Selection of the right business structure is important for parties when they decide to start a business. Various factors are necessary to be evaluated by the parties since different characteristics which are necessary to identify by the parties to ensure that they select the most suitable business structure for their business. Evaluation of these legal characteristics enables the parties to ensure that they are able to find key factors which assist them in fulfilling their objective while managing a business. This memorandum of advice will focus on evaluating the key legal characteristics to different business structures such as partnerships, trusts, and companies which are available for Oliver and Emma. Various rights and liabilities and duties which are associated with these business structures will be analysed in this report as well. Lastly, a recommendation will be given for Oliver and Emma, with reasons, to assist them in choosing the best business structure as per their requirements.
In case the parties did not want to comply with complex legal regulations, then they can select partnership business structure. This is a suitable structure for two or more parties who wanted to join together in order to start a new business. The Partnership Act 1891 (Qld) provides key provisions which govern this legal structure. Section 5 of the act provides the definition of a partnership. It is described as a legal relationship which is formed between two or more parties who have agreed to certain terms in order to carry out business in common with an objective to generate profit. In order to form a partnership business, minimum two partners are required, whereas, the maximum number of partners in a partnership can be 20. All partners have unlimited liability, and they act as agents for each other. There are certain elements of partnership which must be fulfilled by parties.
For example, in Checker Taxicab v Stone case, it was held that a partnership business must be carried out by parties which mean there must be repetition of the business acts and a single investment did not form a valid partnership. The business must be operated ‘in common’ by partners which is another key element. In Keith Spicer Ltd v Mansell case it was held by the court that non-involvement of partners in decision making is considered as non-involvement in the process of running the business together which cannot form a valid partnership. Lastly, the objective of the business must be to generate profits for partners. The advantages of partnership include easy formation process, less legal compliances, less expensive to form, equal division of profits and loss, and controlling of business through mutual cooperation. The disadvantages include unlimited liability of partners, dissolution of business due to a conflict or disagreement and ability of one partner to act as an agent for others.
The nature of a trust can be defined as a relationship which is formed between parties involving trust property. This property is recognised by the law which also includes contractual rights. A trust relationship between parties resulted in separating the burden of ownership which includes paying taxes, managing property, insurance, and others from the benefits of the property such as proceeds of sale, rent, profits or others. The trustee is considered as the legal owner of the property who is responsible for giving back the benefits to the beneficiaries. The key provisions which govern trust structure are given under the Trusts Act 1973 (Qld). Trust can be created through express or implied conduct in which the parties have to show an intention to create a trust relationship. The key advantages of trust structure include distribution of income on trustee’s discretion to beneficiaries, privacy in the operations than compared to a company and protection of beneficiaries from third party creditors. Disadvantages of a trust structure include expensive and complex process of establishment, problems arise in dissolution, difficulty while borrowing loans, trust deed limits a trustee’s powers, set period of trust mentioned in the deed, and personal liability of trustee towards the debts of the asset.
One of the most common types of business structures across the globe is corporation structure which is selected by a large number of people while establishing their operations. In the case of Australia, the companies are governed under the provisions of the Corporations Act 2001 (Cth). There are more legal complexities while forming and running a company structure. The corporation has a separate entity which is a key characteristic due to which parties prefer to incorporate a company structure while managing their operations. Salomon v Salomon & Co Ltd case is a leading judgement which provided key characteristics of a corporate structure. In this case, the House of Lords provided that a corporation is separate from its owners even if it is owned by a majority shareholder. It is a legal person that has rights and liabilities based on which it can form contractual relationships and get sued or sue other parties. The decisions of a company are taken by its directors who cannot be held personally liable for its actions.
The main advantage of a company structure is that parties have limited liability in the business and their personal assets cannot be used by the court to pay off the debts of the company. The shares of the company are easily transferable based on which members can transfer their ownership. It is easier for a company to raise capital for its operations through different mediums. A corporation cannot be dissolved on the death of its members. There are various disadvantages of a company structure as well such as it is expensive to incorporate a corporation and the legal compliances are complex. Members have to pay heavy registration and other fees during the process. The financial records of an enterprise are public which are accessible by everyone. The directors can be held personally liable if they violate their duties while taking business decisions in the company.
Rights
As per a partnership structure, there are various rights available for partners while they manage their business operations. The partners have the right to take active part in the day to day management of the partnership firm. They have the right to consult with each other and discuss the issues while taking business decisions. Partners are authorised to access the books of accounts of the enterprise, and they have the right to share the profits or losses in the business. They have the right to make a contribution in the capital of the firm and avail interest in advances which are paid by partners for business purpose.
