enforce industry codes under the Fair Trading Act 1987 (SA);
- monitor and investigate compliance with the Retail and Commercial Leases Act 1995 (SA); and
- monitor, investigate and advise the Minister about matters that adversely affact small businesses.
Under section 12 of the Act, the Commissioner has the power to require a person to give information required by the Comissioner in the performance of the Commissioner's functions. The maximum penalty for failing to provide the information within the time specified by the Comissioner is a fine of $20 000.
Mediation is provided at low cost (currently $195 for each day or part day) or no cost, if the Commissioner is satisfied that it is appropriate to waive the fee in any particular case [see Small Business Commissioner Regulations 2012 (SA)].
For more information, see the SASBC's website (click here).
The Small Business Commissioner’s role in dispute resolution includes Franchising Disputes under the SA Franchise Code, see further: http://www.sasbc.sa.gov.au/industry_codes/franchising-industry-dispute-resolution-code
Australian Small Business and Family Enterprise Ombudsman
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) was established in early 2016 and replaces the Australian Small Business Commissioner.
It advocates on behalf of Australian small business and provides information regarding setting up, running, growing and closing a business. The Ombudsman also offers a dispute resolution referral service, including where to get help.
More information about the ASBFEO is found on the website.
Most businesses occupy premises leased from a landlord. The lease is usually for a set number of years ending on a specific date. The tenant obtains the security of a long term lease but also an obligation to pay rent for all of that period even if the tenant leaves the premises. A lease cannot be 'broken' before its term expires, free of liability, unless both landlord and tenant agree. Often the tenant is given a right to renew the original term of the lease for a further set period. This renewal is at the sole discretion of the tenant.
Leases of business premises in South Australia are regulated by the Retail and Commercial Leases Act 1995 (SA). Professional advice needs to be sought when entering into a lease, given that the Act is complex. The Act applies to any lease for rent that does not exceed $400,000 (an increase applicable to all leases notwithstanding the earlier threshold of $250,000). Premises covered by the Act include any business premises that sell goods by retail or provide services to the public, including offices. The minimum period for a lease under the Act is five years, except where there is a certified exclusionary clause (S20K) or the lease is for a fixed term of 6 months. The Act requires landlords to provide certain information to prospective tenants, and regulates expenses that can be recovered from tenants. For example, land tax cannot be recovered from tenants.
Usually under a lease, rent must be paid each month and a rent review clause allows the rent to be reviewed each year or each time the lease is renewed. If the lease is covered by the Act, rent reveiws are only permitted every 12 months, except in certain circumstances [s 22]. The lease will often state that interest is payable on any rent payment that is paid late.
The lease will place responsibility on the tenant for repairs to the premises caused during the term of the lease. An exception is usually made for structural repairs. At the end of the lease the tenant must usually leave the premises in the same condition they were in at the commencement of the lease, allowing for deterioration by ordinary wear and tear.
In addition to the rent, the tenant usually pays for council rates, water rates, building insurance, public risk insurance, plate glass insurance, stamp duty and half of the cost of preparing the lease documents. A lease may state that the landlord is to provide certain works in the premises before the tenant moves in. Those works and their completion date should be specified to avoid later disputes. A tenant must always obtain permission to alter the premises, even to nail holes in walls. It is best to obtain written consent from the landlord. A tenant who installs fixtures may be entitled to remove them at the end of the lease, but only if they are classified as trade fixtures (fixtures that the tenant must have to continue a particular business). If not, a tenant may well be adding fixtures to the premises that remain part of the landlord's premises. It is best to get written acknowledgment from the landlord that certain fixtures can be removed by the tenant before they are installed.
Sometimes a shopping centre lease requires a tenant to pay a contribution for promotions, building improvements, management costs and security costs. Also, the rent maybe a percentage of the tenant's takings, with rigorous requirements for book keeping placed on the tenant.
