Question

The Stephanie Resorts complex began in 2001 with 4 family-owned adjacent motels near Seaspray Gippsland. This allowed the owners Benny, Bjorn, Agnetha and Anni-frit to reduce and share their costs (particularly promotion, maintenance, servicing and transportation). Each of the four motels remains under separate ownership although there is a management committee consisting of the four owners that makes decisions on matters of common concern, hires any employees who have roles across the motel complex and decides on owner contributions for repairs, local council charges and agreed developments to the Resort as a whole.

Their location has access to a private area of the ninety-mile beach. The Resort is made up of a series of large huts (redeveloped from the original motel buildings) grouped in four areas each belonging to one of the owners and accessed by brick paths. There is also a common area purchased jointly by the owners in 2010 which has a communal dining room next to a swimming pool equipped with toilets and changing rooms. There is a big sign on the childproof gate warning parents and carers of the need to supervise their under 12s in the pool area. The resort guests are given towels when using this pool. There are also 2 unpaved dirt paths leading down to the secluded rocky beach. The beach is also notionally part of the Resort with the owners receiving permits to set up deck chairs, umbrellas and other recreational services in return for maintaining the area and its brochures describe it as a perfect spot for sunbathing. Staff are trained to advise any clients who want to swim at the beach that the rock pool at the beach is not safe for swimming or diving, There are no signs anywhere on the Resort warning of any danger.

The Resort has a 5 out of 5 rating on the Pagoda Travel website aided by Benny and Bjorn writing numerous fake reviews saying how great Stephanie Resort is. They have not told any of others about their efforts!

There are several long-term employees at Stephanie Resort including Ahmed, the house manager (10 years there) and Chen (in charge of maintenance), 5 years.

The booking agent (Dianne) is not employed by the Management Committee but pays 50% of her profit to it. Dianne charges the providers 20% of the service provider’s fee for any tours or services booked for Resort guests. The committee then distributes the money received from Dianne to the four owners’ families according to monthly occupancy rates. She is responsible for identifying and appointing suitable providers to provide tours and entertainment services on behalf of the Resort. All tours and services are branded Stephanie Resort Entertainment on all advertising material.

The four owners are seeking advice on several questions:

1. Business Structure (5 marks)

The owners believe that they all have responsibility for each of their separate motels and shared responsibility for common areas but that they are not responsible for the acts of the other owners. Are they correct? Give reasons why or why not concentrating on the characteristics of different business structures or trading arrangements and citing relevant law? (3 marks)

Are there any steps or business structures the owners can consider to minimise the possibility of being held responsible for the acts of other owners? In answering explain how such steps would be taken or how any proposed business structure would be structured. (2 marks)

Answer 1

Solution:- Yes, the Owners are correct because Risk management is the main factor involved in the Partnership Business.Your right to transfer your ownership interest in jointly held business depends on how the business is jointly owned. In a tenancy in common, for example, each co-owner has an individual interest that can be transferred to another person or entity, either through a sale or via a will.If a deal done by any owner fails then all the partners will have to bear that.So,the owners may mention in agreement that they won't be responsible for the act of other owners.

The characteristics of different business structures or trading arrangements and citing relevant law are as follows-

1) sole proprietorship

2) partnership

3) limited liability company

4) corporation and S corporation.

A Business structure directs a group of people to fulfill defined roles so their combined actions will help the business achieve its objectives. The way that people's roles align in relationship to one another dictates their functions as individual employees.By following these steps or business structures the owners can consider to minimise the possibility of being held responsible for the acts of other owners. They are pexplained in detailed as follows -

1) A sole proprietorship is the most common form of business organization. It's easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.

2) A partnership involves two or more people who agree to share in the profits or losses of a business. A primary advantage is that the partnership does not bear the tax burden of profits or the benefit of losses-profits or losses are "passed through" to partners to report on their individual income tax returns. A primary disadvantage is liability-each partner is personally liable for the financial obligations of the business.

3) A corporation is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that's required. While double taxation is sometimes mentioned as a drawback to incorporation, the S corporation (or Subchapter corporation, a popular variation of the regular C corporation) avoids this situation by allowing income or losses to be passed through on individual tax returns, similar to a partnership.

4) A hybrid form of partnership, the limited liability company (LLC) , is gaining in popularity because it allows owners to take advantage of the benefits of both the corporation and partnership forms of business. The advantages of this business format are that profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.

When making a decision about the type of business to form, there are several criteria you need to evaluate. Carefully consider the unique needs of your business and its owners, and seek expert advice, before settling on a particular business format.

All these laws should be considered before forming a business structure.