Duties
The main duties of partners in business include carrying out the operation of the firm with common advantage. It is their duty is to ensure that they use their knowledge and skills to conduct the decisions in maximum benefits. It is the duty of the partners that they must render true accounts in the business and provide full and accurate information to other partners. Compliance with duties in a diligent manner is relevant for partners in order to comply with their duties. The management of operations of the company did not allow them to receive any remuneration since it is a part of their duties. They are also obligated to share the loss occurred in the operations of the partnership firm.
Liabilities
All partners are jointly and severally liable for the acts of the firm which are conducted during its operations. The creditors of the firm have the right to sue all the partners jointly or individually. Liability can be imposed on all partners for wrongful actions of a partner. The wrongful act or omission of a partner resulted in incurring a penalty on all partners in the firm. The partners who receive any money while acting within his/her apparent authority have a liability to avoid mutualisation of such money.
Rights
The rights of the trustee are set out in the trust deed which executes between parties. This deed provides the right of the trustee to ensure the trust property is protected for the beneficiary to ensure the interest of the trustees is protected. The beneficiaries have the right to ensure that they cannot sell the trust property to third parties without the permission of the beneficiaries. The trustees have the right to discharge liabilities and debts of the business using the trust funds which are allocated by the beneficiaries. The trustee can seek remuneration for the services provided by him/her and expenses incurred for managing the trust property.
Duties
The key duties of a trustee include maintaining a duty of care to ensure that he/she must exercise a legal of care and diligence while discharging his/her duties. The trustee has the right to invest the trust fund and make decisions regarding the investments. It is the duty of the trustee to protect the trust asset and avoid conflict of interest regarding the ownership of trust property. A trustee also required to keep records and accounts for the trust property.
Liabilities
The key liability of trustee is to ensure that he/she did not conduct sham or fraud towards the beneficiaries by misuses the funds of the trust. The trustee has to ensure that he/she should not breach the trust towards the beneficiaries and appropriate actions are taken to protect their interest. The trust should avoid conducting sham against the property of the trust, and they should not misuse the funding to the trust.
Rights
The key rights of shareholder in a company include receiving dividend for the capital which they invest in the organisation. The shareholders have the right to attend shareholder meetings and vote regarding the key issues of the company. The shareholders have the right to receive reports and announcements regarding the operations of the company which contains details regarding the actions taken by the enterprise. The key rights of directors in the company are to ensure that operations are managing in an effective manner. They have the right to ensure that they receive remuneration for their job which they do in the company. The shareholders have the right to transfer their shares to third parties in order to transfer their ownership in the business.
Duties
The key duties of directors in a company include establishing a registered office of the company and giving information regarding their offer to the members of the company. They have the duty to ensure that they should disclose their personal details which create conflicting interest in the enterprise. The Corporations Act also provides various general duties which are necessary to comply with directors of the company. Section 180 provides that they must maintain care and diligence while taking business decisions. Section 181 provides that directors have to act in good faith towards the company and its stakeholders and they should not take any actions which conflict with the interest of the corporation. Section 182 of the act provides that the directors must properly use their position and avoid taking any actions which could adversely affect the interest of the organisation. Section 183 of the act imposes a duty on the directors to ensure that they should not misuse the information which they have for gaining personal benefits or causing any detriment to the enterprise.
Liabilities
There are various liabilities of shareholders which they have to comply with such as making timely payment of the unpaid amounts for the shares which they hold. The liabilities and obligations which are included in the constitution of the company or its memorandum or association or article of association are imposed on the shareholders. If the shareholders of a company are acting as its directors, then they are obligated to comply with the duties given in the Corporations Act to ensure that they avoid legal liabilities which are imposed on them. The liability of directors is to ensure that they comply with the duties which are included in the Corporations Act or else legal liability can be imposed on them.
In the case of Oliver and Emma, it is advised that they should incorporate a company in order to manage their business operations. Incorporating a company will provide them more benefits than compared to other business structures. They wanted to start a cloud-based solution in order to manage facilities. As per their business model, they wanted to give services to management businesses such as owners, contractors, tenants, and also provide the facility of building repairs, reporting, invoicing, building audit, asset management and tendering. Oliver wants to finance the business; however, he did not want to play an active part in it. On the other hand, Emma wants to manage the operations of the business; however, she did not have capital to fund the operations of the company. As per their requirements, both of them should incorporate a company which will be suitable as per their needs. Oliver can become a majority shareholder in the company in which and Emma can become a director in the company. By selecting this structure, they will be able to meet their requirements and ensure that their objectives are achieved.
