Analysis Of Business Structures In Australia: Company And Partnership
Legal framework of partnership structure
This part of the assignment carries out an analysis about the two types of business structures, through which business can be carried out in Australia. These are the business structures of company and partnership. Both form of business structures are dealt with by separate areas of law. The partnership structure is taken care of by the Partnership Act 1963 (Cth) and the corporations are taken care of by the Corporation Act 2001 (Cth).
Partnership
The members who conduct a partnership business are termed as partners. There has to be two or more partners who carry out the partnership business. However there may be a limit on the maximum number of partners in a business. Generally only 20 people can at a maximum carry out this form of business. The business does not require a formal registration under law. Its existence can be identified by s6 of the PA 1963 and provisions of the common law. In general the courts will deem a business as partnership where there are elements of the business being carried out in common and for a profit making purpose by two or more person. The phrase “in common” means that the business is carried out ad owned together by the partners. There must be continuity in the business or else it may be considered as a joint venture. There are various distinct features of partnerships. Firstly a partnership is not a “separate legal entity” this signifies to the court that the business identity and partner’s identity are totally different. The assets which are owned by the partnership business are considered to be the assets of the partners. The tax which is to be imposed on the business profits is the same as the tax which is imposed individually on the partners. The next feature is of joint and several liability. This signifies that partners may be liable if the other partners have committed a wrongful act and their liability can be unlimited. The protection of limited labiality not being present allows the creditors of business to make a direct claim on the personal assets of the partners. Thus in the present situation it is to be clarified that it is a risky form of business. In addition to these features duties are imposed on partners with respect to each other as well as in relation to the business. They are not allowed to carry out a business which has the capacity of competing with the business which is carried out by the partnership. They will also not be allowed to make any form of secret profit from the business and if they have made such profit without the consent of the partners the proceeds would be held by them legally at a constructive trust for the partnership business.
Distinct features of partnerships
Company
Company form of business is subjected to the governance by the Corporation Act 2001 (Cth). The people who manage the business are known as directors and those who own the business are called shareholders. This makes it clear that there is a distinction between the owners and the managers of a company. The directors and officers are provided the power to manage the affairs of the business by s 198A and they have also been imposed with a lot of responsibilities and duties such as those provided under s180-191 of the CA. The company can execute a contract in its own name with or without the use of a common seal as given in s 127. This means that a direct claim can be brought against the company in case of a default. In the same way there is a corporate veil present between the managers and the identity of the company. The identity of the company is deemed to be separate at law according to the principles of the Salomon v A Salomon and Co Ltd case. The ownership of the company is divided into shares. This means a person holding the shares will be a part owner of the company. These shares can be transferred easily subjected to restrictions imposed by the constitution of the company. It is important to note that a company has been provided with protection under the rules of limited liability. The personal assets of the managers and owners in case of default will not be available to be claimed by the creditors. The creditors can only claim the amount which is owned by the company. Thus only the share investment may be at stake in case something goes wrong.
In this part of the assignment, the Pros and Cons of both partnership and Company had been discussed to provide an appropriate advice to Sam, Stan, Fran and Fergie about the most appropriate business structure for their business activity.
The Advantages of a Corporation (Proprietary)
The identity of the company is deemed to be separate at law according to the principles of the Salomon v A Salomon and Co Ltd case. There is a corporate veil present between the managers and the identity of the company. It can own property by itself.
Perpetual existence
Company is created by law and can only be ended by law through the process of winding up. Even if all the owners of the company are dead it would continue to exist under law till it has not been wound up. This gives advantage of uninterrupted business.
Pros and cons of partnership structure
Common Seal
Documents can be executed by the common seal and signature of two directors and thus makes the process authentic and simple.
Share Transfer
The owners of the business can transfer the shares owned by them if they want unless they have not been restricted by the company constitution.
Limitation of Liability
A company has been provided with protection under the rules of limited liability. The personal assets of the managers and owners in case of default will not be available to be claimed by the creditors. The creditors can only claim the amount which is owned by the company. Thus only the share investment may be at stake in case something goes wrong and personal assets of the owners are safe.
Expert Management
The people who manage the business are known as directors and those who own the business are called shareholders. This makes it clear that there is a distinction between the owners and the managers of a company. The directors and officers are provided the power to manage the affairs of the business by s 198A. Thus expert directors can be appointed to manage the business in a better way.
