The purpose of this memorandum is to present the advice which needs to be given to Mr and Mrs Smith based on the situation they are in and for their future, in context of the present business structure and the business structure which would be suitable for them in future.
Current business structure
Sole trader is a business structure in which the entire business is carried on by the sole proprietor. This does not mean that people cannot be employed in this form; it just means that the ownership of the business remains in hand of a single person. Another form of business structure in the nation is Partnership, where the partners, who are more than two in number, come together to carry on the business of the partnership, and share the profits and losses in an equal manner. Under section 5 of the Partnership Act, 1958 (Vic), the definition of partnership is given. As per this section, partnership is the relationship which is present between different people, who carry on the business in a common manner, where the view is of earning profits. The key here is for two or more persons, to come together, carry on a common business and earn profits. In Joyce v Morrissey, the rock band of Smiths was deemed to be in partnership, even when they were simply band members, performing together. The requirements for holding a partnership are covered under section 6 of this act. As per section 10, the partners are bound by acts carried on for the partnership firm. They key in this regard is the presence of intention.
Till the time Mrs Smith was running the business alone, it was sole trader. However, when six months back, Mr Smith joined the business, it became a general partnership, as it was a simple business structure present between husband and wife. Had Mr Smith been working “for” his wife, instead of “with” his wife, it would have continued to be a sole trader business structure, but coming on board with his wife, resulted in Mr Smith getting in partnership with his wife. On this basis, it becomes clear that Mr and Mrs Smith were running a partnership. Again, he joined the business to carry on the business of her wife and continue in a joint manner, which further affirms the presence of partnership. The contracts which are carried on in partnership need not have the name of all partners, for partnership to be present, and even then, all the partners of the partnership firm are liable for the actions of the other partners, owing to the agency law. A partnership deed or a written contract is not an obligation for the presence of partnership. Also, there was clear intention in this case between Mr and Mrs Smith to carry on the business together, which is the best evidence of lack of sole trader and presence of partnership. Thus, here a partnership was present between Mr and Mrs Smith.
Risks associated with carrying on partnership
Running a partnership form of business has a number of risks associated with it. The biggest risk for the partners in partnership is that they have unlimited liability. This means that in case the partnership firm is unable to pay its debts, the personal assets of the partners can be attached to repay the debts of the company. Another risk is that the partners are jointly and severally liable, which means that for the actions of one partner, the other partners can be held liable. This is due to the presence of agency law, where for the acts of one partner, not only the other partner but also the partnership firm can be made liable. The partnership faces a huge risk of being dissolved owing to friction and disagreements between the partners. Another risk is of breaching the partnership act, particularly when the business of partnership expands to other jurisdiction, in which the provisions of partnership differ from Victoria.
Business structure for expansion and for their children
The partnerships, when want to expand their operations, often opt for the next business structure, i.e., company. In Australia, the companies are operated under the Corporations Act, 2001. Unlike the partnership acts, which differ from state to state, the corporation act applies to the commonwealth of Australia and the individuals can continue to apply the same legislation irrespective of the jurisdiction which they operate in. Unlike the partnership form of business structure, the shareholders do not have an unlimited liability, and in events of winding up, they are required to pay only such sum, which is unpaid on their shares. Thus, the liability for the shareholders is limited. Also, in comparison to a partnership form, the ownership can be transferred easily by simply selling the shares to another party.
The biggest advantage for forming a company is that the money can be raised from general public in public companies, and even in case of proprietary companies, the capital can be raised from the friends, family and acquaintances. So, in case Mr and Mrs Smith require finance, they can raise the funds from different sources, based on the structure of corporation they choose. A company form of business structure would ensure that they have ownership over the business, but do not have to put their personal assets at risk. This would also allow them to hire talent, thereby raising their skill base. A corporation would allow them to continue running their business in different parts of Australia, without having to worry about the applicable partnership act of different jurisdictions.
A corporation form of business structure would enable Mr and Mrs Smith to transfer their business easily to their children where they can be given equal shareholding and continue the business. Apart from this, they can also give their three children equal shareholding, while maintaining the dominant or equal shareholding. For instance, they each person can be given 20% share, which would allow each person to have equal share, in terms of Mr and Mrs Smith and their three children. In doing so, they would not have to face a threat to the property of the children. In partnership, this might become difficult, as for adding each partner, the partnership would have to be re-valued.
There are certain disadvantages of a company form of business structure, which need to be presented before Mr and Mrs Smith so that they can make the decision after considering all the factors. A company form of business structure is costly to set up and maintain and is also more complex in comparison to a partnership form of business structure. The affairs of the companies are public, which is deemed as a particular difficulty in family businesses. The freedom and ease of doing business, as is present in partnership, is not present here, as there are limited external regulations in partnership. A partnership can be easily changed in company, but to do the same vice-versa is a complex process.
It would be favourable for them to opt for this form of business structure in future. Even though Mr and Mrs Smith can continue running their business in a partnership form, and add their children in partnership, it would be more beneficial for them to opt for partnership, owing to the different benefits of company form of business structure and the demerits of partnership. Thus, it is suggested to Mr and Mrs Smith to opt for a company form of business structure as it would serve their dual purpose of expanding the business and handing over the same to their children in the future.
Cassidy J, Concise Corporations Law (The Federation Press, 5th ed, 2006)
Gibson A, and Fraser D, Business Law (Pearson Higher Education AU, 2013)
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
Vickery R, and Flood M, Australian business law: compliance and practice (Pearson Australia, 2012)
Joyce v Morrissey  TLR 707
Corporations Act, 2001 (Cth)
Partnership Act, 1958 (Vic)
Go To Court Pty Ltd, Partnerships in Victoria (2017) <https://www.gotocourt.com.au/civil-law/vic/partnerships/>
Tasmania Government, Company – advantages and disadvantages (2017) <https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/proprietary-company-advantages-and-disadvantages>
Tasmania Government, Partnership – advantages and disadvantages (2017) <https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/partnership-advantages-and-disadvantages>