Most landlords will require the directors of a company leasing premises to guarantee the company's obligations as lessee. If a director agrees to this, the usual protection given by the creation of a company is lost on that lease. Alternatively, the landlord may ask that some other person guarantee the lease. There is no obligation on the company to give its financial details to a prospective guarantor, but if it does, this information must not be misleading. The guarantor is expected to ascertain whether the company is keeping up its lease payments.
The Act also sets out a strict regime for the assignment of a lease to a third party if a business is sold (Part 7). Care should be taken to comply with the requirements of the Act to ensure that the lease is effectively assigned and liability for rent does not remain with the original tenant.
A major cause of business failure is lack of ready cash to pay for supplies and operating expenses. A lack of cashflow can lead quickly to business failure, even though a business may have many customers and produce good products. Many people choose to risk being in debt for the sake of a quick profit while others do not appreciate the costs involved in setting up a business.
The most common way for businesses to raise money is by borrowing it (debt) or by the people running the business putting in their own money. Either way, the debt must be repaid, although sometimes the business owners may not see their own capital repaid. Private investors may be prepared to put money into the business (venture capital), but generally it is illegal to raise money from the public without complying with the provisions of the Corporations Act 2001 (Cth).
Crowdsourcing / Crowd funding is a newly emerging method of raising capital for a startup venture or idea, but there are risks for the business owner depending on how the money is treated and what subscribers are offered, and could be considered to be a managed investment scheme in certain circumstance. There are serious consequences for being involved in an unlicensed managed investment scheme, and professional advice should be sought before raising funds in this way. Further guidance from ASIC here. The Australian Tax Office has some useful and important information about crowd funding and tax implications on their website also.
In any event, it is a good idea to prepare a business plan with anticipated sales and likely expenses. From this the net profit can be worked out. A third party lender will always require a business plan, budgets and other information to gauge the likely success of the business, before agreeing to lend money.
The financial and emotional cost of a failed business, especially on a family, can be high and every effort should be made to become acquainted with the current state of the market.
A business owner with an original idea, design or product may ensure that no one 'steals' it by obtaining protection under laws relating to intellectual property such as the Copyright Act 1968 (Cth) or the Designs Act 2003 (Cth). Advice may also be needed to ensure that the owner does not interfere with protection already given to another person, see: copyright.
In addition, a product may be patented at the Patents Office. This involves a specialised procedure requiring technical drawings and specifications of the product. Usually machines, manufacturing processes or drugs are patented.
An owner may also have to be careful not to breach the law of passing off. This area of common law allows a court to prohibit a person who either deliberately or innocently provides a product or service in such a way that consumers may mistake it for another supplier's product which already has an established market. This will depend on whether the similarity of the products (or services) and their presentation is likely to confuse potential buyers of the established product into buying the new product believing that new product is, or is related to, the product with which they are confident.
Another aspect of intellectual property to consider is the business name and its protection as a trademark under the Trademarks Act 1995 (Cth). It is easy to overlook doing so because new business owners may think that the registration of the business name or company name is sufficient to protect others from using it, which it is not. Although it is an additional administrative burden and cost when starting a business it will ensure that the rights to use the name as its brand are protected.
If customers and clients are likely to gather at your house in substantial numbers, you may well be in breach of planning regulations. Your council could order you to cease trading or fine you for every day that you continue to trade against their order. Similarly, if noise from your house becomes excessive, you face a similar fate. Under the Development Act 1993 (SA) 'home activities' are usually allowed in a residential zone and it is possible that these home activities can be business activities if they use an area of less than thirty square metres and do not detract from the amenity or quality of the area. However it is best to check with your local council. If a house is used as an office and a home mortgage is being paid, it is possible to obtain tax deductions for a portion of the interest paid. Deductions can also be claimed for a portion of council rates, water rates, strata rates, telephone expenses and building insurance premiums. A tax agent should be consulted for advice on home tax deductions.
