A business structure is referred to a category of organisations which are legally recognised in a given jurisdiction and characterised by the legal definition of particular category. Selection of a suitable business structure is necessary to ensure that the corporation is able to avoid complexity in the legal compliance and it is able to avoid legal penalties. Parties can choose between different business structures each of which has separate characteristics which provide advantages and disadvantages of corporations. Following are difference between nature and characteristics between partnerships, trust and corporate structure along with evaluation of their advantages and disadvantages.
Partnership structure
In case two or more parties wanted to start a business structure, then they can select the partnership business structure. It is governed under the Partnership Act 1891 (Qld). Under section 5 of this Act, the definition of partnership is given. It is referred as a legal relationship which is constituted between two or more parties who agreed to run the operations of their business in common in order to generate profit. The partners in a partnership firm cannot exceed over 20 members. The key characteristics of a partnership are that it did not have a separate entity like a corporation based on which the partners have unlimited liability in the business.
They are liable for the debts of the business, and they are liable for the actions of other partners as well. In Joyce v Morrissey case, the court provided that the relationship between parties is a key criterion which must be fulfilled in order to constitute a valid partnership. Moreover, there must be repetition of business activities because an agreement to for performance of isolated event cannot be considered as a valid partnership as given in Smith v Anderson case. Parties receive various advantages in a partnership business one of which includes lack of legal complexities while managing the operations. Partners did not have to deal with a wide range of laws while managing its operation as compared to a corporation. It is easy to form a partnership firm, and the process did not require the parties to invest significant costs as well. The income of parties is taxes as their personal income, and the profits are divided equally among partners unless provided otherwise in the partnership agreement.
Trust structure
A trust structure is referred to a legal relationship which is constituted between parties relating to trust property. Its nature is similar to a contractual relationship in which the parties separate the burden of ownership from the benefits of property. The burden of the property is managed by a trustee that includes payment of insurance, taxes, activities relating to management and others. The benefits are received by the beneficiary of the property which includes rent, revenue, proceeds of sale and others. The trustee of the property becomes its owner which means he/she receive the right to make decisions regarding the property.
The Trust Act 1973 (Qld) provides provisions which are necessary to comply by trusts. The legal framework of trust is complex than compared to a partnership firm. The actions of the trustee cannot be outside the scope of the trust deed which is formed between parties. The advantage of a trust business structure is that privacy is maintained and parties did not have to disclose their affairs to the public.
The income of the trust property is distributed based on the discretion of the trustee. The beneficiary of the property is protected from third parties creditors. However, there are disadvantages of this structure as well. For example, parties find it difficult to get a loan on the trust property. The powers of the trustee are limited by the trust deed. Formation of a trust requires substantial initial investment and parties have to comply with complex legal regulation. The trustee is personally liable towards third parties creditors and this structure is set for a specific period.
Company structure
The Corporations Act 2001 (Cth) governs the companies operating in Australia. The provisions regarding formation of a company along with its rights and liabilities are included in this act. It provided that a corporation is a separate legal entity which has an artificial identity that is different from its owners. This nature of a company was defined by the House of Lords in the case of Salomon v Salomon & Co Ltd. In this case, the court provided that the separate identity is a key characteristic of a company based on which its liability is separate from its owners. Shareholders cannot be held liable for the debts which are incurred by the corporation.
Third party creditors have the right to directly sue the company rather than its members, and the corporation has the right to sue them for violating their contractual obligation as well. Advantages of forming a company include limited liability of parties, easy availability of capital, ease in growth of business, transferability of shares, and others. On the other hand, disadvantages of a corporation include high initial cost for incorporation, strict legal framework, lack of privacy in affairs, liability on directors if they fail to comply with duties and others.
Partnership
Rights
In a partnership firm, partners have various rights which allow them to manage the operations of the partnership firm. Partners have the right under which they can take active part in the operations of the business. They can invest their money in the business and avail interest in advance for their capital. The partners have the right to consult with other partners regarding the business operations while making decisions in the firm. The books of accounts of the firm can be accessed by the partners anytime as it is their right. They loss have the right to share profit or loss of the firm.
Duties
Partners owe a fiduciary duty towards each other based on which they have to maintain a standard of care to ensure that they did not take any actions which could harm the firm or other partners. Partners owe a duty to use their knowledge and skills to take business decisions to avail maximum benefits. Partners did not receive any remuneration for their duties which they conduct while managing the operations of the business. They owe a duty to disclose key information to other partners that are necessary for them to know in order to discharge their duties effectively.
