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LAWS20059 Corporations And Business Structures Course

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  • Course Code: LAWS20059
  • University: CQ University
  • Country: Australia

Question:

Your Brief You are working at an accounting firm. Your overall task is to advise clients on how to structure their business – either as a partnership or company. The clients’ circumstances are extremely important considerations. You should not consider the topic of trusts, as they are used primarily to minimise tax, and tax law is not part of this course. (Assume that the clients instruct you that they’ve had bad past experience with trusts because of the extra administration and accountancy fees that trusts create, and they don’t want to do that again). You should also avoid any advice on tax. The tax implications of business structures are more complicated than websites suggest, and since tax is not part of this course, you should avoid it. (Assume that the clients specifically instruct you not to advise on tax).

In order to provide this advice you need to perform several sub-tasks:-

1.Research the law relevant to your advice.

2.Provide a written report to your supervising partner on your research.

3.Provide a written report to your supervising partner weighing up the alternatives for your clients and making a recommendation for a particular business structure.

4.Provide a separate written report to the supervising partner on the selected case showing the responsibilities imposed on a company director by legislation.

5.Provide an oral advice (in plain language) to the client in the form of a YouTube video, advising on the law, weighing up the alternatives and providing a recommendation.

 

Answer:

Introduction

There are three kinds of business structures namely partnership, company and sole proprietorship. In this section of the paper the features of a partnership and company form of business has been discussed

Partnership

A partnership is a business structure which is carried out by a minimum of two people and maximum of 20 persons. The partnership is governed by the Partnership Act 1963 (Cth) at the federal level and the state partnership legislations which are different for every state at state level. For the purpose of carrying out a partnership business no registration is required. The owners of this form of business structure are known as partners. The way in which the relationship of the owners and the business is to be conducted is decided by the partnership agreement or the partnership deed. Partnership is also governed by common law. It can be identified by the application of common law as well as statutory provisions. Business would be set to have been carried out in a partnership for in case it is evident that there are two or more people conducting the business for the purpose of making profit. The business has to be conducted in common. As distinguished from a joint venture a partnership has to be of a continuous nature and not a single project. All persons have to take part in the management of the business. There are some distinct features which a partnership form of business processes. In  this business the partners are jointly and severally liable for the actions of each other. This means that if one partner has committed a wrongful act the other partner would also be liable for such act. The partners are both the principal and agent of the business. This means that they can bind the business to any of the reactions and are also responsible for the actions of the other partners. In a partnership business the liability of the partners is unlimited. As there is no separate legal identity provided to a partnership business where there is loss faced by the business the personal assets of the partners can be attached. The partnership profit and losses shared according to the contribution to Capital or terms mentioned in the agreement.

 

Company

A company form of business has to be registered under the Corporation Act 2001 and the Australian Securities and Investments Commission Act 2001. There are various features which are company possesses making it different from other forms of business. The company is a separate legal entity. It is created by the provisions of law as an artificial legal person. There is no relationship between the identity of the owners of the company and the Identity of the company itself. Through this feature a company is allowed to own property in its name and also be a party to any legal case through its own name rather than the name of its owners. The property belonging to the company is the property of the company and not the property of its owners. This rule has been established by the court in the case of Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 as well as the case of Macaura v Northern Assurance Co Ltd [1925] AC 619. A company is provided with a feature of limited liability. The feature of limited liability unlike that of a partnership ensures that the liability of a shareholder is restricted to the investment made by such person in the shares of the company or any amount which is unpaid on the shares. In addition the company is provided with the features of separate management. The owners of the company are not mandatorily appointed to manage the organisation. The managers of the company are called directors who may not be the shareholders of the company. The companies also provided with a common seal which is used to execute any documents in the name of the company. Transferability of ownership is also a feature of the company as the shareholders are allowed to transfer or sell their shares to any other person. The constitution of the company creates contractual relationship between the company and the shareholders and the management and the company. All actions of the company have to be carried out in accordance to the constitution of the company. The level of legal compliance required in a company is considerably high. A company is brought to an end by the legal process of winding up and not by the death of any of its owners.

Advantages of a partnership

Partnership form of business is provided with various forms of advantages which maybe a basis ofselecting it as a business structure. These advantages are discussed below:

Cost and time

There is no registration required to form a partnership business. This means that forming a partnership business is very quick and cost-effective. A person does not have to make investment in relation to the cost of registration.

