Legal Characteristics Of Partnership And Company Structure

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.

Partnership Structure Legal Characteristics

Each business structure has different legal characteristics which distinguish it from other business structures. While starting a business, parties have to consider these legal characteristics for choosing the appropriate legal form in which they wanted to run their business. This report will evaluate the legal characteristics of partnership and company structure in order to understand key factors which should be evaluated by parties in order to choose the suitable structure for their business.

Selection of a partnership structure is a common choice for parties while running their operations in Australia. Partners can simply form a partnership by constituting a contract between each other. Generally, profits and losses of the business are divided equally between partners unless otherwise provided in their partnership agreement. In Australia, up to 20 people can form a partnership business to operate their business. Partners have unlimited liability in the business since it did not have a separate legal personality. Partners have to comply with fewer legal requirements while operating their business and the cost for forming the business is low as well. Following are various elements while must be fulfilled by the parties to form a partnership business structure.

The business of the partnership must be carried on by the partners together. This principle implies that the business acts must be repeated rather than performed a single time. Furthermore, a partnership did not exist between partners until the business is started by the parties due to which partnership to carry out a business in the future is not valid as given in Khan v Miah  case.

The partners involved in the business must run its operations mutually based on which they all have different roles in the business. A partnership cannot be formed between up if they are not involved in the business at all as given in Saywell v Pope case. Based on the mutual rights, partners can act as agents for other partners.

Lastly, the purpose of forming the partnership business must be to generate a profit for the parties. However, if the business suffered a loss, it did not mean that the partnership does not exist between partners as given in Jennings v Baddeley case.

A corporation is a common business structure which is selected by parties because it provides the various growth opportunities. It has a separate legal entity from its owners based on which their liability is only limited to the amount they invest in the corporation. Salomon v Salomon & Co Ltd is a leading case in which the court provided that a corporation has separate personality even when it is operated by a family. They cannot be held personally liable for the liabilities of the business, and they are only liable up to the shares invested by them in the company. The Corporations Act 2001 (Cth) governs the companies operating in Australia and issue regulations for their operations. The process of incorporation is complex procedure since parties have to comply with strict legal requirements. Furthermore, the expenses of incorporating the company are also high since there are various administration fees which parties have to pay for its registration. Its operations are managed by directors who have to take business decisions while complying with various duties imposed by the Corporations Act. Following are various legal characteristics of a corporate structure.

• Separate personality of the business (ability to hold property and form contracts)
• Liabilities of its members are limited
• Complex procedure of registration
• Expensive incorporation
• Directors are responsible for managing operations
• A corporation is terminated by winding up
• Profits are distributed in the form of dividend to its owners

Elements of Forming a Partnership

To conclude, legal characteristics of both partnership and company structures are separate, and parties should evaluate them while making a decision to select the appropriate structure for their business.

Legal Characteristics of both partnership and company provide different benefits and challenges for the parties selecting these structures. Thus, before making a decision to select the appropriate structure, parties have to ensure that they should weigh the pros and cons of both legal structures. This report will analyse both pros and cons of partnership and company to weight them with each other in order to provide a recommendation to the clients.

Pros

• The process of forming a partnership business is easy since parties did not have to comply with strict legal requirements. They can simply form a contract with each other in order to start their business.
• The expenses incurred in the formation process are also low in partnership since there are not heavy registration fees required.
• Profits and losses of the company are divided equally between partners unless specified by the parties in their partnership agreement.
• The operations are controlled by mutual understanding between partners since they are only responsible for managing its operations.
• While managing the operations of the business, compliance with strict legal requirements is not necessary for partners.

Cons

• Since the business did not have a separate personality, the liability of partners is unlimited. The court can order the partners to use their personal assets in order to repay the debts of the business.
• A conflict or disagreement can occur between partners due to which they might decide to dissolve the business. Furthermore, the business can also be dissolved when a partner dies.
• Partners have mutual rights based on which they act as agent for one another and others can be held liable for wrongs of one partner.

Pros

• Liability of parties is limited in the business, and they are only liable up to the amount invested by them in the business. The business has its separate legal entity which protects its owners from unlimited liabilities and wrongs of the business.
• Owners can easily transfer their ownership in the business to third parties. They are not required to get prior permission of any other party.
• There are different options available for the company to raise capital for its operations under its own name. For example, getting a bank loan in the name of the corporation or issuing shares in the public to raise funds for its operations.
• Generally, directors are experienced and skilled individuals who take corrective business decisions in the company.
• Death of members did not dissolve the business because it has perpetual succession.

Cons

• The process of incorporating a company required the parties to comply with a large number of legal requirements which makes the process complex.
• The parties have to pay registration and other fees which make the process of incorporating a company expensive.
• The financial affairs of a company are public which can be accessed by anyone.
• Directors can be held personally liable for the decision taken by them in the future if they violate the duties imposed on them by the Corporations Act.

After comparing both merits and disadvantages of partnership and company structure, selection of a partnership is more suitable option for the clients. The clients did not prefer the legal complexity of trust due to which they wanted to change their business structure. Thus, they should select a partnership structure since in this structure they would have to comply with fewer legal regulations. The formation of the business is simpler than compared to a company since there are not legal complexities in the formation. The expenses incurred in starting the business are less than compared to a company. Furthermore, partners are jointly and severally liable for their business because they control all of its operations. During its operations, they have to comply with fewer legal formalities. Thus, a partnership structure is suitable for the client.

