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Types of legal Business structures in Australia

Discuss about the Corporation Law for Legal Business Structures.

Businesses are structured based on the needs of their owners and their target markets. These varying business structures function in different ways based on their framework and regulations which govern them.

A Sole Proprietorship business is a business structure where one person is in complete control over the affairs of the business (Harris, Hargovan & Adams, 2017). This means that the owner of the business is solely responsible for all the legal aspects of it including all its debits and liabilities. This form of business is also known as sole trader. A sole trader business structure is relatively inexpensive and does not require any legal formalities such as incorporation. This makes it an ideal business structure for small-scale ventures that have function on relatively low capital and risks (Sweeney, O’Reilly & Coleman, 2013). However, from the perspective of a sole trader the business structure has unlimited risks as the liability of the sole trader is unlimited (Burns, 2016). This means that his personal property can be attached to recover liabilities of his business. As a sole trader’s business is not distinguished from the owner as a separate entity and thus its liabilities are taken as the owners liabilities. In Australia obtaining an Australian Business Number (ABN) is sufficient to start a sole proprietorship business.

A partnership is a business structure where various individuals agree to undertake business activities jointly with the aim of earning and sharing profits. A partnership is formed through mutual agreement and it is the mutuality of the transactions that forms the crux of this business structure (Harris, Hargovan & Adams, 2017). The features of this form of business are the joint ownership of the venture, sharing of profits and losses and concurrent rights that can be mutually exercised. In the Australian legal system different states have enacted different partnership legislations such as the Partnership Act, 1892 enacted in New South Wales or the Partnership Act, 1891 which is in force in Queensland (Vermeesch & Lindgren, 2001). Partnerships may have limited or unlimited liability depending on the framework of the organization (Allen & Kraakman, 2016). In case of limited liability partnerships the liability of the partners are restricted to the amount guaranteed by them at the time of formation of the partnership.

A corporation is the most common form of business structure for large-scale businesses and is a separate legal entity on its own. This means that a corporation or company is responsible for its own actions and can sue and be sued in its own name (Harris, Hargovan & Adams, 2017). Thus a corporation is distinguished as a separate entity from its owners (shareholders). A company is Australia is governed under by the Corporations Act, 2001 which defines and regulates its functioning. Common law principles that have been developed through judgments delivered over the years would also apply to corporations (Kraakman & Armour, 2017). A company is incorporated by virtue of the capital raised from investors who become shareholders once the investment is made. The corporate veil protects the administration of the company from liability and this had also been reiterated in Salomon v A Salomon & Co Ltd [1896] UKHL 1 (Graw, 2011). However, in certain cases the court may lift the corporate veil and attribute liability to the administration if required by due process of law.

Sole Proprietorship

Another business structure in use in Australia is the formation of a trust. A trust creates a fiduciary relationship between people who are tasked with holding property or assets for a beneficiary (Harris, Hargovan & Adams, 2017). These individuals who hold the property are known as trustees. Trust law in Australia is derived from and English trust law and almost identically follows it. The formation of a trust involves the execution of a Trust Deed which defines and regulates it functioning (Latimer, 2016). The establishment of a trust is an expensive process and should only be employed in cases where the beneficiary is unable to manage and hold the properties in question. The trustees of a property have a legal interest in the property held by them whereas the beneficiaries in the scenario have an equitable interest. If a person holds both the equitable interest would be extinguished as held in Stickney v. Keeble [1915] AC 386 (Luhmann, 2018).

A joint venture is a unique business structure as it is ideally formed for one business project. This form of business is also called an unincorporated contractual association (Harris, Hargovan & Adams, 2017). In this structure two or more business entities agree to undertake a project and the profits and losses are shared by these entities. The entities retain their separate existence. In Australia a joint venture can be incorporated into a separate legal entity on its own by virtue of incorporation under the Corporations Act, 2001 (Graw, Whitford & Sangkuhl, 2015). The primary laws governing joint ventures in Australia are the Corporations Act 2001, Australian Securities and Investments Commissions Act 2001 (Cth) and Listing rules of the Australian Securities Exchange (ASX Listing Rules) (Park, Vertinsky & Becerra, 2015).

In case of a farmer who hires digging equipment and drivers to work on project sites the ideal business structure would be sole proprietorship. As a sole proprietor the farmer would have complete control over the working of the venture and would be able to regulate the functioning of the venture entirely (Abdulsaleh & Worthington, 2013). Another reason for this is raising capital and complying with regulatory provisions that apply to companies would be a tedious task that would not be beneficial for such a small-scale venture. A sole trader business would imply that the farmer is responsible for all the debts and liabilities of the venture (Hanrahan, Ramsay & Stapledon, 2013).

A former bank manager who wishes to become a financial advisor could ideally form a partnership business as this business structure is best suited for such transactions. In this way he could form an agreement with some of his peers and thus can share profits and losses (Cohen, 2017). A firm that provides financial advice requires various areas of expertise and thus employing multiple minds for the transactions would be ideal.  Formation of a partnership business is also less tedious as it has lower compliance requirements. In case of such a business structure the liability of the partners would be unlimited unless the partners form a limited liability partnership (Storey, 2016).

