Partnership as a business structure can be defined as a venture that comes into existence through an agreement between individuals to engage in business activities mutually with the objective of earning profits. This is a popular business structure and is opted for by business ventures with a handful of owners who wish to conduct business activities without the tedious legal complications of incorporating a company. A sole trader business structure is very similar to a partnership however when the ownership of the venture is to be shared this structure would not be appropriate. A partnership deed is a governing document which regulates the relationship between the partners of the venture. This deed also provides for a profit sharing ratio which defines the way in which the profits would be distributed. A partnership however can be formed through oral agreement if such a relationship can be inferred through the conduct of the parties. This determination can only be made by court. In these situations where a partnership deed is absent common law dictates that the parties would share the profits of the venture equally. It can also be assessed that such a business structure would ensure that these parties retain ownership of the firm as direct owners. This means that the partners would be liable for the liabilities of the firm. This is one of the disadvantages of a partnership form of business structure, unlimited liability. This means that the business is not distinguished from the ownership and thus the debts of the business must be borne by the partners even if the same means that the partners would have to liquidate personal assets to meet the debts of the firm. This is because the partnership business is not a separate legal entity. These are created through legal fiction and would absolve the owners of any liability apart from their initial investment into the venture. This also thus means that the ownership and administration of the business in a partnership business structure is not distinguished and thus skilled professionals cannot be employed for the administration of the business. This would ideally lead to a state of mismanagement and would thus act as a hindrance to increased productivity within the partnership firm. Thus in effect the partnership form of business could be easily formed but the risks involved in the same are greater than in case of a company and thus such a form of business structure is an option but would be a riskier wager when commencing business activities as a fitness centre.
A company is a separate legal entity as created by legal fiction and executed through incorporation through the framework of legislation in force within a particular jurisdiction. In case of the Australian Commonwealth the act governing the activities of companies incorporated within or carrying on business activities inside the jurisdiction is the Corporations Act, 2001. The provisions of this act define the modes of incorporation of a particular company and also state the ways in which companies is expected to act within the jurisdiction. The primary advantage of incorporating a company is that the ownership is considered separate from the entity itself. Thus for any disputes the entity itself would be held responsible and would be liable to be pursued. This means that these parties within such a framework would ideally taken charge of the situation under the same of the company. This is why a company as a business structure is the most appropriate form of business structure around the globe today. This imbibes an assurance that the ownership of the entity would not be in any way implicated for the acts of the company at such a time. Additionally, it can also be assessed that this creates a situation that the initial investment made by the owners is the sum total of their debts towards the company. Such a calculated assessed risk would be easily assessable and would encourage diversification in the venture. This is another important reason to incorporate companies, the opportunity for expansion. This expansion can be executed through diversification or further investment in expansion. The separate legal entity of a company also ensures that the owners are not involved in frivolous litigations brought against the company. In a case where the company wishes to initiate legal proceedings against a person or an entity it would be able to do the same in its own name and thus such an action would not have to be initiated by the ownership of the firm. Another advantage of incorporating a company is the fact that professional skills and management can be employed and thus the same would lead to increased productivity for the venture. This is by virtue of the fact that in case of companies the ownership is distinguished from the administration. The administration of firm would not comprise of shareholders and would conversely comprise of specialized individuals who are experienced in company administration with the adequate qualifications for the same. In the same way, these individuals would add value to the board of the company and would facilitate faster and more efficient decision-making. This would resultantly increase productivity within the firm and it would additionally ensure that strong corporate governance principles are observed by the company. Good corporate governance protects the rights of the shareholders and safeguards the interests of the venture. Thus this would be particularly profitable for the ownership of the company. This is why for the fitness centre that Jack and Jill wish to commence business transactions with incorporating a company would be the most ideal choice and thus would be the best way to move forward with the business plan. A company would also ensure that the venture is a going concern and the venture is not dependent on the life or functionality of one or all of the shareholders of the company. Thus as a going concern it has perpetual succession and this guarantees longevity for the venture.
The type of company that has to be formulated is a proprietary company. Therefore, in order to incorporate a proprietary entity of company. It is worthwhile to refer here that, incorporation is considered to be the legal process for the formation of a company. It is evident that a proprietary company comes into existence by the process of incorporation. After a proprietary company is legally incorporated it attains the shape of a separate legal entity which is distinct from the shareholders investing their assets and capital for the functioning of the company. The first step of the formation of a proprietary company is referred to as promotion in which an individual contributes and persuades others to engage themselves in the equal contribution of capital to the company before its incorporation. The person engaging himself in the incorporation of the company is known as the promoter. Promoters are authorized to enter into a contract on behalf of the company prior to the granting of the certificate of incorporation. In such process, the promoters are at the authority to arrange share issues on the behalf of the company.
The incorporation of a company is a lengthy and complex procedure which involves expensive requirements and compliances. It is worth mentioning that incorporation of a proprietary company can prove to be advantageous in many ways. Firstly, a proprietary company protects the assets of the owner against the liabilities of the company. Secondly, a proprietary company has been allowing easy transfer of ownership from one part of the business to another. Thirdly, it involves lower tax rate on personal income. Fourthly proprietary company has been raising capital by way of selling stock. It is noteworthy to mention here that, from the very beginning, proprietary companies has been considered as the most appropriate legal vehicle for the purpose of carrying on business operations.
