Outline of PPT - Activity 3 (SS)

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Deakin University *

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LML 6006-1

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Law

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Feb 20, 2024

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docx

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10

Uploaded by sachita04

Activity 3.1 DRAFT Presentation Outline Instructions : Outline the appropriate business structures for the client’s proposed enterprise. The presentation should outline: ● the most appropriate business structure(s) that should be recommended to the clients to meet the clients' objectives ● any revenue and duty implications which influence your recommendations ● is there any other advice the clients should be obtaining, and ● if finance is required to fund the clients' commercial enterprise: o what alternative form(s) of financial or security arrangements are available (including equity finance), and o what obligations and liabilities will arise for the clients under these arrangements. Facts: John Mann and Lin Chen propose to purchase the VeryBelle Homes business from the company vendor (Design and Build Pty Ltd). You were asked in your supervisor’s memo to research possible business structures. Clients referred by M & M Business Brokers. ● 10 minutes to present. ● Tailor advice and recommendation to client’s circumstances. ● 10-12 slides ● Use colour, diagrams and flow charts. Outline of PPT Slides 1 – 5:
1. OUTLINE THE BACKGROUND/SUMMARISE FACTS GIVEN. Client’s personal circumstances and objectives/assumptions made: 1. To purchase, operate and own VeryBelle Homes together, which is a design and construction business. 2. To combine your talents in business together. 3. To find investors in the future, to build display homes in another display village, and possibly undertake house and land developments – this will be an important consideration in our advice regarding the appropriate business structure. - Do they or any family members want to work in the business? Nothing mentioned in facts re this. - What are the client’s goals in relation to the business going forward? Above at #3. - Mention the structure we will be recommending: COMPANY. The possible types of business structures for VeryBelle Homes include: 1. Company; 2. Partnership; or 3. Unit/Discretionary Trust. Please note, sole proprietor is not included as an option here - given there is more than one person involved in their business. We will be recommending the company structure, this will be explained on the next slide. 2. RECOMMENDED BUSINESS STRUCTURE: COMPANY A company is a separate legal entity. Companies can hold assets and distribute dividends to shareholders. Companies are commercially well understood and accepted; it is commonly recommended to conduct a business through a company We recommend a company structure because: ➔ It will be an easy transition given “VeryBelle Homes” is currently managed by a company. ➔ The changeover costs will be significantly less since there will be no alteration to the current structure of the business (for example, duty on the transfer of assets, the possible impact of the Capital Gains Tax (‘CGT’) and the possible loss of income taxation benefits). ➔ As building companies are known to operate on slim margins, and often attain debts exceeding the value of business assets – it is important that your business assets are protected. ● A company has its own separate legal entity with perpetual succession and is owned by shareholders and managed by directors. The liability of
shareholders or members is limited and you will not be personally liable for the debts of the company. ● Therefore, your family assets will be protected because a company must pay its debts from its own resources. ➔ To fulfil your future goals, there is flexibility to expand the business by issuing additional shares later to attract investors. ➔ The tax rate for a company is significantly less than the highest tax rate for individuals. ➔ Companies are also commercially well understood and accepted. However, there are some disadvantages of a company structure: ➔ The reporting requirements can be complex. ➔ The incorporation of an enterprise may mean that the principals become employees of the company, giving rise to exposure to payroll tax and compulsory superannuation payments for principals who are employees. ➔ A company is not entitled to claim the Capital Gains Tax discount concession that is available to individuals, trusts and superannuation funds. In a company, payment of dividends is determined according to the number of shares held. NEW SLIDE: 3. REVENUE AND DUTY IMPLICATIONS OF COMPANY STRUCTURE There are many tax advantages of a company structure: ➔ A company is a separate legal entity to the people who manage it. Therefore, the company is a separate taxpayer and required to lodge its own tax return and pays tax on its profits at the company tax rate which is 25% for companies with annual revenue less than $50M and 30% otherwise. ➔ The company can then distribute profits to shareholders in the form of franked dividends. These dividends are taxable to the shareholders less a credit for the tax already paid by the company. ➔ However, companies cannot access the 50% capital gains tax discount. ➔ Setting up and maintaining is also more expensive than the alternatives, which have greater compliance obligations imposed by regulators such as ASIC. If you adopt a company structure, you will both consent to being appointed as directors. There are a number of obligations and duties imposed on directors of a company under the Corporations Act 2011 (Cth). In brief, it requires certain formal meetings to take place and requires certain documents to be lodged with ASIC. 4. FINANCE AND SECURITY ARRANGEMENTS ONLY FOR OUR RECOMMENDED STRUCTURE (COMPANY). Now we will present several forms of Financial and Security Arrangements available for your proposed purchase of the business:
FINANCING Debt financing = money provided by an external lender. For a small business such as yours, the most common forms of debt finances are: - Overdraft o the most common source of short-term finance and are often used to supplement the working capital needs for a business. An overdraft is a loan facility through which the account holder can draw loan funds up to a certain limit. Please note that an overdraft is repayable on demand. o Overdraft is repayable on demand. While theoretically the financier can require repayment of the balance owing at any time, a financier must give reasonable notice to a borrower of the cancellation of the facility. - Term loan facility: this is a cash advance provided for a specific period and usually also for a specific purpose, subject to the financier’s rights to require early repayment on default. o predominantly used to satisfy medium to long-term borrowing requirements, such as the purchase of a major asset. A term loan would be a suitable form of financing as this loan could be specified for the acquisition of VeryBelle Homes. M&M Business brokers have sent us the previous year’s profit and loss statement, and a list of assets – and an important element in a financier’s decision to provide a commercial loan, is to ensure that the borrower has sufficient cash flow to meet the principal and interest repayment obligations. o - which outlines the need to seek further advice from an Accountant. Other forms may include ( only mention if time permits): - Line of credit/credit cards - Commercial bills - Leasing - Bank guarantees - Letter of credit The extent of security required by the bank will be determined by the bank’s credit risk assessment. Equity financing The above-discussed methods are known as debt financing as they must be repaid. The other means of obtaining finance is through the investment of equity for an ownership share in the entity. The most common form of this is the provision of funds to a company in return for the issue of shares. Please note however, there is strict control of equity raisings by the ASX under its rules for listed entities and by ASIC under Corporations Act Ch 6D.
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