Liabilities
A partnership relationship imposes a liability on each partner under which they can be held jointly and severally liable for the actions of the firm. In case any partner engages in a wrongful act or omission during the course of business, then other partners are also liable under such act. Partners are liable to avoid mutualisation of the money which they receive from other partners since they owe a liability towards the firm. Partners act as agent of each other based on which the liability of one partner can be imposed on other partners as well by third parties.
Trust
Rights
Trustee has various rights which are given in the trust deed which are formed between the parties. As per these rights, the trustee has the right to make decisions for management of the trust property. The protection of the trust property is the right of the trustee. The trustee is also allowed to use the trust funds which are allocated for managing the trust property. The beneficiary has a right on the property as well regarding collection of its benefits such as profits, rent, interest, and others. The beneficiary also has the right to ensure that the trustee did not sell the trust property to third parties without the permission of the beneficiary.
Duties
The trustee owes duties towards the beneficiary to ensure that the trust property is properly managed. The trustee owes a duty to ensure that he/she avoid misusing the trust fund for personal purposes. A duty is also imposed on the trustee to ensure that he takes appropriate actions to protect the trust property. A duty regarding maintenance of records for the trust property and its benefits is also necessary by the trustee. The trustee also owes a duty to ensure that conflict regarding the interest of the trust property did not arise and the beneficiary receives all the benefits at appropriate time.
Liabilities
A trustee has the liability to ensure that it avoids taking any actions which could result in causing harm to the trust property and the interest of the beneficiary or else legal penalties can be imposed. Liability can be imposed on the trustee if the terms of the trust deed are violated in order to conduct fraud or sham. Proper use of trust fund and giving back the benefits to the beneficiary is also necessary by a trustee to avoid legal liabilities.
Shareholders of the company possess a number of rights within a company. One of the primary rights of the shareholders of an entity is to receive the returns on their investments in the form of dividends on shares. In addition, shareholders have right to be part of the decision-making process within a company, by attending and voting on the various matters relating to the company. Further to add, the shareholders have the right to gain an insight into the operations of the organisation by receiving various reports and the announcements regarding the key affairs. The shareholders of the company are also entitled to transfer the ownership of the shares possessed to third parties. The directors of the organisation have the right to manage the business operations in an effective and efficient manner. In return, they have the right to receive the remuneration in lieu of rendering services to the organisation.
With rights, come the duties of the directors. Some of the chief duties of the directors of the company have been highlighted as follows. The primary duty of the director is to set up a registered place of business for the entity, together with providing information to the members of the company regarding the offer of the same. The Corporations Act (Cth) lays down some basic duties of the directors to be complied with as prescribed in section 180 to section 183 of the act. While section 180 requires the directors to exercise due care and diligence while exercising the powers, section 181 requires the directors to act on good faith.
Thus, these regulations are focused on promoting accountability. It is significant to note that the directors must provide the company about their personal details before assuming the appointment. Section 182 lays the duty on the director to act in the interest of the company and thus avoiding the personal interest while discharging the official functions. Lastly, the section 183 prescribes that directors must not engage in the misuse of information gained during the course of discharge of their directorship functions.
Liabilities
Out of the various liabilities of the shareholders, the primary is to make the payment in relation to the unpaid shares held, within the prescribed time. The additional liabilities are in the form of ones as laid down in the memorandum or association or article of association of the entity. The shareholders who are simultaneously acting as directors must comply with the director duties as prescribed in the Corporations Act, the failure of which may result in legal liabilities.
In this memorandum of advice, nature, characteristics, rights, duties, and liability of partnership, trust and company structure are evaluated in order to give advice to Oliver and Emma regarding which business structure should they choose. As per their condition, they should select a corporate structure to start their business. Oliver and Emma want to establish a cloud-based solution which is focused on managing facilities for clients. As per this business, they will have to deal with a large number of clients which will receive cloud-based facilities from them. Selection of the right structure is necessary to ensure that the parties are able to expand their business operations while sustaining growth in the industry. The corporate structure is suitable for Oliver and Emma that will assist them in sustains their growth in the rapidly growing market.
The key characteristics which give the corporate structure an edge over partnership and trust structure are the separate legal entity of the business. Both Oliver and Emma have different preferences which they will be able to fulfil if they select the corporate structure since these facilities will not be available in the case of partnership and trust business structure. Firstly, a trust structure is not suitable for Oliver and Emma because they will not deal with trust property in their business. The business which they are starting focuses on providing cloud-based services to clients based on which they will be dealing with clients rather than creditors.
