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Business Structure at present

Discuss about The Commentaries on the Law of Partnership.

Choosing the business structure through which the business would be conducted is a crucial decision due to the different features, advantages and disadvantages of business structures in the nation. The key forms of business structures in Australia include sole trader, partnership, trust and company. Based on the characteristics of each type of business structure, they can also be identified. This helps in analysing the different factors revolving around a case to gather the presence of business structure[1]. In the following parts, the present business structure which is being carried on by Mr. and Mrs. Smith is analysed. Once this is done, an advice would be drafted for them to highlight the future business structure which they should opt for based on the needs stated by them. In doing so, the merits and demerits of the pertinent future structure would also be summarised.

As stated in the introductory segment, there are business modes of running business in the nation. The sole trader is such a business which is run by a single person; though such person can employ others for running the business. The key here is that the business continues to be the sole responsibility of the proprietor. When the business is run by two or a higher number of people, it transforms from a sole trader to partnership form of business structure, provided that there is presence of other characteristics of partnership. A partnership is a business structure in which two or more partners run the business of the company in a unified manner, share the profits and losses between them, and the business is run for a common purpose[2]. Each jurisdiction in Australia, i.e., state and territory, has separate partnership acts. For Victoria, there is applicability of the Partnership Act, 1958[3]. This act provides the definition of partnership in its section 5 which is the same one as was just stated[4]. When a partnership is formed, the terms of the partnership, the sharing of profits and losses, the contribution of capital and the other details are put down on a document, which is in form of a contract and is known as a partnership deed. This document is the governing document for the particular partnership. However, the drawing up of a partnership deed is not obligatory and even in absence of this a partnership can be present. In this regard, the case of Joyce v Morrissey[5] is of help. This case had a rock band being declared as the presence of partnership due to the bands members performing in a band, which was running business in a common manner; and the profits, were being shared by the band members. These comply with the requirements for having a partnership based on section 6 of the Partnership Act[6]. Further, section 10 provides that the partners are liable for the actions of the partnership firm as the business is run commonly, with the intent of doing the same[7].

Business Structure for future

The evaluation of the facts of the case makes it clear that the business was being run in a together manner by Mr. and Mrs. Smith and that they were running it commonly for sharing profits. This makes their business structure as partnership, instead of their conceived notion of the same being a sole trader. A sole trader was present before the husband joined the business six months back. The reason for their deeming this business as a sole trader was the wife being named in the contracts of the business. However, in partnership, the general partner can indulge in contracts on behalf of the partnership firm and the agency law makes the other partners liable for such undertaken contracts. Also, a contract by one partner is considered as a contract undertaken by all of the partners of the partnership firm[8]. So, even when the contracts are drawn on the name of the wife, there will be deemed a presence of partnership. This is due to two distinctive reasons. First, in sole trader, only a single person runs the entire business, whilst in the case study, the business was being run by the husband and wife. Secondly, the husband had been brought in the business where he was helping his wife and working with her. This meant that he was running the business with her, instead of “for” her, which could made him as an employee. As nothing otherwise is stated, it is assumed that the profits are shared between them equally, which further strengthens the notion of the business being run by the two of them in unified manner.

The partnership form of business structure being run by the husband and wife has a number of demerits which are also deemed as the risks associated with partnership. The first one the joint liability of the partners due to the operation of agency law, where the actions of a partner or the partnership firm bind all the partners, irrespective of their role in such act. So, even when a partner does something which was not in his authority, the other partners are made liable for it[9]. Next is the unlimited liability of all the partners, where the partners’ personal assets can be made liable in conditions of dissolution of partnership, where the partnership is unable to pay off its debts. This puts the personal assets of the partners at risk. There is also the possibility of a disagreement or a dispute between the partners resulting in the end of the partnership due to the deadlock between the partners[10]. 

Concluding recommendations

Since the husband and wife are already running their business in partnership, the only other form which would suit them is company form of business structure. In Australia, the Corporations Act, 2001[11] is applicable and this has to be followed in every part of the nation, unlike partnerships where each jurisdiction has a different partnership act. A key advantage in this form is the separability of shareholders from the company. To state it more clearly, the shareholders have limited liability and can be made liable for the unpaid amount on their share only in cases of the company being wound up. The companies also can raise the funds from public, instead of having to rely upon the standard financing options. By offering the shares to public, in case of public company; and by offering shares to family and friends in case of proprietary company, money can be raised by the companies[12]. This form has a key advantage of the ownership being transferred from one person to another, by simply selling off the shares, unlike partnership where the partnership requires revaluation in case of addition or deletion of a partner[13].

For the present case, the husband and wife should opt for company as a business structure for the expansion of their business as this would allow them to raise funds from public. Where they want to restrict the shares to family, they should opt for proprietary company form. This would also enable them to transfer the ownership of the business, or split the same, with their sons. They can also run their business without having to track down the provisions of different partnership acts, based on the different regions in which they conduct their business. The company form would also allow them to hire people without any limits, expand their base of operations and manage the business in a more efficient manner.

However, every business structure has its demerits and so is the case with company form. The key disadvantage is the cost of forming and running a company form of business structure. Also, the affairs of company are public matter and require a number of disclosures. This would not help the couple as they want to keep the business in their family. This problem can be easily solved by opting for proprietary company as their type of company. They can initially start with small proprietary company followed by large, and when their business blooms, they can transcend to a public company[14]. The couple would also have to face the disadvantage of high compliance requirements, which are very less in partnership form. This would also mean raised responsibilities for the couple due to the strict duties and responsibilities imposed on the directors and key officers of the company under Part 2D.1 of the governing act[15].

To bring the discussion to its conclusion, the facts of the case presented in the given scenario show that a partnership form of business structure was being run between the couple at present. The advice which can be drawn from this discussion is that the couple should convert their business from partnership to a company form for their expansion needs and also for transferring their business in future to their sons. Even though this would mean taking up of certain disadvantages for the couple, but these can be carefully planned; for instance, by opting for a small proprietary company initially. 

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)

Story J, Commentaries on the Law of Partnership, as a Branch of Commercial and Maritime Jurisprudence, with Occasional Illustrations from the Civil and Foreign Law (The Lawbook Exchange, Ltd., 2007)

Vickery R, and Flood M, Australian business law: compliance and practice (Pearson Australia, 2012)

Joyce v Morrissey [1998] TLR 707

Corporations Act, 2001 (Cth)

Partnership Act, 1958 (Vic)

Schweizer Kobras, Corporate Law (2017) <https://www.schweizer.com.au/articles/Corporate_Law_(SK00079638).pdf>

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

[1] Andy Gibson and ‎Douglas Fraser, Business Law (Pearson Higher Education AU, 2013)

[2] Ibid

[3] Partnership Act, 1958 (Vic)

[4] Partnership Act 1958, s5

[5] [1998] TLR 707

[6] Partnership Act 1958, s6

[7] Partnership Act 1958, s10

[8] Joseph Story, Commentaries on the Law of Partnership, as a Branch of Commercial and Maritime Jurisprudence, with Occasional Illustrations from the Civil and Foreign Law (The Lawbook Exchange, Ltd., 2007)

[9] Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)

[10] Roger Vickery and ‎MaryAnne Flood, Australian business law: compliance and practice (Pearson Australia, 2012)

[11] Corporations Act, 2001 (Cth)

[12] Julie Cassidy, Concise Corporations Law (The Federation Press, 5th ed, 2006)

[13] 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>

[14] Schweizer Kobras, Corporate Law (2017) <https://www.schweizer.com.au/articles/Corporate_Law_(SK00079638).pdf>

[15] Corporations Act 2001, pt2D.1

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