Often, a lease will allow a landlord to evict a tenant without notice if the rent is in arrears. However, if the tenant is in breach of any other term of the lease, under the Landlord and Tenant Act 1936 (SA) , reasonable notice of the breach must be given to the tenant. Reasonable notice is usually at least ten or fourteen days. The notice must be in writing, specifying what the breach is. The notice must also state what must be done to rectify the breach and at what time. The notice must be signed by the landlord. Once the landlord takes possession of the premises, a notice to quit addressed to the tenant should be attached to the front door of the premises. The tenant can then negotiate to continue to occupy the premises on whatever terms can be agreed.
It is possible to apply to a court for relief against forfeiture of a lease. This involves an application for an injunction supported by an affidavit seeking an order that the landlord allow the tenant to move back into the premises. It is usually necessary to prove that the landlord failed to give reasonable notice of the breach (except for arrears of rent), that there was no breach, that the breach is trivial or that the breach will be rectified promptly. Relief will not be given simply because the tenant will suffer undue hardship by losing the premises.
A lease of premises may include a clause allowing the landlord to recover arrears of rent by issuing a warrant to seize goods owned by the tenant which are in the premises. The procedure of seizing the goods are contained in sections 13-46 of the Landlord and Tenant Act 1936 (SA). The landlord can issue the warrant without giving notice to the tenant. The warrant can only be for unpaid rent, not other charges owed by the tenant. The warrant can be written by the landlord or a lawyer. It must be served on the tenant or left in a prominent position in the premises. Once served, the tenant's goods can be seized immediately.
Usually a licensed process server will seize the goods for the landlord and prepare an inventory. The goods should be sold by auction and a reasonable attempt must be made to obtain a market price for the goods. It is not possible to challenge a warrant properly executed by a landlord. However, it may be possible to apply to a court for an urgent injunction to delay the warrant if it can be proved that arrears will be paid promptly, that there are no arrears or that there is a counter claim against the landlord. A warrant cannot be delayed for causing hardship to the tenant.
If a lease does not contain a clause allowing the landlord to seize goods, then the landlord cannot seize the tenant's goods and would be liable for any damage caused. If someone other than the tenant has goods in the premises and wants to recover them the person must complete a sworn declaration giving details of ownership and then serve this form on the landlord [Landlord and Tenant Act 1936 (SA) s 22].
A mortgagee (a lender) is given a right to repossess premises, to take over the conduct of a business and to lease out or sell the premises or business.
These powers must be specified in the mortgage document. This document will usually be a mortgage over real estate, a company debenture or a bill of sale. The document will specify what notice must be given by the mortgagee. Notice can be given if there are any arrears of payment. However if the mortgagee does not take action within the time given in the notice, it is usually necessary to serve a notice of intention to repossess allowing at least one month to rectify the breach. After that period, repossession can take place [Law of Property Act 1936 (SA)].
Usually a mortgagee will use a lawyer and a process server to prepare and serve the notice of intention to repossess. An accountant will then be appointed to act for the mortgagee, operating the business or organising it for sale. A land agent may be used to advertise the business for sale. A lawyer or land broker will handle the actual sale. A mortgage document will state that the mortgagee can recover all its costs, including fees for its own time, against the tenant. These costs are substantial and a tenant will suffer a heavy loss if a mortgagee does take possession.
A mortgage document is generally worded to allow the mortgagee the maximum amount of power to decide what course of action to take to recover the mortgagee's losses. A mortgagee in possession should not run down the business unnecessarily. However, it does not have to consider the tenants' interests in deciding how best to recover the losses. The mortgagee must give a written report to the tenant at the end of the possession listing its expenses, income and of assets sold.
A tenant can sue a mortgagee in possession for negligence, but this is difficult to prove. A mortgagee need not sacrifice its own interests for the sake of preserving the tenant's livelihood. However, it cannot be wasteful in allocating resources or spending time on activities that benefit neither the mortgagee nor the tenant. The mortgagee must make a reasonable attempt to sell assets at a market price. Auctions are allowed. If the business is not adequately advertised or it can be proved that a better price could have been achieved if reasonable steps had been taken, then an action in negligence may succeed. These actions are expensive and the tenant must prove that no reasonable mortgagee would have acted as this particular mortgagee did.
