HA3021 -COMPANY LAW CASE STUDY Total Length XXXXXXXXXXwords Assessment Marks available -20 marks Due Date – Week 10 QUESTION 1 (4 Marks) Nicola and May are partners in a business which operates a...

Answer 1
Nicola and May currently operates a second hand book business in the leased shop and is
very profitable. Both are partners. They are now thinking of expanding the business and
want to acquire two second-hand shops in the suburbs. Since both of them will be occupied
with the existing shop and one new shop, there is a requirement of a manager to run the
second shop to be purchased.
Nicole is concerned about her potential liability for the debts and liabilities of the business
and thinks that she will be in a fix if May decide to leave the business.
Nicole should think of incorporating a Company or a Limited Liability Partnership to hedge
herself from the above risks.
Advantages of incorporating a company
1) Separate legal entity – Currently, Nicola and May are into simple partnership. In
partnership, liability of the partners is joint and several. Nicola may have to pay
penalty or any other legal action if May commits any default or wrong-doing. Further,
in the event of liquidation of their business, even the personal property of Nicola can
be attached to pay off the debts and the liabilities. Incorporating a company will
hedge Nicola of these liabilities. In a corporation, liability of the members is limited,
and their personal property cannot be attached in the event of winding up of the
company. Both Nicole and May can become the members and directors of the
company and run their business. Further, Nicola will not have joint and several
liability and will be shielded by any wrong doing by May.
2) Restriction on transfer of shares – Nicola fears that May may leave the business and
it will be tough for her to handle all three shops. In that event, incorporating a
company helps as they generally in a closely held company one can put restrictions on
the transfer of shares. Nicola can be assured that May may not be easily able to
alienate herself by selling its shares.
3) Raising new capital – New capital can be raised if in the future May decides to leave
the business. In that scenario, Nicole may rope in a new partner by selling the shares
of the incorporation. Further, if in future Nicola and May decides to expand its
business and needs money, fresh capital can easily be raised. Further banks are also
more willing to lend money to corporations.
4) Tax advantages – Further, individual tax rates in Australia is at a maximum marginal
rate of 45% whereas corporate tax rate is approximately 30%. Incorporating a
company can lead to huge tax savings for Nicola
Dis-advantages of incorporating a Company
1) Statutory compliance costs – Companies have to comply with lots of legal
formalities and hence the compliance costs will increase on incorporation of the
company. They will have to file various annual returns and also contribute to social
responsibility initiatives which only adds to the costs and time involved
2) Double taxation - Incorporating a company leads to double taxation, as first the
company has to pay income taxes on its net income and then the members have to
pay tax on the dividends received.
Advantages of a Limited Liability Partnership
1) Separate legal entity – As discussed previously, Limited Liability Partnership also
has separate legal entity and all the benefits discussed above apply here as well
2) Restriction on transfer of shares – Nicola fears that May may leave the business and
it will be tough for her to handle all three shops. In that event,...