Assignment
INSTRUCTIONS:
This is an individual assignment. You are free to discuss the assignment question with your friends. However, you should not disclose your written answer to anybody before the submission date.
You need to submit your answer through turnitin by noon of Friday, March 24.
Laucala registered students are also requested to submit a hardcopy of the same document to the SOAF secretary, again by noon 24/3.
How long should your assignment submission be? Answer each of the questions asked. In answering a question stay focused. Explain your answer clearly and fully. When you have explained the answer fully, stop.
Where appropriate, answers should include reference to any relevant section.
Here is the assignment.
The story below is located in Fiji. The story is in two parts. Following each part there are some questions. Answer all questions. Questions have equal weighting.
The Early Days
A, B, C and D are all adult males and skilled musicians. (A plays guitar, B bass, C keyboards and D drums.) All have worked previously as professional musicians.
In January 2015, A invites B, C and D to join him in forming a band. Following discussion, agreement is reached on the following plan.
A, B, C and D will form a band to be called Red Rose. The band will play professionally (i.e. not just for fun).
Red Rose will play at dances, tourist resorts, weddings, concerts and other functions; in short wherever and whenever an engagement can be obtained.
The band’s finances are to be handled by A, who will bank the proceeds of all engagements, ensure the payment of all expenses and pay the residue in equal shares to all four band members.
Each band member is to use all his music industry contacts in hunting up engagements for the band. In addition the band will be listed with Joe’s Talent Agency on standard terms. (Joe’s Talent Agency is the trading name for a business owned by Joe as a sole trader. The business finds work for performers. Joe’s standard terms provide that Joe is to receive 5% of the fee earned on any engagement arranged by Joe.)
Each band member is to play the instrument on which he is skilled and each member is to use his own instrument and associated electronic equipment. (B whose amplifier is underpowered is told to get a bigger and better amplifier.)
The band is to be run in a professional manner. In particular, all members must attend scheduled rehearsals, be on time for performances and not drink too much when performing.
Following the January meeting the band begins rehearsing. In February, Joe arranges a two week engagement for the band at Sheraton Resort. The band proves to be very popular and thereafter through word of mouth and the active soliciting of engagements by Joe and by band members, the band obtains a steady stream of work.
(i) On the information provided it is pretty safe to say that A, B, C and D have formed a partnership.
- What are the partnership terms? Detail as many as you can.
- Are there any matters not addressed, that you think should have been addressed by the partnership agreement?
(ii) Should the name Red Rose be registered?
Present Times
It is now 2017. Red Rose is still playing music and is the premier band in Fiji. The firm is making very good money.
Things have changed a little. Red Rose is no longer listed with Joe’s Talent Agency. The firm now employs a manager (‘M’) to assist in running its business. M’s job is to find gigs for the band [i.e. engagements] and to generally promote and publicise the band. M’s duties also include the more mundane responsibilities of overseeing the maintenance of equipment, organising transportation and accommodation when the band is on tour and handling the band’s finances.
Accounting services for the firm and each of its members are provided by Kumar and Associates. Kumar and Associates is an accounting services business employing three qualified accountants plus semi-professional staff. The business is owned by Ms Kumar.
The success of the band means that each partner now has a large annual income. The bad news is that each partner also now has a large annual income tax liability. The firm consults Ms Kumar as to how their affairs might be structured in a tax efficient manner.
Kumar identifies that each partner has a significant number of dependants (spouse, children, elderly parents) and recommends that each partner should attempt to spread his income (currently his share of the firm’s profits for the year) among his dependants. This can be best accomplished utilising a trust. Kumar proposes that a different legal structure be adopted to carry on the live musical entertainment business. At the centre of this structure is a trading trust. A detailed account of the legal restructuring follows.
First, a company is created. The company is called Trust Co Ltd (‘Tco’). Tco has 4 shareholders: A, B, C and D. Each member has one share. (Each share has an issue price of $1 and is fully paid up.) The company’s constitution provides that the directors of the company shall be A, B, C and D for life.
Second, the Tco board of directors appoints Ms Kumar as company secretary and adopts as the company’s registered office the address of Kumar and Associates.
Third, Ms Kumar settles the sum of $10 on Tco to hold on trust. The terms of the trust are contained in a document (the trust deed) signed by Tco. By this deed Tco agrees to act as trustee of what therein is called the ‘Families Trust’. The deed grants the trustee a discretion to invest the trust property in such shares, bonds or operating business as the trustee may from time to time select. The beneficiaries of the trust are identified as ‘such persons as settle money on the trustee’. A beneficiary’s interest in the trust is determined by reference to his or her percentage contribution to the aggregate monies settled on the trustee. The trustee is required to annually distribute all income of the trust to beneficiaries in proportion to each beneficiary’s interest. Finally the deed provides that in return for acting as trustee, Tco shall be entitled to an annual fee equal to 10% of the revenues of the trust.
Fourth, the board of directors of Tco approves the establishment of two accounts with Bankco. Account 1 is entitled Company Account, and Account 2 is entitled Trust Account.
Fifth, the dependents of A settle $25,000 on Tco as trustee of the Families Trust. The dependents of each of B, C, and D settle equivalent sums (aggregate sum settled $100,000).
Sixth, a contract of purchase and sale is negotiated and signed between the firm and Tco. The contract provides that Tco shall purchase all tangible assets of the firm plus goodwill. The contract price is $90,000 to be paid in cash. Performance is scheduled for one week after signing of the agreement. Tco as trustee of Families Trust, plans to use the assets acquired to conduct a live musical entertainment business. The business’s principal ‘product’ will be a band to be called Red Rose.
Seventh, the partners agree to dissolve their partnership immediately after performance of the sale is completed.
Eighth, Tco enters into employment agreements with each of A, B, C, D and M. The duties of the four employees A, B, C and D is to attend and perform music as directed by their employer Tco. The employment duties of M are to market and administer the live music business conducted by Tco.
Following the events outlined above, there has been a complete legal restructuring of the live music business. However, from the vantage point of a fan of the band Red Rose, nothing much seems to have changed. Indeed, fans of the band will generally have no knowledge of the legal restructuring that has taken place.
(iii) At the start of 2017 there is only one business.
Following the restructure, is there still only a single business?
(iv) Following the restructure, A [and likewise B, C and D] has 3 distinct legal roles/identities.
- What are these distinct legal roles/identities?
- Will these roles provide distinct income streams for A?
(v) Ms Kumar as company secretary is entitled to a salary. M as manager of the company’s music business is entitled to a salary.
- From which bank account (Account 1 or Account 2) is Ms Kumar’s salary paid?
- From which bank account is M’s salary paid?
(vi) Once the purchase and sale agreement is performed the firm is to be dissolved (seventh step). Can the partners each take a quarter of the sale money ($90,000) received or must they first ensure all outstanding debts of the firm have been paid?
(vii) Suppose that one year after the restructuring, Tco purchases a new sound system for use in the live musical entertainment business. Tco borrows money from Bankco to purchase the sound system.
Is this a liability of Tco or a liability of Families Trust or a liability of the beneficiaries?