Advantages Of The Corporate Structure

Advantages Of The Corporate Structure

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Advantages of the Corporate Structure

A company is a legal entity created separately from those who own and operate it. As a separate entity, the company's debts and taxes are separate from its owners (shareholders), thereby, offering the greatest personal liability protection of all business structures.

A company is an artificial "legal" person. It is owned by shareholders who have limited liability (i.e., they are not personally responsible for the company’s debts). A company is run by directors.

Because the company continues to exist even after the death of a shareholder, it offers tremendous estate planning advantages. In addition to liability protection, incorporating offers attractive tax advantages, better financing and the ability to raise cash.

The main advantage of a Limited Company is to separate business risk from the shareholder's personal assets and a possibility to limit the amount of money that a business proprietor owes personally.

A Company allows shareholders to limit their maximum possible liability for the debts of that Company to the amount of the paid capital in the Company. If a shareholder holds hundred $1.00 shares in a Company, that shareholder's liability for the company's debts is limited to $100.00. Shareholders are only liable for any unpaid shares and any debts that have been personally guaranteed. That's in contrast to the position of a sole trader or partner in a firm who is liable for the debts of that business unlimited.

Whilst there are still common law grounds for the protection of an unregistered name, forming a Company is a way to formally register a Business name and therefore notifying the world of a name's existence.

Once the Registrar of Companies approves the Company name no other Company can be registered with the identical or near identical name.

There is no register for unincorporated bodies such as partnerships or sole traders.

Additional name protection can be archived through registering a Trademark or Service Mark with the Commissioner of Trademarks.

A Company is a separate legal entity from its shareholders.

An individual cannot enter into a contract with him but a shareholder can enter into a contract with the Company. Therefore a shareholder may be employed by the Company or may loan money to the Company on the same basis as any other unrelated party.

A Company gives different opportunities for raising capital. This may be by issuing of new shares (the purchase of which, by the new shareholders, brings capital into the Company) or by offering the Company as security (or collateral) for any mortgage or debenture that the Company takes on gives the lender more options and therefore more security.

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Arranging security for a loan can be both cheaper and easier for a company than an individual.

It is possible for a shareholder to have his or her own lending to the company, secured by way of a debenture. In the event of the company experiencing financial difficulties, eventuating in a wind up of the company, the debenture holder would stand to rank ahead of the unsecured creditors in distribution of the residual assets.

A Company facilitates continuity. A Company as a 'separate entity' is not limited to the lifetime of any one particular shareholder. If a shareholder wishes to sell or otherwise transfer part or all of his or her shares to another party, the Company continuity is not affected. This would be different with a sole trader or partnership. Both of these business forms would have to create a completely new entity.

So to recap the advantages are-

• Shareholders have limited liability, although banks usually require individuals to sign personal guarantees or to put up their own assets as security for loans

• Easier to raise finance — a company can issue shares or create a "floating charge" over its assets and ongoing business (in a document called a debenture), and these can be used as security for a loan

• Companies pay tax at a flat 33% and losses can be offset against future taxable income

• A company structure leads to a clear distinction between the personal affairs of the shareholders and their business affairs.

But …

• Registration expenses and formalities

• Ongoing administrative formalities and expenses (eg, financial statements, annual returns to be filed, forms to be lodged with registrar when directors are replaced)

• Stringent legal regulations — companies are governed by the Companies Act 1993 which sets out various procedural rules and legal obligations

• Personal liability in some circumstances — the Companies Act says that directors are personally responsible for the company’s actions in certain circumstances (eg, letting the company trade when it is unable to pay its debts)

• Tax administration requirements are more complex than those for a sole trader or partnership.

PART B

Restraint of trade clause’s can still apply to an individual if that individual is working within a company structure, Section 15 of the Companies Act states that a company is a separate legal entity to it’s shareholders, So if Rachel’s only capacity in the company is one of being a non-working shareholder for the existing term of the clause then she would legally be able to do so. However if Rachel is more than a non-working shareholder, and is actually involved in the running of the company then the restraint of trade clause would apply. Employees and directors of companies are considered to be the same, which is outlined in the case of Mc Guiness v Lewis. This means that Rachel wouldn’t be able to operate a business on her own or if she hid behind a group that had formed a company structure, within the remainder term of the clause.
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