Partnership

A rare earth prospector who is willing to start explorations in Central Australia and Kenya should opt for a joint venture. The reason is that in case of the joint venture, the parties will only be responsible for the liabilities of the venture in the proportion that has been decided in the joint venture agreement (Killing, 2013). In the same way, this contract will also provide the amount of profit that will be received by the parties or the loss that will be shared by the parties. The joint venture agreement also covers other matters like the objective and the structure of the venture as well as the financial contribution that is going to be made by each party to the project (Perkins, Morck & Yeung, 2014). A joint venture is governed by the agreement, created by the parties and maybe incorporated or unincorporated based on the needs of the project. In this way, in the present case, creating a joint venture will be the most suitable option for starting the new business.

In this case, a philanthropist is willing to establish a private nature park and the money will be used for funding research into their endemic species. Therefore, the facts of the case suggest that the most appropriate business structure will be the formation of a trust (Richardson, 2013). After the establishment of trust, an obligation will be imposed on the trustees according to which they will be required to hold the property or the assets for the benefit of others, in this case for funding the research related with rare endemic species (Benn & Dunphy, 2013). Although it is expensive to set up a trust because a formal trust deed will clearly outline the way in which the trust is going to be operated it would be the most ideal structure for such a form of business as it would safeguard the investment adequately. Similarly, the trustees will be legally liable for the operations of the trust and they will have to undertake yearly administrative tasks (Dal Pont, 2015). Therefore in the present case, the most suitable business structure will be the formation of a trust for establishing and managing the private nature park.

A software developer who wishes to develop an app with the designed software would need to incorporate the business into a corporation. This is because the cost of developing an app and giving it the appropriate exposure would be immensely high and would also require a considerable amount of manpower (Hannigan, 2015). Thus, a company would be able to provide for the needs of such a venture adequately (Idowu, 2013). Moreover, the launching of an app is a risky business venture as its success completely depends on how it is received by the public in such a case it would be ideal for the developer to limit his liability by being a shareholder (McQueen, 2016).

Conclusion

To conclude the appropriate business structure for each venture depends on the needs of business. 

Reference list:

Allen, W. T., & Kraakman, R. (2016). Commentaries and cases on the law of business organization. Wolters Kluwer law & business.

Burns, P. (2016). Entrepreneurship and small business. Palgrave Macmillan Limited.

Graw, Parker, Whitford and Sangkuhl, 2015, Understanding Business Law 7th ed LexisNexis Butterworths.

Hanrahan, P. F., Ramsay, I., & Stapledon, G. P. (2013). Commercial applications of company law.

Harris, J., Hargovan, A. & Adams. M. (2017) Australian Corporate Law (6th ed.). Chatswood, N.S.W.: LexisNexis Butterworths. ISBN.

Kraakman, R., & Armour, J. (2017). The anatomy of corporate law: A comparative and functional approach. Oxford University Press.

Latimer, P, 2016, Australian Business Law CC, Edition.

Luhmann, N. (2018). Trust and power. John Wiley & Sons.

Park, C., Vertinsky, I., & Becerra, M. (2015). Transfers of tacit vs. explicit knowledge and performance in international joint ventures: The role of age. International Business Review, 24(1), 89-101.

Stephen Graw, 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters.

Sweeney, O’Reilly & Coleman, 2013, Law in Commerce, 5th Ed., LexisNexis.

Vermeesch, R B, Lindgren, K E, 2001, Business Law of Australia Butterworths, 12th Edition.  

Abdulsaleh, A. M., & Worthington, A. C. (2013). Small and medium-sized enterprises financing: A review of literature. International Journal of Business and Management, 8(14), 36.

Benn, S., & Dunphy, D. (2013). Corporate governance and sustainability: Challenges for theory and practice. Routledge.

Cohen, E. (2017). CSR for HR: A necessary partnership for advancing responsible business practices. Routledge.

Dal Pont, G. (2015). Equity and trusts in Australia.

Hannigan, B. (2015). Company law. Oxford University Press, USA.

Hanrahan, P. F., Ramsay, I., & Stapledon, G. P. (2013). Commercial applications of company law.

Idowu, S. O. (2013). Encyclopedia of corporate social responsibility (Vol. 21). N. Capaldi, L. Zu, & A. D. Gupta (Eds.). New York: Springer.

Killing, P. (2013). Strategies for joint venture success (RLE international business). Routledge.

McQueen, R. (2016). A Social History of Company Law: Great Britain and the Australian Colonies 1854 1920. Routledge.

Perkins, S., Morck, R., & Yeung, B. (2014). Innocents abroad: the hazards of international joint ventures with pyramidal group firms. Global Strategy Journal, 4(4), 310-330.

Richardson, B. J. (2013). Fiduciary law and responsible investing: In nature’s trust. Routledge.

Storey, D. J. (2016). Understanding the small business sector. Routledge.

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