In order to incorporate a proprietary company, it is necessary to draft the Articles of Incorporation by listing the main purpose of the business and its location. In this regard, the number of shares and issuing of stock also needs to be mentioned. It s known to all that, every company is owned by their respective shareholders. Small companies comprises of single shareholders while large companies have thousand of shareholders. Therefore, in the case of a proprietary company, the shareholders shall only be held responsible for the payment of their own shares. As a result of being the proprietary owners of the company the profits of the company are received by the shareholders in the form of dividends. In case of proprietary company, there is an authority on the part of the shareholders to elect the directors of the company.
The incorporation of a proprietary company involves the formation of an invisible veil referred to as the corporate veil that protects the directors and the shareholders of the company. it is worth mentioning that, incorporated proprietary businesses are capable of taking risks without the exposure of the shareholders and directors of the company towards personal liability which falls outside the purview of original investments of the company.
The directors are responsible for carrying on the day to day activities of the company. The directors generally owe a duty of care to the company and must act in the best interests of the company. A proprietary company usually comprises of one or two directors. There is no personal liability on the part of the directors for the debts incurred by the company except in cases involving fraud regarding specific tax statutes.
The liabilities on the part of the directors can be categorized into-
Liability to the company and the shareholders:
There is a liability on the part of the directors towards the company and the shareholders. However, in the case of Foss v Harbottle (1843) 2 Hare 461, it was held that, the duties of the directors are in regard to the company and not towards the individual shareholders. There is an authority on the part of the shareholders to bring action against the directors for any breach known as derivative action.
Liability to the other directors:
A director is not liable for the acts of the co-directors in the course of business. However, the director shall be held liable if he fails to supervise the activities of his co-director acting in bad faith.
Liability to the third parties:
In certain cases, a director is held personally liable to a third party for specific acts. For instance, if any negligent statement is made by a director to any third party and he suffers a loss as a result of such statement then the director is held to be personally liable.
According to the provisions of Section 180(1) of the Corporations Act 2001 (Cth), the directors are authorized to exercise their duty with due care and diligence as it would have been performed by any reasonable man of prudent nature. In Daniels v AWA Ltd (1995) 13 ACLC 614, there is an obligation on the part of the directors to keep them informed regarding the activities of the company. According to the provisions of Section 181 of the Corporations Act 2001 (Cth), there is a statutory obligation on the part of the directors to discharge their duties in good faith and in the best interests of the company.
It is worthwhile to refer here that, there is an existing balance between entrepreneurial risk and corporate responsibility of directors. Directors must be able to take decisions involving certain degree of commercial risk for the development of the economy. On the other hand, dishonest behavior of the director must be discouraged as much as possible for the purpose of protecting the interests of the shareholders.
c) Yes, Jack and Jill can be appointed as directors of the proprietary company. this is due to the reason that directors can be referred to as the employees of the company who has been employed after formal appointment.
References:
Cases:
Daniels v AWA Ltd (1995) 13 ACLC 614.
Foss v Harbottle (1843) 2 Hare 461.
Journals:
Atkin, Daniel, and Daniel Cheilyk. “Jumping at shadows-shadow and de facto directors.” Governance Directions67.8 (2015): 491.
Cumming, Douglas, and Sofia Johan. “Venture’s economic impact in Australia.” The Journal of Technology Transfer 41.1 (2016): 25-59.
Dennis, Michael, and Jose Manuel Pliego Ramos. “Creating an Enabling Legal Environment for Micro, Small, and Medium-Sized Enterprises: Simplified Incorporation and Registration.” Ariz. J. Int’l & Comp. L.33 (2016): 71.
Fox, Judith. “Honest and reasonable director defence.” Governance Directions 67.4 (2015): 218.
Hargovan, Anil. “Corporate law: Foreign directors of Australian companies put on notice: No leniency for ignorance of duties.” Governance Directions 69.1 (2017): 37.
Hedges, Jasper, et al. “The policy and practice of enforcement of directors’ duties by statutory agencies in Australia: An empirical analysis.” Melb. UL Rev. 40 (2016): 905.
Huggins, Anna, Roger Simnett, and Anil Hargovan. “Integrated reporting and directors’ concerns about personal liability exposure: Law reform options.” Company and Securities Law Journal 33 (2015): 176-195.
Keay, Andrew. “Directors negotiating and contracting in the wake of their companies’ financial distress.” Journal of Strategic Contracting and Negotiation 1.3 (2015): 214-230.
Nyombi, Chrispas. “Lifting the veil of incorporation under common law and statute.” International Journal of Law and Management 56.1 (2014): 66-81.
Yeo, Victor Chuan Seng. “Directors’ Duty of Care and Liability for Lapses in Corporate Disclosure Obligations-Observations and Comments on Select Issues.” SAcLJ28 (2016): 598.
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