Legal Characteristics Of Partnership And Company Structure

Understanding the Importance of Selecting the Right Legal Structure

While starting a business, it is important for the parties to select the right legal structure for them after evaluating its legal attributes. This decision has a significant impact on the business in the long run since it influences the way parties manage their operations. In case people made a wrong choice, then they could suffer terrible consequences such as the dissolution of the business or insolvency. Thus, parties should evaluate and compare legal characteristics of different business structures to find the most suitable for them. In this report, partnership and company structure will be analysed based on their legal attributes in order to identify their key characteristics.

In terms of simplicity, selection of partnership business is an obvious choice. Forming a partnership does not require parties to have certain professional skills, and they did not have to deal with factors such as registration or licensing. The nature of this business is simple, and it is one of the least regulated forms of starting a business in Australia. This business is suitable when more than one (up to 20) entities wanted to join together by pooling their resources and knowledge to start a business. After becoming member of a partnership, all partners are jointly and severally liable for the operations of the business. They also act as an agent of other partners since they have a fiduciary duty. Certain elements must be fulfilled by partners to constitute a partnership business structure.

Firstly, the business must be carried out by partners in a mutual relationship, and there must be repetition of acts because a partnership cannot be formed for isolated event which did not repeat in the future as given in the case of Smith v Anderson. Furthermore, all partners must play different roles in the business, and they must have a mutual responsibility in the business as given by the court in George Hall & Son v Platt case. The goal of the partnership must be to generate profits for its partners; however, only sharing of profits did not make a person partner in the business as given in Cox v Hickman case.

A corporation has a separate legal personality which differentiates it from its members. The members of a company have limited liability, and they cannot be held personally liable for its operations as given in the case of Salomon v A Salomon & Co Ltd. The provision regarding incorporation and managing of a company are given under the Corporations Act 2001. While forming a corporation, parties face some complexity in the registration process since they have to comply with various legal requirements. The cost of incorporation is high as well since parties have to pay various fees relating to the registration. There are many on-going statutory reporting obligations which parties have to comply with while managing the operations of a company. Operations of a company and its business decisions are taken by its board of directors who have to discharge their duties while complying with various general duties imposed by the Corporations Act.

Partnership Business Structure and Its Legal Characteristics

Conclusion

In conclusion, there are separate legal characteristics of partnership and company structure which are necessary to be evaluated and understood by parties before selecting the suitable business structure form them.

In order to select a suitable business structure, parties should evaluate both the advantages and disadvantages of the structure to ensure that the structure meets their requirements. Legal attributes of the business structure provide various merits and challenges to the parties based on which they can make their decision. In this report, pros and cons of partnership and company structure will be analysed to provide a recommendation to the clients.

Advantages

1. The legal complexities in the formation of the partnership are relatively low because parties did not have to comply with multiple legal regulations.
2. The initial investment in the business is low as well since there are no heavy registration costs or fees.
3. Decisions making remains in control of the partners, and they form business policies based on mutual agreement.
4. Financial affairs of the business remain private, and they can only be accessed by partners.

Disadvantages

1. Business did not have a separate entity and partners have unlimited liability based on which they are liable to pay off the debts which the business is unable to repay.
2. Disagreements or conflicts between partners can result in terminating the whole partnership business.
3. Ownership of the business is not easily transferable without the permission of other partners.
4. Death of partners can dissolve the partnership business.

Advantages

1. Shareholders and directors have limited liability in the business because the corporation has a separate personality based on which it can form contract or take loans under its own name.
2. There is a wide range of options available for the company to collect capital for its operations. For instance, issuing shares in the public, taking loans, incurring debts, and others.
3. Due to perpetual succession, the death of members did not dissolve the company or its business.
4. Ownership is easily transferable without permission of other members, and the process is easy as well.

Disadvantages

1. The procedure of incorporation is complex because parties have to comply with various legal regulations.
2. The initial investment in the incorporation is high because parties have to pay registration costs and other fees.
3. Financial affairs of the business are not private.
4. In case of violation of duties, directors can be held personally liable for the decisions taken by them in the company.

Partnership is a suitable business structure for our client because it is more appropriate as per their needs. The formation process is simple, and the initial investment is low as well. Since clients are frustrated by the trust structure, they can select partnership structure in which they will not have to comply with strict legal regulations during incorporation and while managing its operations. Their financial affairs will be private, and they will not have to comply with strict regulatory policies while taking business decisions. Thus, selection of a partnership business structure is more suitable for the clients.

Conclusion

In conclusion, partnership and company both have separate legal attributes which differentiate them from each other. Based on these characteristics, parties who select them receive both merits and challenges. By evaluating these factors, parties can select a suitable structure for their business which assists them in effectively run the operations of their business and benefit them in the long run.

Directors have to comply with various duties while discharging their duties which are imposed by the Corporations Act. They have to comply with them in order to ensure that they focus on fulfilling the objectives of the company and achieve its interest rather than focusing on personal benefits. In order to understand the relevance of directors duties, the evaluation of ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72 case is necessary.

In this case, duties were breached by Adler while acting as a director. An unsecured loan of $10 million was given by HIH Casualty and General Insurance in which Alder was involved; the loan was given to Pacific Eagle Equity Pty Ltd (PEE). A sum of $4 million from its money was invested by the company in the shareholding of HIH which was later sold by the company at a loss of $2 million. Another $4 million was invested in acquiring the shareholding of Adler Corporation Limited. This investment was made at a loss as well. The rest $2 million were given by the company as a loan to Adler and other parties without any securities. The documentation of all these transactions was not conducted by the company, and Adler conducted all these transactions for personal benefits. Thus, he breached section 180, 181, 182 and 183 of the Corporations Act.

• Care and diligence (section 180)

The directors have a fiduciary duty towards the company and its stakeholders, thus, they have to maintain a level of care and diligence while performing their operations. Directors should not take any actions which no reasonable person would while acting in their position. They have to ensure that appropriate care is taken by them while discharging their duties. Adler breached section 180 because he failed to maintain a level of care and diligence. The actions taken by him were wrong, and no reasonable person would have allowed given a loan of $10 million without any security.

• Good faith (section 181)

Directors have to ensure that they perform the operations in the company while maintaining the good faith. They should not focus on their personal benefits by taking advantage of their position. They should use their powers for the proper purpose only and ensure that they are focusing on the interest of the company. Adler misused his position by authorising an unsecured loan of $10 million. Furthermore, he used such money for personal benefits rather than focusing on the interest of the enterprise, thus, he breached section 181.

• Proper use of position (section 182)

Directors should ensure that they use their position only for authorised and proper purposes. They should not use their position for causing harm to the corporation or for personal benefits. The objective of Adler was to gain personal benefits by using the company’s money. He misused his position to fulfil his personal objectives rather than focusing on the interest of the corporation, thus, he breached section 182.

• Proper use of information (section 183)

Directors have access to confidential information of the company, and they use such information for taking business decisions and forming future policies. It is their duty that they use such information for proper purpose only. They should not use such information for causing harm to the company or gaining personal advantage. Adler used the information for personal gain while causing harm to the corporation based on which he breaches section 183.

Conclusion

In conclusion, directors have immense powers in the company due to which they have to comply with various duties to ensure that they did not misuse such powers. These duties are imposed by the Corporations Act in order to ensure that directors properly use their powers and avoid causing harm to the company or gaining unfair personal advantage. Violation of these duties results in creating legal consequences in which directors can be held personally liable