 

Control over management

The management and the owners of a partnership form of business are the same. Therefore all of them have a say in how the business operations are to be carried out. They have the right to make decisions in relation to the business.

Easy to operate

The level of compliance in a partnership form of business is considered be less as compared to a company. This is because there are not many reporting obligations which are imposed on a partnership form of business like a company.

Availability of funds

As compared to a sole proprietorship partnership form of business provides better availability of funds as it is carried on by more than one person who can also share the liability of the business.

Disadvantages of a partnership

Along with the advantages partnership form of business structure also have some disadvantages which needs to be considered before selecting it as a business structure.

No separate legal entity

A partnership business does not have a separate legal entity. It cannot own property in its own name. The Identity of a partnership is same as the identity of the partners. Thus when are cases filed against the partnership it is the case against the partners.

 

No perpetual existence

Unike a company a partnership comes to an end as soon as any of the partners leave the partnership or die. Even if there were three partners and one of them has left a partnership the business would come to an end. Therefore the certainty is less in this form of business.

Jointly and severally liable

In this form of business the partners are jointly and severally liable. Any action of a partner would also make the other partner liable even if they were not a part of such action.

Unlimited liability

Liabilities of the partners are unlimited. The creditors of the business can directly sue the partners and attach their personal assets in case of business debts.

From the above discussion it can be stated that carry out partnership form of business structure can be very risky if the business operations are carried on in a large scale. This form of business structure can be selected for small and medium range business operations.

Advantages of a company

Separate legal entity

Through this business structure it is allowed to own property in the name of the business and also in case of a legal dispute the name of the business can be used to address it.

Transferability of shares

Owners can easily transfer their shares without hampering the existence of the business.

Limited liability

The liability of the business owners known as shareholders is only to any amount unpaid in the shares or what they have already invested in the company and not personal assets.

Perpetual existence

The company form of business is certain that does not come to an end when any of the owners die or leave the business.

Access to funds

The use of the structure provides greater access to Capital over any other structure.

Disadvantages of company

High cost of registration and compliance

The formation of the company is a very time consuming process and also requires significant investment.

Different management

The owners do not have much control over the management as the affairs of the company and managed by the directors.

Regulatory obligations

There are significant amount of regulatory obligations which an organisation has to comply with under the Corporation Act and under the direction of the Australian securities and investment Commission.

Thus through the advantages and disadvantages of a company it can be stated that this structure has very less risk involved while carrying out business operations and is a very suitable for a business having large scale business operations.

The case of Asic v Adler and 4 Ors [2002] NSWSC 171 is a primary case in relation to the breach of directors duties in Australia. In this case the defendant was a non executive director of the company. The dependent had transferred $10 million to accompany where he was a major shareholder. The issue before the court in this case was that whether the defendant has violated the provisions of the Corporation Act 2001. The court had to determine whether the defendant would be considered as a director under section 9 of the Corporation Act. The duties which have been allegedly been breached by the directors of the company include section 180 of the Corporation Act which is related to the duty of diligence and care, section 181 acting in best interest of the company, section 182 misusing the position in the company and section 183 misusing the information gained from the company. Section 180(1) states that director of an organisation under the meaning of section 9 of the Act along with other officers has to act  diligently and carefully while discharging his or her obligations towards the organisation just as a reasonable person would discharge if he had been placed in the position of the director in the same situation. Section 181 of the legislation makes it mandatory for a director to act in good faith and best interest of the company they are working for with the intention of pursuing a proper purpose.

 


