QUESTION ONE (BUSINESS STRUCTURES)

John, Kay and Tom, recent business graduates from the University of South Western Sydney set up Menz Fashion Consulting. They decide to formalise this arrangement preparing a document called "The Business Agreement".

The business agreement contains the following terms:

John is to manage the sales and marketing functions, Kay, the finance and compliance functions while Tom is to manage logistics and production.

All three have contributed towards purchasing various assets for the business including 3 vans to be used to transport men's apparel from suppliers and to clients. All assets are jointly owned by all of them.

John and Tom are each to contribute to 40% of the capital while Kay is to contribute to 20% of it.

Profits and losses are to be shared equally.

Any loan contracts or supply contracts entered into by any of them which exceeds $5,000, needs unanimous consent.

After a few months, they needed funds to refurbish the business premises and accordingly, they take out a business loan from Pamela, their close acquaintance. The loan agreement provides for the following terms:

The lender will receive a share of the profits and losses to the extent of 40%

The lender has the right to examine the business books at will.

The lender is entitled to receive a quarterly business statement.

The lender has a right to be participate in making major decisions within the business.

Recently, Kay believing that she has discovered a niche business area, uses the letterhead of the business and orders 100 suits made from organic materials from Enviro Suits Pty Ltd at $100 each, without getting the consent of John and Tom. When the suits are delivered, John and Tom threaten to expel Kay from the business and immediately ship the suits back to the manufacturer with a covering letter advising Enviro Suits Pty Ltd that as Kay had no authority to buy the suits, the business refuses to accept them.

In the interim, one of their employee delivery drivers, whose role is to transport the suits from the supplier to the warehouse, has carelessly reversed into the vehicle of a third party causing the items being transported in the third party vehicle to be damaged.

In addition, John and Tom have since discovered that Kay has been using two of the vans for a private taxi business transporting overseas passengers from the domestic airport to hotel accommodation. John and Tom have further discovered that Kay has been using the computer equipment on site to run her own personal business, Fashionistaz Galore, (which has a similar business model) to Menz Fashion Consulting. Some existing clients of Menz Fashion Consulting have alerted John and Tom that Kay has been cold-calling them to migrate their business over to her personal business.

Please answer the following questions in the IRAC format, using key sections of relevant legislation and case-law:

(a)Advise whether there is a partnership in existence. Further, please advise if Pamela is a partner of the business.

(b)Advise John, Tom and Kay regarding their potential liability, for the outstanding debt of $10,000 as well as for the actions of their delivery driver in causing damage to third party property.

(c)Advise whether Kay's actions infringe any obligations she has under the law.

(d)John and Tom have recently been considering whether a sole trader or company structure would have been better alternative business structures to use instead of their current business structure. Explain your answer with reference to the following:

a.Characteristics of each of these structures.

b.Potential liability faced by them through use of each of these structures

c.Reporting Burden with each of these structures.