Choosing The Best Business Structure: Partnership, Trust, Or Company

Overview of Partnership, Trust, and Company Characteristics, Merits, and Demerits

To ascertain the characteristics, merits and demerits of Partnership, Trust and Company as a form of business structure for Oliver and Emma to decide for setting up their business.

Characteristic

In a partnership business, two or more people jointly invests on the business with a common goal of profit making. General and limited are the two kinds of partnership business available. The characteristics of the partnership is as follows:

• Partnership is inexpensive and easy to set up.
• Partnership requires at least two to invest in the business, which can be up to 100 partners.
• In a partnership business, the partners have an unlimited liability towards the partnership firm.
• The partners share an individual and collective responsibility towards each other’s actions and towards the firm’s liability.
• The profit and the loss of the partnership firm would be divided among the partners, either equally or as per their contribution to the firm or as agreed in the contract.
• The entire partnership relation is based upon a written, oral or implied contractual agreement.
• The contractual relation bind the partners together, for bearing the liability of the firm, which make the partners a principal as well as an agent at the same time.
• Bankruptcy, death or insolvency of the partners can dissolve a partnership business.
• A partnership firm is not bound to register mandatorily.
• GST registration is however compulsory for the partnership businesses which overshoots $75000 of annual turnover.
• In Australia, partnership business is governed by the Partnership Act 1890.

Merits

• Partnership is inexpensive and easy to set up.
• A partnership firm is not bound to register mandatorily.
• The contractual relation bind the partners together, for bearing the liability of the firm, which make the partners a principal as well as an agent at the same time
• The profit and the loss of the partnership firm would be divided among the partners, either equally or as per their contribution to the firm or as agreed in the contract.
• It is easier to get loans and credits in a partnership venture
• It is easier to keep the affairs of the partnership business private.

Demerits

• In a partnership business, the partners have an unlimited liability towards the partnership firm.
• In case of severe debts of the firm, the personal assets of the partners get affected.
• The profit and the loss of the partnership firm would be divided among the partners, either equally or as per their contribution to the firm or as agreed in the contract.
• Bankruptcy, death or insolvency of the partners can dissolve a partnership business.
• It is an expensive process to divide profits and assets of the firm every time a partner joins or leaves.

TRUST

A trust refers to the business venture where a person or a company (trustee) is held as the caretaker of a property who looks after it and passes on the profit to the person who is the beneficiary. A beneficiary derives the income of the trust property only, while the trustee is the one who takes care of the trust property. He is the one who runs the business in real.

Characteristic

• A trust is not at all simple to set up. It involves various complexities.
• It is expensive as well.
• A trust deed is to be made by the person who forms the trust initially, which gives a clear view of the trustee, the beneficiary and the trust property.
• The trust deed makes the trustee responsible and liable legally for the trust property and providing the benefits derived from the trust property as per the deed.

Merits

• It involves limited liability for corporate trustees.
• It is easier to maintain privacy in a trust venture as the affairs are confined between the trustee and the beneficiary.
• The income from the trust property is divided equally among the beneficiaries unless otherwise stated in the trust deed.
• Income from the trust is taxed along with the regular income tax.

Demerits

• A trust is not at all simple to set up. It involves various complexities.
• It is expensive as well.
• The trust deed makes the trustee responsible and liable legally for the trust property.
• Trusts are restrictive towards the trustee and their authority over the trust property.
• It is difficult to borrow credits and loans in case of a trust venture.

COMPANY

A company bears a separate legal entity that enable to sue and to be sued, to have its own property and a common company seal. It bears a limited liability towards its own debt. A company could be private and public. Additionally, a company can be run by one person only, which is called sole proprietorship. A private company, in Australia is known as proprietary company. The Corporations Act 2001 of Australia governs all kinds of companies.

Characteristic

• A company bears a separate legal entity that enable to sue and to be sued, to have its own property and a common company seal.
• It bears a limited liability towards its own debt
• A company could be private and public.
• A public company can raise capital and other funds by offering their shares to the public.
• A private company cannot offer its shares to the public. It can only raise money by way of loans and borrowings from financial institutions.
• The fund of the company can only be enjoyed and utilized for the benefit of the company, and not for its shareholders.
• The shareholders can only enjoy the profits and dividends.
• The Australian Securities and Investments Commission or  ASIC is the regulatory body of the companies in Australia. While theCorporations Act 2001 governs them.
• An annual turnover above $75000 requires a company to register for GST

Merits

• A company bears a separate legal entity that enable to sue and to be sued, to have its own property and a common company seal.
• A public company can raise capital and other funds by offering their shares to the public.
• The shareholders can only enjoy the profits and dividends.
• Often the shareholders are offered important posts in the company for providing various functions.
• Company can borrow money by offering their shares to the public, which is an easier way to raise fund in times of need.
• It is open to wider human resources as it can accommodate greater number of people as employees.
• Tax paying process is easier and more favourable for a company, as it bears the identity of a legal person.