To conclude, by analysing both advantages and disadvantages of partnership and company structure, a recommendation is given to the clients. Selection of a partnership structure is more suitable for clients than compared to a company structure.

A company is a legal person, and it takes its actions based on the agency of natural persons. Corporations act through their board of directors who takes decisions regarding its operations. It is the duty of directors to ensure that they focus on the interest of the company rather than their personal benefit. However, it is easy for them to misuse their position; thus, the Corporations Act implement duties on them breach of which can hold them personally liable for their operations. The ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72 case will be analysed in this report to understand the relevance of directors duties and their compliance.

The key parties, in this case, include HIH Casualty and General Insurance (HIHC), Pacific Eagle Equity Pty Ltd (PEE), Adler Corporation Limited (AC) and Adler. A loan for $10 million was authorised by HIHC to PEE without any security. Adler played a significant role in this transaction, and this transaction was not recorded properly. A loan of $2 million was given by PEE to Adler and other parties from the $10 million. Furthermore, $4 million was invested in purchasing the shareholding of HIH. Later, PEE sold such shares at a loss of $2 million. Moreover, $4 million was invested by the company in AC based on which it purchased the shareholding of the company at a loss. Adler was involved in all of these transactions, and he used the company’s money for personal benefits. Based on these transactions, he was held guilty of breaching section 180, 181, 182, and 183 of the Corporations Act.

Corporate Structure Legal Characteristics

Section 180 (care and diligence)

The board of directors in a company are operated at the highest authority, and they take all the business decisions in the corporation. While making these decisions and discharging their duties, they owe a fiduciary duty towards the company and its stakeholders. They have to maintain a degree of care and diligence while making decisions in the corporation which any reasonable person would in the particular situation. Adler breached his duty by allowing HIHC to give $10 million as a loan to PEE without taking proper security. This decision would not have taken by any reasonable person based on which Adler breached his duties given under section 180.

Section 181 (good faith)

Directors have a duty to ensure that they act in good faith by making business decisions and exercise their powers for proper purposes only. They should not make any business decisions which are likely to cause harm to the company or its stakeholders. Directors should not prioritise their personal interest above the interest of the company. Adler used the loan of $10 million for personal benefits by giving loan to himself and purchasing the shares of its own company. It also caused detriment to HIHC based on which he breached section 181.

Section 182 (proper use of position)

Directors have the authority to make business decisions for the company and form its future strategies because they operate in the top level position in the corporation. Thus, they owe a duty to ensure that they should properly use their position while making business decisions and discharging their duties. They should not harm the company or its stakeholders or focus on gaining personal benefits. Adler used HIHC’s money for personal benefits which caused harm to the company, thus, he breached section 182.

Section 183 (proper use of information)

Directors should use the information which they have in the business properly to avoid prioritising personal interest above the company or causing any harm to the organisation. The unsecured loan of $10 million given by HIHC was detrimental for the company, and Adler only focused on his personal interest, based on which he breached section 183.

Conclusion

To conclude, directors should comply with the general duties imposed by the Corporations Act violation of which leads to legal consequences. The example of ASIC v Adler case is relevant in understands the importance of directors’ duties and their compliance.

Directors Duties and Compliance

Hello. In this video, I will discuss two business structures which include partnership and company in order to advise our clients regarding the selection of the one or the other. Selection of these structures is fairly common in Australia and parties select them to run their operations. Our clients are operating in the real estate field, and they wanted to change their business structure from trust to something else. All the parties belong to the same family, and they wanted a business structure which has fewer legal regulations. In order to advise them, it is important to evaluate the legal characteristics of both partnership and the company structure. Firstly, the incorporation of partnership is fairly easy, and parties did not have to comply with strict legal regulations. The cost incurred in the formation of a partnership is low as well. While operating their business as a partnership, partners do not have to comply with strict legal regulations. Partners are responsible for managing operations of the partnership, and they take all its business decisions. However, they have unlimited liability based on which their personal property can be used by the court to pay off the debts of the partnership business. In case any conflict or disagreement arises between partners, then it could result in the dissolution of the entire business.

On the other hand, incorporating a company requires parties to comply with strict legal regulations. The process of incorporation requires parties to incur heavy costs in registration and other fees. While managing its day to day operations, the parties have to comply with various legal regulations. Furthermore, the financial affairs of the company are not private, and anyone can access them. However, parties have limited liability, and they cannot be held personally liable for its operations. There are more options for raising capital present for members of a company. In the case of our clients, they all belong to the same family. They wanted to change their current business structure because they did not prefer to comply with strict legal formalities. Thus, it is my advice that they should form a partnership business which would be more suitable for them. Firstly, there are no legal formalities in the formation, and the costs of incorporation are low as well. During day to day operations, the clients will have to comply with fewer legal regulations and their financial affairs will be private. On the other hand, they will have to deal with a large number of legal requirements which will increase the complexity of their legal operations. Therefore, based on my advice, the selection of a partnership structure is a more suitable option for them which will benefit them in the long run.