The Partnership and the Company: An overview
The business structure is the model of a business. All the relevant facts such as how many legislations will be applicable on a business, what will be the limitations of a business and what privileges will be available to the same depending on the form of a business. A business can be formed in any model such as sole proprietorship concern, a partnership firm, or a company. A Person is advised to choose a correct business model for his/her business as it will have a great significance on the future of business.
This report is submitted hereby to provide an overview of the two basic structures of the business named as Partnership Firm and Company.
Firstly, to discuss the partnership, this is to say that this is a very simple form of business. In this form of business at least two or more person is there. The sole objective of this togetherness is to run a business and to share the profits and loss resulted thereon. People often use this structure in those situations where they need either capital or any other element from others. Under a partnership, the people who run the business are known as partners of the firm. Such partners remain responsible in respect to other partners and in respect to the firm. They are required to act in a fiduciary manner. This is essential to inform the client that, in every partnership firm, a defined legislation is applicable. Which legislation will be applicable to a partnership firm is depends on the country and area of jurisdiction of the firm. Every state of Australia has it is own legislation on the subject of partnership. Such legislation provides rules and regulations related to the partnership of that state.
Normally in a partnership form of business, partners thereon have their unlimited liability, it means they can held personally liable for all the liabilities and debts of their business and their personal property can be sold out to repay the debts of partnership firm. However, a different kind of partnership is emerging these days that is named as “Limited Liability Partnership.” This form of business is a mixture of traditional partnership and a company. As the name implies this is a partnership firm in which liability of partners remains limited up to their investment. While citing the characteristics of a partnership, this is also necessary to share that partners are in an agency relationship with their firm. They act on behalf of their firm and the outsiders actually deal with them not with the firm, although business carries with the name of the firm only. This is a form of business where ownership and management remain in the same hands. Partnership agreement defines the terms and conditions of the business and mutual relationship and the same can be developed in verbal or written mode.
Partnership Firm
Moving towards the companies, this is another structure of the business. Similar to partnership legislation is also applicable in case of company. For instance, in Australia Corporations Act, 2001 is there to deal with the companies. Not similar to a partnership, in a company, there is a separation between ownership and control. A company is a separate legal personality in the eyes of law and this is the reason that directors and officers thereof cannot be held personally liable for any task they do on behalf of the company until unless the do such task within the prescribed and provided powers. In comparison to a partnership firm, provisions are stricter in the case of a company. A company has a perpetual life. The same goes until the process of winding up starts. A company is an artificial person but the same is also a legal person. A company can run a business and can enter into business transactions with it is the name. A company can be a various type such as private limited or public limited. Further from the viewpoint of liability, the same can be of limited liability o unlimited liability as well.
It is expected that after the study of this report, the client is able to understand the basics of these two structures.
In this report, the positive and negative factor will be discussed in order to make the client able to take a correct decision. In the last part of the report, the client can find out the recommendations, yet this is advisable to go through this report too in addition to the recommendations.
Partnership Firm: – No doubt a partnership is a very easy business structure to adopt and one can easily incorporate a partnership firm with a low cost, however, some negative sides are also there of this business model that is explained below along with the affirmative side.
Pros
- As mentioned earlier, this form of business is very easy to establish as very less cost is involved in the process of incorporation of the firm.
- Very few rule and regulations are there for this kind of business format therefore not so many legal liabilities involved either in the course of incorporation or in the continuation of a business.
- In case of limited liability partnership, liabilities of partners remain limited similar to the director of a company.
- Business gets an advantage of all the positive factors related to all the partners such as expertise skills, capital, and experience.
- Business affairs remain private as no public involves in the case of a partnership firm and for this reason, the information related to a business need not share with anyone.
- Dissolution of a partnership firm a very simple task to do similar to the formation.
Cons
- In general, a partnership firm is a traditional one and for this reason, partners are personally liable with respect to the deeds and debts of the firm.
- High chances of disputes are there in the cases where partnership deed is not in writing.
- Sources prove limited sometimes as funds cannot be raised form the public or open market.
- In the situation of loss, partners start blaming each other and it affects the business of the firm.
- The resignation of a partner often changes the structure of a firm and affect the value of a business negatively.
Companies: Similar to a partnership firm, companies also have a certain limitation in addition to the advantages, which are described in the below discussion.