• It is not cheap to establish a company. It requires a good amount of capital to form and maintain a company.
• As the company can generate fund from the public, its affairs are not private as well. The shareholders have the right to know the affairs of the company.
• The reporting system of a company is complicated and involves various procedures as well.
• The court may pierce the corporate veil in case of disputes or frauds and can make the directors liable for the debt and other liabilities of the company.
• The shareholders are held for paying tax for the profit that they draw from a company.

Application

From analysing the characteristics, merits and demerits of Partnership, Trust and Company, Oliver and Emma can get an overview of these business ventures. If they invest in a partnership firm, it would hold them individually as well as collectively liable for the firm and for any wrongdoing of one another. While, if they invest to set up a trust only, then Emma have to serve as the trustee as she wishes to devote her full time to the business while Oliver would become the beneficiary as he only wants to support financially. This does not work well for them as they both seek for an equal return from the venture as they have dependant family members who depend on them financially. While the characteristics, merit and demerit of a company quite suit their purpose to invest in a business that would reap a good amount of profit with limited liability for the debt of the business. Although in exceptional cases for a company, the court may lift the corporate veil in case of fraud and could make the directors liable for such fraud, however in regularity the directors are not individually or collectively liable for the debt of the company. Therefore, Oliver’s past history of being imprisoned for misappropriating funds and Emma’s issue of long pending debts would not affect each other and the business as well.  The characteristics, merits and the demerits of company suits their purpose the best.

Therefore, the characteristics and merits of the company would prove to be more appropriate for Oliver and Emma.

Issue II

To ascertain the rights and liabilities involved with the business set up of Partnership, trust and Company which would help Oliver and Emma to decide the best form of business structure for their investment.

Assessment of Rights and Liabilities of Partnerships, Trusts, and Companies

Rights of Partners

• Right to take part in the regular course of business affairs
• Right to take the major business decisions pertaining to the firm
• Right to have knowledge about the finances and accounting of the firm.
• They should be able to enjoy the profits of the business as discussed in the partnership deed.
• A partner should be reimbursed the amount that he has spent for the benefit of the firm.
• He can make use of the firm’s property for the benefit of the firm.
• A partner, on retirement, has the right to operate a competing business, unless otherwise agreed in the partnership deed.

Liabilities of Partners

• Unlimited liability is a serious problem for a partnership firm and the partners who are to be held liable, individually and collectively for each other’s wrongdoing.
• The partners would be held liable for the debts of the firm.
• A partnership requires separate Tax File Number.
• In Australia, partnership firms need Australian Business Number (ABN) to function.
• The partners need to pay personal income tax.

TRUST

Rights of trustee

• The trustee should be indemnified for the expenses that he made for the trust
• He would be eligible for asking the beneficiaries to reimburse him.
• A trustee could ask for legal intervention in the trust property in case of dispute.
• He has the right to remedy for a breach of trust.
• He has the right to demand compensation for the losses that he might have bore for such breach.

Liabilities of the trustee

• A trust must pass on the income of the trust to the beneficiaries as per the trust deed.
• He must not use the trust property for his personal use.
• He is liable to maintain a proper books of accounts which could give a thorough knowledge about the incomes and expenditures of the trust.
• A trustee must not be partial toward a beneficiary, unless the trust deed asks the trustee to be so.
• A trustee must keep a track of all the necessary payments which is needs to be done.

• Right to receive the income that is derived from the trust.
• Right to have knowledge about the progress, alteration, renovation of the trust property, if any.
• The beneficiary has the right to receive all information about the income and expenditure of the trust
• The beneficiaries have the right to file a petition to the court for the removal of the trustee, together.
• They have the authority to dissolve the trust property by the order of the court.

Liabilities of the beneficiary

• The beneficiaries must have the knowledge pertaining to the trust property.
• The beneficiaries cannot restrict the trustee to such an extent that he cannot take any decisions for the benefit of the trust property. Any such restriction has to be just and reasonable.
• They must have the knowledge regarding the income and expenditure of the trust.
• They should keep a check on the current situation of the trust as well.
• Beneficiaries must review the activities of the trustee on regular intervals.

