Different business structures have different characteristics based on which parties can select them while starting their business. Selection of the suitable business structure is the key objective of parties while starting their business. The objective of this report is to evaluate the key factors of partnership and company structure. Different attributes of each structure will be discussed in the report to understand the different aspects of each structure based on evaluating cases and legislation.
When two or more parties agreed to start a business together, then they form a partnership. This structure enables two or more parties, up to 20, to form a business together and run its operations. Partners have unlimited liability, and they can be held personally liable for business debts. While forming this structure, certain elements are required to be present without which a valid partnership business cannot be formed.
It is necessary that the partner must have a relationship with each other to form a partnership business. In the case of Joyce v Morrissey, the court provided that a relationship between two or more people which fulfils the criteria of a partnership can bind them into a business structure based on which they can be held liable for actions of each other.
The business of a partnership is carried out by partners themselves, and they are solely responsible for its operations. An agreement for the performance of isolated event which would not repeat in the future cannot be constituted as a partnership as given by the court in Smith v Anderson case.
The business of the partnership must be run in common by each partner. The non-participation in the business cannot form a partnership between two or more parties as given in the case of Saywell v Pope.
The purpose of the partnership must be to generate a profit for the partners which they divide between each other based on their profit sharing ratio. However, in Britton v The Commissioners of Customs & Exercise case, the court provided that only sharing of profits did not constitute a partnership between parties and presence of other elements is necessary as well.
The provisions regarding constitutions and attributes of a corporation are given under the Corporations Act 2001 (Cth). A corporation has a separate legal entity in the eyes of the law based on which it is different from its members as given by the court in the case of Salomon v Salomon & Co Ltd. The registration of a company is necessary without which it cannot become a separate personality. It is an artificial person based on which it has several rights and liabilities as well. In the case of Lee v Lee’s Air Farming Ltd, the court provided that third parties cannot hold the owners of a company liable for its debts since their liability is limited to their shares in the company.
The decisions in a company are not taken by its owners, like a partnership. Instead, directors are responsible for run the operations of the corporation, and they take all the business decisions on the company. In Australia, the Corporations Act provides provision regarding governance of a company, and it also imposes various duties on directors which they are necessary to be fulfilled while taking business decisions. The process of forming a corporation is complex since parties have to comply with a large number of legal requirements. Furthermore, the cost of incorporation is high as well since the parties have to pay registration and various other fees.
Conclusion
Based on the above analysis, each business structure has different characteristics. Partnership is suitable for parties who wanted to keep their business small and in control without facing strict legal regulations. The corporation provides more growth opportunities to parties based on which they can easily expand their business.
While making these decisions, parties are required to evaluate key factors of different business structures and compare them to select most appropriate structure for them. In order to determine the most suitable business structure, parties are required to evaluate the advantages and disadvantages of each structure to determine which is suitable for them. The purpose of this report is to evaluate both pros and cons of establishing partnership and company structure to give recommendations to the client.
Advantages
Disadvantages
Advantages
Disadvantages
Based on the analysis of both pros and cons of a corporation, a partnership structure is more suitable for the client. The cost of forming a partnership is easy, and the client can form a partnership by entering into an agreement. The process of incorporation is easier as well since they have to comply with fewer legal regulations than compared to a company. Since all the clients belong to the same family, it would be easier for them to form the partnership and share the profits and losses of the business. After incorporation compliances of a partnership are fewer as well than compared to a company since the clients did not have to comply with continuous disclosure and reporting regulations. The main advantage of a company is that it would enable the clients to raise capital for their business from multiple sources. However, they would have less control over their operations, and they would have to comply with a large number of regulations while maintaining business operations. Thus, for starting a real estate business, the clients should form a partnership business since it is the most suitable option for them.
To conclude, each structure has different attributes which are necessary to be evaluated in order to select the most appropriate business structure for a party. It is recommended for the clients that they should form a partnership to operate their business which would be more suitable for them.
The Corporations Act 2001 imposes a number of duties over directors to ensure that they did not breach their duties and misused their position for personal gain. These duties ensure that the directors are focusing on growing and expanding the business of the enterprise which benefits all of its stakeholders. The purpose of this report is to evaluate various duties which are necessary to comply by directors while discharging their duties by analysing the case of ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
In order to understand the role of director duties, analysis of the facts of ASIC v Adler case is relevant. In this case, various duties were breached by Adler while he was acting as the director. Firstly, a loan was authorised by HIH Casualty and General Insurance which was not properly. The loan was given to Pacific Eagle Equity Pty Ltd (PEE) which was acting under the control of Adler. Adler played a significant role in authorising this loan since he had a large shareholding in HIH, and he was acting as non-executive director of Australian Equities Unit Trust. PEE invested $4 million from the loan in purchasing the shares of HIH and later the company sold the share at a loss of $2 million. The company also invested $4 million in Adler Corporation Limited by purchasing its shareholding at a loss as well. The company gave the rest $2 million as a loan to various parties in which Adler was included as well. All these transactions were not recorded properly in the accounting statements and Adler breached various duties by authorising this transaction. He was held guilty for breaching section 180 to 183 of the Corporation Act.