In the present situation the director was a non executive director. In this case it was held by the court that the director who was also an officer of the wholly owned subsidiary which would make him as a director under the provisions of section 9. This would apply because even where the director had not been properly appointed as a director he had a role of director in the company and could be considered as the defacto director. In this case Williams who was also the Managing Director of the subsidiaries had been found to have violated section 180(1) as there was a failure on his part to ensure proper safeguard before a loan was provided to the other company. The finance director of the company was also held to have violated the section as he had failed to discuss the proposal of giving the loan with investment committees. The business management rule provided in section 180 (2) of the Act was not applicable in this situation as the decision made by the directors was not an informed decision and there was elements of personal interest as well in the decision. This is the rule which provides protection to the directors in case they have been charged with the violation of section 180(1) of the Act. The court also held in this situation that a director's is not act in a proper purpose which is required under section 181 of the act. This was because the director did not act in the best interest of the company. The transaction which was entered into in relation to other companies had been for an improper purpose and for the sake of personal interest. The court also held in this case that the director has violated section 182 and 183 of the Act because she had used the information and this position in the organisation for pursuing personal interests rather than the interest of the company. Therefore the primary implication on this case is that the directors of the company are required to act in the best interest of the company.  Their decisions should always be in compliance with diligence and care and they should always indulge in informed decision making. The directors may be held personally liable in case they have found to violate the provisions of directors duties under the legislation. They may also be forbidden from managing a company in the future in Australia for a specific period under section 206C. The financial penalty to be imposed on them can extend to $200, 000.

I would like you to know that there are three kinds of business structures namely partnership, company and sole proprietorship.

I will only advice you features of a partnership and company form of business as I don’t think Sole proprietorships will suit your needs.

A partnership is a business structure which is carried out by a minimum of two people and maximum of 20 persons

The company is a separate legal entity. This means that It is created by the provisions of law as an artificial legal person. There is no relationship between the identity of the owners of the company and the Identity of the company itself.

The company is allowed to own property in its name and also be a party to any legal case through its own name rather than the name of its owners

A company is provided with a feature of limited liability. This feature ensures that the liability of a shareholder is restricted to the investment made by such person in the shares of the company or any amount which is unpaid on the shares.

The company is provided with the features of separate management. The owners of the company are not mandatorily appointed to manage the organisation. The managers of the company are called directors who may not be the shareholders of the company.

There is no registration required to form a partnership business. This means that forming a partnership business is very quick and cost-effective. A person does not have to make investment in relation to the cost of registration.

The formation of the company is a very time consuming process and also requires significant investment.

The management and the owners of a partnership form of business are the same. Therefore all of them have a say in how the business operations are to be carried out. They have the right to make decisions in relation to the business.

The owners do not have much control over the management as the affairs of the company and managed by the directors. However you have the option of managing your company as well by being a director.

In partnership form of business the partners are jointly and severally liable. Any action of a partner would also make the other partner liable even if they were not a part of such action. By using a company you will be precede form such provisions.

Liabilities of the partners are unlimited. The creditors of the business can directly sue the partners and attach their personal assets in case of business debts.

The liability of the business owners known as shareholders is only to any amount unpaid in the shares or what they have already invested in the company and not personal assets.

Thus, your personal assets would be protected if you use a company form of business

There are significant amount of regulatory obligations which an organisation has to comply with under the Corporation Act and under the direction of the Australian securities and investment Commission.

However, given the other advantages this disadvantages can be overlooked

Thus I would advise you to use a private company for your business

 

References

Allen, William T., and Reinier Kraakman. Commentaries and cases on the law of business organization. Wolters Kluwer law & business, 2016.

Asic v Adler and 4 Ors [2002] NSWSC 171

Bulchandani, K. R. BUSINESS LAW FOR MANAGEMENT. Himalaya Publishing House, 2017.

Cheeseman, Henry. "Business Law . Boston, Massachusetts: Pearson Education." (2016)

Clarkson, Kenneth, Roger Miller, and Frank Cross. Business Law: Texts and Cases. Nelson Education, 2014.

Corporation Act 2001 (Cth)

Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and cases in the legal environment. Wolters Kluwer Law & Business, 2015.

DesJardins, Joseph R. An introduction to business ethics. McGraw-Hill/Irwin, 2014.

Glover, W., and D. Doss. "Business law for people in business." Austin, TX: Sentia Publishing (2017).

Graw, S., Parker, D., Whitford, K., Sangkuhl, E. and Do, C., 2016. Understanding business law.

Jones, Lucy. Introduction to business law. Oxford University Press, 2017.

Kubasek, Nancy, et al. Dynamic business law. McGraw-Hill Education, 2015.

Law, Jonathan, ed. A dictionary of business and management. Oxford University Press, 2016.

Macaura v Northern Assurance Co Ltd [1925] AC 619

Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. Nelson Education, 2015.

Roach, Lee. Card and James' Business Law. Oxford University Press, 2016.

Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22

Stoica, Fl C., and Ch Ene. "Business Law Business Organisations." (2016).

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