COMPANY

• Attending meetings of the company is one of first and foremost rights of shareholders.
• Shareholders bear the right know the income and expenditure of the company by way of the annual report.
• He has the right to receive a share of the profit or dividend that a company earns in a fiscal year.
• He may sue the company for fraudulent issues.
• A shareholder bears the right to check the books of account of the company.

Liability of shareholders

• The shareholders are liable to pay the unpaid amount of the shares that are due with them.
• They have the duty to keep a check on the activities of the director pertaining to the functioning of the company.
• The shareholders are held for paying tax for the profit that they draw from a company.

Rights of directors

• The directors have their rights and duties laid down under the Corporations Act 2001who asks them to carry out their responsibilities in good faith.
• They are liable to participate in the board meetings and lay down their opinion for consideration of the board members.
• A director has the right to hold their position until their term comes to an end, by contract, termination or by retirement.
• A director is eligible to receive remuneration from the company.

Liability of directors

• The directors have their duties laid down under the Corporations Act 2001 who asks them to carry out their responsibilities in good faith.
• The court may pierce the corporate veil in case of disputes or frauds and can make the directors liable for the debt and other liabilities of the company.

Application

The analysis of the rights and liabilities involved with Partnership, Trust and Company, Oliver and Emma can get an overview of these business ventures. If they invest in a partnership firm, it would hold them individually as well as collectively liable for the firm and for any wrongdoing of one another. While, if they invest to set up a trust only, then Emma have to serve as the trustee as she wishes to devote her full time to the business while Oliver would become the beneficiary as he only wants to support financially. This does not work well for them as they both seek for an equal return from the venture as they have dependant family members who depend on them financially. While the rights and liabilities involved with a company suit their purpose to invest in a business that would reap a good amount of profit with limited liability for the debt of the business. Although in exceptional cases for a company, the court may lift the corporate veil in case of fraud and could make the directors liable for such fraud, however in regularity the directors are not individually or collectively liable for the debt of the company. Therefore, Oliver’s past history of being imprisoned for misappropriating funds and Emma’s issue of long pending debts would not affect each other and the business as well.  The rights and liabilities involved with the business structure of a company would prove to be more appropriate of them.

Therefore, by analysing the rights and liabilities of the different types of business structures, it would safe to say that the rights and liabilities attached with a set up of a company would be convenient for Oliver and Emma.

Issue 3

To ascertain the best business structure for Oliver and Emma to invest on, along with citing reasons for such choice.

Rule

A company bears a separate legal entity that enable to sue and to be sued, to have its own property and a common company seal. It bears a limited liability towards its own debt. A company could be private and public.

While, a trust refers to the business structure where a person or a company (trustee) is held as the caretaker of a property who looks after it and passes on the profit to the beneficiary. A beneficiary derives the income of the trust property only, while the trustee is the one who takes care of the trust property.

The most suitable business set up for Oliver and Emma would be forming a company under the Corporations Act 2001 where Emma would be the director and Oliver, a passive investor. Company structure would make them free from any liability o the debt of the company, unless the court lifts the corporate veil. Additionally, they can assign the company as a trustee for their dependants. as a trustee, the company would be liable to take care of its beneficiaries. Emma’s adult son and Oliver’s elderly mother and disabled child would be able to reap the benefits out of the trust property, which is the company.

Conclusion

Therefore, to conclude, a company would be the best option for Oliver and Emma to invest in. Along with, it would be wise to enlist company as a trustee of their dependants.

References

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Cohen, Elaine. CSR for HR: A necessary partnership for advancing responsible business practices. (Routledge, 2017)

DeMott, Deborah A. “Relationships of Trust and Confidence in the Workplace.” (2014) Cornell L. Rev.100: 1255

Iyer, Easwar. “Theory of alliances: partnership and partner characteristics.” (2013) In Nonprofit and Business Sector Collaboration, pp. 48-64. Routledge

Martínez, Patricia, and Ignacio Rodríguez del Bosque. “CSR and customer loyalty: The roles of trust, customer identification with the company and satisfaction.” (2013) International Journal of Hospitality Management 35: 89-99

Nyombi, Chrispas. “Lifting the veil of incorporation under common law and statute.” (2014) International Journal of Law and Management56.1: 66-81.

Pozen, Robert C., et al. “trusts&trustees.” (2012) Trusts & Trustees 18.3

Tomasic, Roman, Stephen Bottomley, and Rob McQueen. Corporations law in Australia. (Federation Press, 2002)