In the case of partnership structure, Oliver will have to engage in the operations of the company and Emma will have to invest capital in its operations. The profits of the business will also be distributed between them as per their capital investment. In the case of a company, Emma can hold the shares of the company while acting as a director. Emma did not have to pay the full amount for the shares which she owned. She can also receive remuneration for acting as a director in the company. A trust structure is not suitable for them because they did not want to invest in property to manage their operations. Moreover, the trust will be held liable towards the third parties rather than the beneficiaries based on which liability will be imposed on Emma if she acts as a trustee for Oliver. Another key issue is that Oliver was imprisoned for six years in 2005 for misappropriation of funds in multiple failed companies. On the other hand, Emma has been hiding the fact that she has been mounting personal debts and two of her creditors have recently demanded money from her by sending a letter.
In the case of a trust, Emma will be held liable towards the third parties for the property if she acts as a trustee and she will also be liable towards her creditors. In the case of a partnership business structure, both Oliver and Emma will have unlimited liability in the business. It means that if Oliver conducts any illegal activities while conducting business operations, then Emma will also be liable for those actions. Similarly, Emma will be liable towards her personal creditors along with creditors of the partnership firm. However, in the case of a company, both the parties will be considered as separate from the corporation. The liabilities of the company will be separate, and the liabilities of the members will be separate as well. Oliver can become the shareholder of the company; however, it will be managed by Emma when she acts as a director of the company. The imprisonment of Oliver will not affect the management of the company. On the other hand, Emma will not be held personally liable for the debts of the company and her liabilities will be limited to her personal creditors.
The key challenge faced by Oliver and Emma while incorporating a company is that they have to pay high initial costs and comply with a strict legal framework which increases complexity in operations. As per the estimation of Oliver and Emma, the business is more likely to proliferate in next few years which will result in increasing the revenue of the company. Selection, a company structure, will enable them to expand their business operations easily than compared to other structures. It will be easier for them to raise capital for their operations in a company structure through various sources such as issuing shares, taking loan under the name of the company, issuing debentures and others. It will assist the company in achieving its corporate objectives which will be beneficial for Oliver and Emma as well. This option is not available in the case of a trust and partnership business structure which will limit the growth opportunities of the business. Therefore, it is advised to Oliver and Emma that selecting a company structure is most suitable for them.
In conclusion, each business structure has different nature, characteristics, and features which provide both advantages and disadvantages to parties who select them. Various rights, duties, and liabilities are imposed on the parties as well based on the type of business structure selected by them. Evaluation of all these elements is necessary to ensure that parties select the most suitable structure for managing their business operations. Based on the evaluation of these factors, it is advised to Oliver and Emma that they should select a company business structure which will provide them more growth opportunities to them. They will not be held personally liable for the operations of the business, and the business will not be affected by their personal debts. In the future, it will be easier for them to sustain the growth of their company than compared to a partnership and trust structure, therefore, is it the most suitable option for them.
References
Allerdice, Robert, ‘Trust of partnership interests,’ (2014) Taxation and Practice 537.
Bottomley, Stephen, The constitutional corporation: Rethinking corporate governance (Routledge, 2016).
Bryan, Michael, Vicki Vann and Susan Thomas, Equity and trusts in Australia (Cambridge University Press, 2017).
Deards, Elspeth, Practice Notes on Partnership Law (Routledge, 2013).
Duncan, William, Joint Ventures law in Australia (Federation Press, 2012).
Graw, Stephen, David Parker, Keturah Whitford, Elfriede Sangkuhl and Christina Do, Understanding business law (LexisNexis, 2015).
Hepburn, Samantha, Principles of Equity & Trusts (Aus) 2/e (Routledge, 2013).
McLaughlin, Susan, Unlocking company law (Routledge, 2018).
Redmond, Paul, ‘Directors’ duties and corporate social responsiveness,’ (2012) 35 UNSWLJ 317.
Weitzenboeck, Emily, A Legal Framework from Emerging Business Models: Dynamic Networks as Collaborative Contracts (Edward Elgar Publishing, 2012).
Welsh, Michelle, ‘Realising the public potential of corporate law: Twenty years of civil penalty enforcement in Australia,’ (2014) 42 Fed. L. Rev. 217.
Checker Taxicab v Stone (1930) NZLR 169
Keith Spicer Ltd v Mansell (1970) 1 All ER 462
Salomon v Salomon & Co Ltd (1897) AC 22
Partnership Act 1891 (Qld)
Trusts Act 1973 (Qld)
Corporations Act 2001 (Cth)
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