Facts Following on from Question 1, you find a cafe franchise you want to buy for $150,000. You realise you will need $50,000 working capital. Your mum is happy to go into business with you, but she does not want to expose her personal assets and will risk no more than $50,000.

Offers on the caf close next week and you dont want to miss out. You havent found an accountant yet to ask for their advice, so you emailed your friend Campbell for advice regarding what business structure you should use to purchase the franchise and to run the caf. Campbell completed Bus114 last year, but he only just passed. Campbell provides you with the following structuring advice.

Campbells advice [via email]:

RE: caf dream coming true!

Hi Bestie

Thanks for reaching out to me with this. Ive thought about it a lot and here are some options for you, based on the information youve given me.

You mentioned you prefer a company structure with your mum as a minority shareholder, so you can make all the decisions for the business unchallenged. As the majority shareholder, you are automatically the decision-maker, so this works.

A company can be set up as the vehicle for purchasing the cafe franchise and operating the cafe. The company would be owned by you and your mum. You would buy 75% of the shares in the company for $150,000 and your mum buys the remaining 25% of the shares in the company for $50,000. This means that your mum will only be exposed to 25% of the liabilities of the company.

Your mum should then settle her shares in a trust with you as the sole beneficiary so if she dies, the company can continue.

I know you want to get on with this straight away so another idea, is you could establish a partnership between yourself and your mum. You dont even need a written agreement. You contribute $150,000 and she contributes $50,000. Like above, because she is the minority partner, she will only be exposed to 25% of the liabilities of the partnership.

Since you want to protect your investment and dont want the risk of being exposed to 75% of the liabilities, you should join the partnership via a company. Forget that your sister Sarah says you cant because partners must be human. Partners can be either humans or a company controlled by a human, applying the rule from Salomon v Salomon.

So, with this idea, you set up a company, invest $150,000 and the company forms the partnership with your mum.

A final idea is that you and your mum establish a discretionary trust which will purchase the caf franchise. Set it up so you are both trustees and beneficiaries. You then settle $150,000 on the trust and your mum settles $50,000 on the trust. As a junior trustee your mum will only be exposed to the money she settled on the trust. Like a partnership, you dont need this to be confirmed in writing. You can, and its a good idea, but you can deal with the paperwork later.

To protect her house from creditors, your mum should also place her house in this trust.

All the best

Cam

Required

Identify the incorrect statements and imprudent advice in Campbells email by applying the knowledge you gained from Weeks 5 and 6 of this course, and explain why it is incorrect.