Pros
- Funds can be raised from the public in case of public company.
- Liabilities of directors remain limited and they can not be held personally liable.
- A company has an unlimited life.
- Shares of a company are freely transferable in the secondary market and one can easily come in and out as a shareholder.
- A company is a more regulated way in terms of the law.
- Liabilities of shareholders also remain limited in the case of a limited company.
Cons
- Very strict provisions related to penalties are laid down under the Corporations Act, 2001 in case of non-compliance with the requirements of various sections.
- The court can deny the separate entity of a company in those cases where directors act beyond the given authorities and can held them personally liable.
- In the case of unlimited companies, personal property of shareholders can be used to repay the debts of the company.
- Cost of formation of a company is very high.
- Many legal formalities are there in case of a company.
In the current circumstance, the client consists of four people who are not unknown to each other, in fact, they are family members and share a relationship of brother and sister with each other. In such a situation, there are very few chances of disputes and therefore this is advisable for them to establish a business in the form of a partnership firm. By using the company format, they will fall into a situation of additional legal formalities and this structure will lead to a high cost to them. It is to assume that being the member of the same family they have trust with each other. Although this is also to advise that in order to ignore any possible future dispute, they should develop a partnership agreement in writing. This is the recommendation, which has provided on the basis of characteristics, pros and cons of both of the business structure and now the final decision will be of the client.
Limited Liability Partnership
Under the Corporations Act, 2001, both general and specific duties are mentioned. In general, a company is a separate legal entity and an officer or director of the same cannot be held personally liable for any deed of the company. However it was held in the case of Salomon v A Salomon And Co Ltd [1897] AC 22 that whenever a director, member or officer think of to take unfair advantage of the separate entity rule then the court can pierce the virtual corporate veil and the individual personally liable. Further, compliance of a director’s duty is also a significant task to do. In this area, the case of ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72 is a very significant case.
In this case, a person named Rodney Adler held the main victim. This person was a shareholder and now executive director of a company named HIH. He was also an officer in another company known as HIH Casualty and General Insurance Ltd (HIHC). HIHC was a subsidiary of HIH and this company (HIHC) has provided an unsecured and undocumented loan worth $10 million to a third company Pacific Eagle Equity (PEE), which was again controlled by the Adler. After the said loan, the company PEE turned into the trustee of Australian Equities Unit Trust (AEUT), that was owned by Adler corporation (in which Adler was the director).
As Adler was the common member in every aforementioned company and was in a position to take the decision, he acted unethically and outside of the provisions of law. PEE has purchased the securities of HIH worth $4 million from the market out of loan amount receive form HIHC, to manipulate the other shareholders of the market with a fabulous working of HIH. Later on, PEE has old out these shares with a loss of $2 million. In addition to this, PEE also purchases shares of many companies from Adler Corporation, which has sold out later on with a loss.
In the decision of the case, the court held that Adler acted in the conflict of the interest of many shareholders of HIH, HIHC, and PEE. Court held that Adler breached the duties lay down for a director under section 180 to 183 of the Corporations Act, 2001. Under these sections, duties of directors are defined that is expected from every director and officer of the company. Provisions of these sections are briefly discussed below:
- Section 180:- This section says that every director and officer of a company in Australia is required to act with due care. While taking the decision for the decision, it is the responsibility of a director to care with a level of diligence.
- Section 181:- According to the provisions of this section, a director, and officer of the company must act in the good faith of the company. They must remain careful that what is in the best interest of the company and then they should behave. A director or an officer must not do any act that can result in harm to the company.
- Section 182: This section focuses on the purpose and states that every director and officer of a company must act for a proper cause. They must not take any decision for an improper purpose.
- Section 183: Post of a director and officer in a company is the senior one. Directors are the person who takes a decision on behalf of the company and the whole management of the company lies with the directors. In such a situation this is required that a director must not use his/her position improperly in the company.
- Section 184: As director take all the important and day to day decisions of a company, therefore all the secret information are available with them, hence a director must not use such business related information for an improper or unethical cause.
In the decision of the case of ASIC v Adler, the court has banned the Adler to be a director for the next twenty years. This is a very significant case in the history of Corporate Law as it shows the results that can come out from a situation where a director do no fulfill his/her duties and responsibilities.
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