The disadvantages of a Corporation
Complex Operations
There are significant legal obligations which are imposed on a corporation operating in Australia through the provisions of the CA as well as the regulations of the ASIC. In addition corporation has to follow the good governance principles of the ASX.
Costly to Manage
The cost of managing the operations of the company can be very costly as there are various areas of law which needs to be complied with.
Lack of Control
As ownership and management may be different they may be lack of control however they can be same as well.
The Advantages of a Partnership
Fewer complexes
The partnership form of business is less complex as compared to corporations in terms of operations.
Time and cost saving in registration
There is no need to register and thus time and cost are saved.
Wide degree of control
The partners control how the business is to operate
Diversity of partners
Various partners bring different expertise into the business
The disadvantages of partnership
No limited liability protection
Limited liability provisions are not offered under partnership form of business
No perpetual existence
It comes to an end when partner leaves of dies
No separate legal entity
Partners cannot be protected by the corporate veil.
Legal framework of company structure
No transfer of business
Business cannot be transferred.
Joint and several liabilities
Partners may be liable if the other partners have committed a wrongful act and their liability can be unlimited
Advice
Through the results of the analysis of the pros and cons of both the business formats the best advice for Sam, Stan, Fran and Fergie, would be to carry out their Real estate business by using a Company. If they use a company they can have uninterrupted continuation of business, easy transferability, limitation of liability and confidence of the other stakeholders because of legal protection. They may have to spend a little more for this structure but it would be beneficial for them in the long run.
This part of the assignment provides a discussion in relation to the case of ASIC v Adler. The case discusses the provisions of the CA and particularly the breach of directors’ duties under s 180(1)-183. The facts of the case are as follows. HIH Casualty and General Insurance Ltd (HIHC) had made an unsecured and undocumented payment of $10Million to another company named Eagle Equity Pty Ltd (PEE). The PEE was controlled by the main accused in this case Mr Adler. He was a substantial shareholder in HIHC and a non executive director of Adler corporation. The loan made PEE the trustee of AEUT. The loan had been provided without the approval of the board of directors. No approval was also taken from the shareholders. There was also no disclosure made to the HIH investment committee or the board. The court in this case came to the conclusion that Mr Adler had violated the general duties as an officer of HIHC and HIH with respect to such transactions. The court further stated that the specific duties which had been violated by the director include, s 180(1), 181, 182, 183 of the CA. The decision made by the court, imposed a ban on the directors from managing corporations for a period of 10 years. In addition to the Ban, penalties had also been imposed by the court worth $450000 on Adler, 250000 on Williams and $5000 on Fodera. In addition a compensation of $7,986,402 was asked to be paid by Adler to HIHC.
Through the application of s 9 of the CA the court determined the meaning of the words director and offer to find out whether Adler falls within the meaning. The court came to the conclusion that the defendant was not only a director of HIH but also an officer of its subsidiary under the provisions of s9. This made it clear that he had substantially participated in the decision making of the business.
Distinct features of companies
With respect to the provisions of s 180(1) it is given out that a officer or directors of a corporation have to exercise their duties and discharge their powers with standard of diligence and care as a prudent person would have deployed in the circumstances of the company and position of the directors. The court stated in this case that the provisions of s 180(1) had been breached by Fodera and Williams as they had failed to make sure that appropriate protection is in place before a loan of $10 m had been provided. In addition they carried out the transaction without gaining approval of the same form the board of directors.
The defence which is provided by s 180(2) was not eligible to be availed by the defendants in this case because the business judgment rule can only be used when the decision has been taken in light of proper information, in good faith and without having any element of personal interest. Here, the court was able to identify an element of making personal gains at the cost of the company on the part of the defendant directors.
The provisions of s 181 of the CA also have been found to be violated by the defendant directors. This is because the directors of the company are asked to do their functions in observance of proper purpose, good faith and for company’s best interest. However they had failed to do so as their actions was in personal interest and not for a proper purpose and had elements of bad faith. Thus, the court declared the directors guilty.
The court also held that in providing the loan the defendant director had violated the provisions of s 182 and 183 of the Act as he had misused the information attained through the company along with the position held by him in the company, for the purpose of making personal profit at the expense of the company. Thus the implication of this case is that the non executive directors can also be liable for the breach of duties if they have been indulged into decision making.
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