A trust structure would have been suitable if they wanted to establish their business in which they have to purchase trust properties, however, it is not the case. Moreover, they will have to face a large number of legal complexities while establishing a trust business structure. They will also have to make higher initial investments, and their rights and liabilities will be limited as per the trust deed. Therefore, a trust business structure is not the right option for Oliver and Emma. Secondly, there are many advantages which Oliver and Emma will receive if they decide to establish a partnership structure. They will not have to incur higher initiative investments in the business since setting up costs of a partnership firm is substantially lower than compared to a company or trust structure. Moreover, they will be able to distribute their profits of the business equally between themselves.
The income generated in the business will be considered as their personal income, and it will be taxed as their personal earning as well. However, establishing a partnership firm is not the right option for Oliver and Emma. The key limitation of the selection of this structure is that the liability of both Oliver and Emma will be unlimited. The personal assets of both parties will be exposed to third-party creditors of their business. The court can order them to use their personal assets in order to pay off the debt of the company. Moreover, each partner will be acting as an agent for another which means that actions taken by one partners which are within the scope of the business which results in binding other partners as well.
It means that liability can be imposed on one partner based on the actions of another partner which are taken in the partnership business operations. It will result in creating challenges for Oliver and Emma. Furthermore, they will face difficulty while collecting capital for their operations. Since a partnership firm did not have a separate legal entity, Oliver and Emma will not be able to collect loan or credit under the name of the firm. They would have to take personal loan if they wanted to collect capital for their business operations in order to expand it in the future. In case of a disagreement between parties, the business can be dissolved since partners cannot transfer their owners. Both the parties will have to engage in business activities, and they have to invest equal capital in the business in order to get equal profits.
All these challenges can be addressed by incorporating a company structure. Oliver did not want to play a role in the business based on which he can invest in the company and collect his shares after which he will not have to handle the operations of the company. Emma, on the other hand, did not want to invest; instead, she wanted to manage the operations of the business. Therefore, she can handle the position of an executive director in the business in which she can manage its operations and receive remuneration for the same. She can also acquire shares of the company and made payment after some time.
When the parties decide to expand their business operations in the future, they will be able to collect capital for business operations by issuing the shares of the company or collecting a loan under the company’s name. They will have limited liability in the business based on which their personal assets will not have used by the court in order to settle the debts of the company. In case of a dispute, the company will not be dissolved since parties will be able to easily transfer their shares in the company to third parties. Oliver was imprisoned for six years in 2005 for charges involving misappropriation of funds in multiply failed corporations.
Emma has been mounting personal debts, and two creditors have sent her a notice to demand money recently. The legal entity of the company is separate from its owners based on which Oliver can become the shareholder of the company in which she will not be responsible for handling debts. Emma’s personal debts did not interfere with her ability to handle the operations of the company based on which she is allowed to become the director of the company, and she can later repay her debts. Based on all these elements, it is advised that Oliver and Emma should select a corporate structure which is the most suitable structure for them in which they will be able to effectively manage their business operations and sustain its future growth.
A Articles/Books/Reports
Bryan, Michael, Vicki Vann and Susan Barkehall Thomas, Equity and trusts in Australia (Cambridge University Press, 2017).
Dowell, David, Mark Morrison and Troy Heffernan, ‘The changing importance of affective trust and cognitive trust across the relationship lifecycle: A study of business-to-business relationships,’ (2015) 44 Industrial Marketing Management 119-130.
Duncan, William, Joint ventures law in Australia (Federation Press, 2012).
Goulding, Simon, Principles of company law (Routledge, 2013).
Hepburn, Samantha, Principles of Equity & Trusts (Aus) 2/e (Routledge, 2013).
Hudson, Alastair, Understanding company law (Routledge, 2017).
Morse, Geoffrey, Partnership law (Oxford University Press, 2010).
Sealy, Len and Sarah Worthington, Sealy & Worthington’s Cases and Materials in Company Law (Oxford University Press, 2013).
Welsh, Michelle, ‘Realising the public potential of corporate law: Twenty years of civil penalty enforcement in Australia,’ (2014) 42 Fed. L. Rev. 217.
B Cases
Joyce v Morrissey (1998) TLR 707
Salomon v Salomon & Co Ltd (1897) AC 22
Smith v Anderson (1880) 15 Ch D 247
C Legislation
Corporations Act 2001 (Cth)
Partnership Act 1891 (Qld)
Trust Act 1973 (Qld)
D Others
Australian Institute of Company Directors, General Duties of Directors (2018) <https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-6-2-duties-directors_general-duties-directors_a4-web.ashx>.
Australian Taxation Office, Partnership (2016) Australian Taxation Office < https://www.ato.gov.au/business/starting-your-own-business/before-you-get-started/choosing-your-business-structure/partnership/>.
Legislation, Partnership Act 1891 (2018) < https://www.legislation.qld.gov.au/view/html/inforce/current/act-1891-007
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