Firstly, it is the duty of directors to maintain a standard of care and diligence to ensure that the interest of the company and its stakeholders is secured. In ASIC v Cassimatis (No. 8) case, the directors failed to fulfil the interest of the company and took actions which no reasonable person would in such situation. Similarly, in the case of Adler, he was involved in authorising the issue of $10 million loan which was unsecured. This decision was not in the interest of the company or its stakeholders based on which he breached his duty.
It is the duty of directors to ensure that they took action in good faith of the company. They should avoid taking business decision which no reasonable person would in the particular situation which could ultimately harm the corporation or its stakeholders. In case of Adler, he authorised the decision for giving an unsecured loan of $10 million to PEE. No reasonable person would have approved this decision. Furthermore, Adler used such money for personal gain based on which he breached his duties given under section 181.
Since directors act at the top position in a company, they have significant powers to take or influence business decisions in the company. It is their duties to ensure that they did not use their position for unfair practices which result in adversely affecting the company or its stakeholders. They should avoid using their position for personal gain. Adler used his position to authorise the loan which ultimately benefited him. He used such money to invest in its own company and giving loan to himself due to which he breached his duties.
Since directors are responsible for making future strategies in the corporation, they have access to all the confidential information regarding the company and its operations. It is their duty to ensure that they did not misuse this information for personal benefit or causing harm to the company or its stakeholders. Alder misused the information for personal gain by giving loan to himself and investing in his company. Furthermore, it adversely affected the interest of the company as well based on which he breached section 183 of the act.
To conclude, directors should evaluate their duties to ensure that they did not breach them. The breach of these duties results in negative legal consequences which adversely affect directors and the company, thus, effective compliance with these duties are necessary.
Hello and good morning. In this video, I would give advice to our clients in order to assist them in selecting an appropriate business structure between partnership and company. In order to give them advice regarding selection of an appropriate business structure, it is necessary to understand the characteristics of different structures and their role in the organisation. In this video, attributes of both partnership and company structure will be discussed along with their advantages and disadvantages. Finally, a recommendation will be given to the clients based on weighing the advantages and disadvantages of both business structures to assist them in making a suitable decision. When people decide to open a business in Australia, they choose between different business structures. One of the common structures selected by them is the partnership. In this structure, two or more people can start their business by entering into an agreement. A relationship is created between them based on which they become partners.
Based on their agreement, they decide to carry out the operations of the business together. Partners themselves take the business decisions, thus, they are solely responsible for its growth or failure. Since partners are responsible for all the actions of the partnership, they can be held liable for its debts. The business did not have a separate personality of its own based on which the liability of partners is unlimited as well. The cost of forming a partnership business is low since parties have to comply with fewer legal requirements. The regulations of a partnership are less complex based on which partners did not have to face strict legal regulations. The operations of a partnership are private as well based on which they did not have to disclose their accounts to the public. Partners share the income and loss of the business together based on their profit sharing ratio which is given in their partnership agreement.
On the other hand, a corporation is incorporated after complying with a large number of regulations. The process itself is complex and expensive since parties have to spend on various fees and preparation of documents. It is a separate legal entity which has a separate personality from its owners. It has its own liabilities which are not imposed on its members. Its members are liable up to the amount spend by them in the company. Furthermore, corporations are able to generate wealth for their operations since they can issue their shares in the public or get a loan under its own name. It provides them more growth opportunities since they can utilise the money to expand their operations. Its accounts are not private, and anyone can access them. Furthermore, companies have to continuously make disclosures regarding its operations which make increases more legal complexities for the organisation. The operations of a company are managed by its directors. They are responsible for taking business decisions in the company while ensuring that its operations are expanding and the interest of its stakeholders meet.
They have to avoid taking any decisions which could negatively affect the interest of the company or any of its stakeholders. In order to ensure that directors did not misuse their powers and position, they have to comply with various duties imposed by the Corporation Act. In case they found breaching these duties, then they have to face legal consequences. In case of our clients, their objective is to convert their business from a trust to start a real estate business. They did not prefer the trust structure since it required them to comply with a large number of strict legal regulations. As per my advice, they should form a partnership business which would be more suitable for them. The legal structure of a partnership is relatively easy and simple based on which they would not have to comply with strict legal requirements. They can easily form a partnership structure with dealing with a large number of legal regulations. It will also save the money of clients since the process of forming a partnership is inexpensive.
On the other hand, if they decide to incorporate a company which would be an expensive incorporation process and it would require them to comply with strict legal requirements. They would have to hire directors, fulfil disclosure requirements and other legal regulations while operating the business as a company, whereas, the process of managing a partnership would be much easier. In case of a partnership, they would be under the control of the business, and they would be able to take all of its decisions, whereas, it is not the case with a corporation. Based on these facts, it is my advice that the clients should start their business by incorporating a partnership structure. It would provide them more benefits than compared to incorporating a company, and they would be able to save their capital. Since they all are part of the same family, forming a partnership would be easier for them based on which they have to comply with fewer legal regulations.
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