Changing the owner of a business involves transferring ownership of the business asset. If a business is solely owned by a husband and is put in joint names with his wife, the law regards the husband as transferring an interest in the business to his wife. For this reason stamp duty is payable on any change of ownership in the business. Stamp duty is assessed on the value of the interest being transferred. That value is the net value of the interest being transferred. This is calculated by deducting the debts attached to the interest from the gross value of the interest. Current financial statements including a profit and loss account must be lodged with the transfer document at the Stamp Duties Office. The Stamp Duties Office may choose to value the business by capitalising its income rather than having regard to market value. Whichever method achieves the most realistic result can be used.
A change in ownership of a registered business name must be registered within twenty eight days at the Corporate Affairs Commission. Both the vendor and purchaser must sign this form. If the vendor is unwilling to sign, the form must be lodged with the purchaser's signature and a statutory declaration explaining why the vendor has not signed the form.
A Form 2 under the Land and Business (Sale and Conveyancing) Act 1994 (SA) must also be prepared by the vendor, see cooling off.
The Australian Taxation Office may also require proof that there has been a transfer of ownership and for this reason a contract for sale and purchase is usually desirable as a record of the transfer.
Partners wishing to resign from a partnership must comply with certain formalities. If they do not they can still be regarded by other people as a partner and therefore responsible for debts incurred after their 'resignation'.
To dissolve a partnership it is necessary to prepare a Notice of Resignation, an example of which is provided below.
The following procedure must be followed:
- Serve a copy of the Notice of Resignation on all other partners.
- Serve a copy of the Notice of Resignation on all current and past creditors of the partnership.This will allow the retiring partner to avoid any debts incurred with these creditors by the other partners after dissolution but not any debts outstanding at the time of dissolution.
- The notice must then be published within fourteen days of the resignation in the Government Gazette at a cost of about $45. This will protect the retiring partner from any creditors who may do business with the other partners but only after the publication of the notice.
- If the partnership has a registered trading name it will also be necessary to complete a Change in Proprietors of Business Name form. These are available from the Office of Consumer and Business Affairs.
If the above procedure is complied with, the resigning partner is not liable for debts incurred after the resignation. The resigning partner is still liable for debts previously incurred, although the continuing partners will often agree to pay those debts and 'indemnify' the resigning partner if necessary. However, if the remaining partners can not pay a debt that they have indemnified, the creditor can still take action against the retiring partner. It is recommended that legal advice be sought prior to resigning from a partnership.
SAMPLE NOTICE OF RESIGNATION
Partnership Act, 1891- 1975
Notice of Discontinuance of Partnership
Take notice that as from 3 April 2011 the partnership of John Citizen of 100 Rose Terrace Adelaide 5000 and Mary Citizen of 100 Rose Terrace Adelaide 5000 in the State of South Australia who traded as Citizen Fabricators was dissolved.
John Citizen has retired from the partnership.
Mary Citizen will continue to operate the business under the name of Citizen Fabricators and shall be responsible for all the debts and liabilities thereof.
Dated 3 April 2011
A director should resign by written notice. That can be effective immediately. The company must register the notice of resignation at the Australian Securities and Investments Commission within fourteen days or it commits an offence [Corporations Act 2001 (Cth) s 205B]. This notice should be signed by the resigning director.
A director who resigns is still liable for any guarantee signed as a director (director's guarantee). These documents are enforceable as contracts and are still enforceable against guarantors who are no longer directors. It is only because they are usually signed by company directors that they are called 'director's guarantees'.
A director remains personally responsible for any liability under the Corporations Act 2001 (Cth) which was incurred by the company while that director was still acting as a director, see Criminal offences. However, that director is not responsible for any liabilities incurred after the resignation.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.