BUSINESS ENTITIES AND AGENCY ASSIGNMENT
9BUSINESS ENTITIES AND AGENCY
Business Entities and Agency
Business Entities and Agency
Business Type and Structure
This paper explains the process of starting a new business and the legal and compliance issues pertaining to business registration in Victoria, Australia. The business chosen for this assignment is a small sized pizza restaurant. The restaurant will be located in one of the suburbs of Melbourne city in Victoria. There is a very high demand for pizza in Melbourne. The business will be conveniently located for both locals and tourists. The desired structure for this business is a sole proprietorship. Under the laws of Victoria, sole proprietorships do not enjoy the privilege of distinct legal existence from their owners. As such, the state levies taxes on the business owner’s personal income tax returns.
The greatest advantage of operating a sole proprietorship form of business is that the owner enjoys flexibility and control in running the business. The owner can easily alter important aspects of the business to match the prevailing market conditions. Another advantage is that less capital is required to start the business compared to other structures such as a limited liability company or partnership. In addition, the owner enjoys all profits and is responsible for making important decisions to maximize returns in investment. Because sole proprietors have unlimited liability, creditors can extend credit when needed (Sitarz 2005, p. 62).
The most important disadvantage of a sole proprietorship is that the business owner is personally liable for business debts. Thus creditors can seize the owner’s personal properties to settle claims if business assets are not enough. In addition, creditors can be unwilling to give loans to high likelihood of business failure, high turnover rate and lack of collateral security. In such a case, it can be difficult for the business owner to raise enough capital to support long-term plans such as expansion. If the owner dies or becomes incapacitated, the business may cease to exist. Lastly, a sole proprietor lacks the professional business management skills compared to corporations and limited liability companies (Sitarz 2005, p. 51).
Compliance Issues, Tax Obligations and Costs of Starting a Sole Proprietorship in Victoria
In Victoria and other Australian states and territories, sole proprietors are required to register and obtain license before starting their businesses. However if the business name is the same as the owner’s first and last names, there is no need for registration. The business name serves as the title under which the sole trader conducts business. An Australian business number is required to register any business name in Victoria. The number is issued by the Australian Business Register. Registration fee is currently AUS$ 34 for one year or AUS$ 80 for 3 years (Business Victoria, n.d).
In the state of Victoria, sole proprietors are taxed on their personal incomes. Therefore, the business owner uses their individual Tax File Numbers to file income tax returns. A sole proprietor will be required to register for goods and service tax (GST) if the business has annual turnover of $75, 000 and more. Tax is paid at the same rate as that for individual taxpayers. Sole proprietors have an option of paying taxes in quarterly installments towards the total tax expected to be paid at the end of the financial year. This arrangement is called Pay As You Go. Sole proprietors can claim deductions for super contributions made. If the sole proprietor employs people to assist in running the business, the business owner has a responsibility to pay relevant taxes and statutory deduction such as employee payroll tax on eligible employees (Australian Government, n.d).
In order to comply with the law, any business registered in Victoria is required to apply for relevant licenses and permits. This requirement protects the safety and health of business consumers and the environment. Thus, penalties can be extremely high for operating a business without necessary licenses and permits. For the pizza shop, a food license is required. This license authorizes the holder to sell food for human consumption at the premises. In Victoria, food licenses are issued by the local authority in which the business is located. In this case, the local authority in Melbourne will issue the permit for the pizza shop. Before issuing the license, the authority will have to satisfy that the proposed business premise is suitable, has the necessary approvals and that the license will not cause undue inconvenience in the locality (Business Victoria, n.d).
In addition to licensing and registration, a sole trader must establish the code of practice that applies to the business. In Victoria, codes of practice are referenced in state Regulations and Acts and may include practical advice and statements of principle on how a business should operate in a particular industry. Codes of practice also give a detailed description of standards that a business must comply with. For the pizza shop, the food standards code applies. These standards are a legislative instrument under the national legislations. Compliance with the food standards codes are monitored by state authorities. Business owners are expected to comply with all instructions described in the code of practice and train their employees about the codes (Australian Government, n.d).
Under Australian business laws as applied in the state of Victoria, a principal—agent relationship is defined as a fiduciary relation created by contract in which one party (the principal) grants another party (the agent) authority to to perform specified duties under control and on behalf of the principal. In the case of the pizza shop, the Melbourne-based founder is the principal while Max Teprest is the agent. The Victorian law of agency allows the pizza trader to employ another person to open a branch of his shop and trade. The principal remains liable for the consequences of the actions of the agent ((Ibp Inc 2013, p. 154).
If the principal allows the agent to open a branch in Sydney under his business name, the latter’s authority may be apparent or actual. Actual authority arises when the principal confers implied and express powers to the agent to act on his behalf. By exercising actual authority, the agent acts as though the principal himself is acting. Therefore, the principal is liable to the consequences of the agent’s act. In some cases, the principal can confer apparent authority to the agent. This can happen when the principal mistakenly or knowingly allows the agent to carry out certain acts when in reality the authority does not exist. If the agent acts believing in good faith that he has the authority, then the principal remains liable for the actions of the agent even if no actual authority was granted.
The legal basis of the agency relationship is the implied or express understanding that the agent will act as instructed by and on behalf of the principal. By agreeing to the conditions set forth by the principal, the agent assumes a duty of care for the principal’s interests. Further, the agent is bound to the agreement that he will not negligently or intentionally act improperly while performing his duties. This applies to the agent not manipulating the terms of the agreement to make undue advantage of any business opportunities uncovered by the relationship. These obligations are the basis of the ongoing relationship of confidence and trust between the agent and the principal (Ibp Inc 2013, p. 128-129).
A key obligation of the agent to the principal is obedience of reasonable instructions given by the principal. The agent does not have powers to engage in acts that have not been impliedly or expressly authorized by the principal. The agent is also required exercise reasonable care and use reasonable skills in performing the duties authorized by the principal. Most importantly, the agent has to maintain high levels of loyalty to the principal during the period of the agency relationship. This means that the agent has a duty to refrain from engaging in actions or putting himself in a position that may cause a conflict of interests with the principal. At all times, the agent must inform the principal of any issue or fact that can materially affect the terms of the agency relationship.
Under Victorian laws, the principal owes certain duties to the agent as conditions for the agency relationship. These duties are indemnification, acting according to contractual agreement, fair dealing and good faith, and compensation. Compensation is the most important duty and means that the principal is bound to compensate the agent as per the terms of the agreement. Therefore, the agent is hired in a similar manner as an employee of the principal. The fee payable to the agent is agreed expressly and does not have to be money but anything of value as accepted by the agent. The duty of indemnification means that the agent is entitled to reimbursement of any claims, expenses or liabilities incurred as a result of performing agency duties. Breach of the agency agreement can result in a lawsuit by either party based on tort liability or breach of contract. Breach may also result in termination of the agency relationship. In case of a termination, the principal has a right to ask the agent to return authorization documents. This helps in avoiding future incidents where the agent continues to discharge duties in which the principal is bound (Ibp Inc 2013, p. 135-142).
Australian Government, n.d, Business and company registration, Viewed 31 August 2016 https://www.business.gov.au/info/plan-and-start/start-your-business/business-and-company-registration/registration-and-licences
Business Victoria, n.d, Setting up a business. Viewed 31 August 2016, http://www.business.vic.gov.au/#1007246