Reference no: EM132703847
Question - A, B, C and D, all males and all talented musicians, compose a rock band commonly known as Red Rose. From a legal vantage point, A, B, C and D are equal partners in a live musical entertainment business trading as Red Rose.
The partnership assets include a sound system, a van, goodwill and the business name Red Rose. The personal talents of each partner, of course, are also central to the success of the business.
The firm 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 owned by Ms Kumar. Besides Ms Kumar, three qualified accountants plus semi-professional staff (all employees) work in the business. (If you ask Ms Kumar who are the associates she will tell you there are none.)
Over time the popularity of the band grows. With this comes increased revenues and with this in turn comes increased income tax liabilities for each of the firm's partners. The band 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, Trust Co Pte Ltd ('Tco') is created. The form A2 is filed with the Registrar of Companies. Inter alia this form states that the company's initial members are to be A, B, C and D with each taking 1 ordinary share at an issue price of $1 per share. Articles of the proposed company accompany the form A2. These articles state that the company's directors shall be A, B, C and D and that each shall hold office for life. The articles also state that the company's object is to act as a trustee. In all other respects the articles are in the form of Schedule 2.
The Registrar duly issues a Certificate of Registration.
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'.
Here are some details concerning 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 monies 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 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 $10,000 on Tco as trustee of the Families Trust. The dependents of each of B, C, and D settle equivalent sums. Monies settled on the trustee are deposited in Account 2.
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 $34,000 to be paid in cash. Performance is scheduled for one week after signing of the contract. 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.
Answer the following questions.
You need to briefly explain your answers to all questions excepting the last.
(i) At the start of the Red Rose story there is a single business, namely the live musical entertainment business carried on by the firm of A, B, C and D.
Following the restructure is there still only a single business?
(ii) 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 3 distinct income streams for A?
(iii) Ms Kumar as company secretary of Tco is entitled to a salary. M as manager of Tco'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?
(iv) In this story each of A, B, C and D as directors of Tco owe fiduciary duties to Tco. Does Tco itself owe fiduciary duties to anybody?
(v) Is Tco permitted to pay a dividend to its members before distributing income of the trust to the beneficiaries?
(vi) At the end of this story what is the issued capital of Tco?