Report to supervising partner on your research
Whenever a person is thinking of starting a new business, it is important for such person to think of various business structures that can be adopted by the person in order to start a new business. The commonly available business structures in Australia are sole trader, partnership, company and a trust. However in the present report, we’re going to discuss the business structures of a partnership and a company. In this context, a partnership can be described as a group or the association of persons who have decided to carry on business and to distribute income for the losses of the business among themselves. An example can be given of the situation where a person and his friend or family member decide to start a business together; it may be operated as a partnership. It needs to be mentioned at this point that it is relatively inexpensive to set up and operate a partnership. In this case, the income, losses and the control of the businesses jointly shared by the partners (Lipton, Herzberg and Welsh, 2016). The law does not require that a written partnership agreement is necessary for the creation of a partnership. However, it is preferable to have a partnership agreement in writing.
Such partnership agreements should describe the ways in which the income or the losses of the business are going to be distributed among the partners and how the business is going to be controlled by them. The reason behind the preference for having a partnership agreement in writing is that such agreement can help in preventing misunderstandings and a dispute regarding what is brought to the partnership by each partner and what each partner is entitled to receive from the income generated by the business. This is particularly significant for the purpose of tax in case the profit or the loss of the business is not going to be equally distributed among the partners (Harris, Hargovan and Adams, 2015). It is also worth mentioning that the partners are not the employees of the partnership, however a partnership may employ other workers.
Another structure that is commonly used for starting and operating a business in Australia is that of a company. A company is a legal entity and as a result the set up and operating costs of a company is also higher. There are additional reporting requirements that have been imposed on the companies. The directors of the company have the responsibility of managing the affairs of the company and it is owned by the shareholders. While a company provides some protection to the assets, there are certain cases where the directors may be held legally responsible for their actions and sometimes, regarding the debts of the company. The Australian Securities and Investments Commission (ASIC) have the responsibility to regulate the companies in Australia. In this way, as compared to sole trader or partnership business structure, a company is a separate legal entity. As a result of this legal fiction, the company enjoys the same rights as enjoyed by any natural person. Therefore, a company can incur debt in its own name, and it can be sued under its own. The owners of the company (shareholders) are not generally held liable for the debts of the company. However, the business structure of a company is quite complex. The set up and administrative costs are quite high due to the additional reporting requirements imposed on the companies (Graw and Parker, 2009). A company has to be registered with the Australian Securities and Investments Commission (ASIC). The directors and officers of the company are required to comply with the legal obligations that have been imposed on them by the Corporations Act, 2001.
Key features of a partnership and a company
Hence, the key features of a company can be described as follows. It has a separate legal identity. It has limited liability as compared to the business structures. However, a company is a complex business structure, to start and to operate. The setup costs and running costs are higher, as compared to the business structures. The obligations imposed by the Corporations Act, 2001 have been fulfilled.
Whenever a person is going to start a business, one of the first decisions that has to be made by the person is related with the business structure that is going to be adopted. The nature of business sector has an impact on liability, taxes and the way the business is going to be done. In the present report, the differences that are present between the business sector of a company and partnership are going to be discussed so that it becomes easy to decide the most appropriate business structure for the clients.
Structures: First of all, there is a difference present between the structure of a corporation and a partnership. The business sector of a corporation is more complex and more people are involved in the process of decision-making. A company is an independent legal entity that is owned by the shareholders. The shareholders decide how the company is going to be run and who is going to manage it. On the other hand coming case of the partnership, there are two or more persons who share the ownership of the business (Crosling and Murphy, 2009,). In general partnerships, all the duties related with management, profits, expenses and liability are shared by the partners. In case of limited partnerships, the ownership responsibilities are shared by the general partners while the limited partners act as investors only.
Startup costs: As mentioned already, the company is more expensive and complicated to set up as compared to a partnership. There are a number of administrative fees associated with the creation of a company, as well as complex tax and legal requirements. The companies are required to file articles of incorporation and they should obtain state and local permits and licenses. Generally, lawyers are hired by the corporations for helping in this process. On the other hand, the establishment of partnerships is less costly and simple. The partners are required to register the business with the state and obtain local or state business license.
Liability: in case of a partnership, the general partners are considered as being liable for all the debts and legal obligations of the business. The assets of the partners can be used to repay the debts of the company. Generally, partnerships include the partnership agreements with exactly mention one person of the liability; each partner is going to be responsible for. On the other hand, the company is treated by the law as a separate legal entity (Deakin, Angus and Basil, 2007). As a result, it is responsible for its own debts and obligations. The shareholders do not face the risk of losing their personal assets.
Report to supervising partner setting out your argument weighing up the two alternatives and providing a recommendation
Management: The management structure of a partnership is simple, as compared to a corporation. In case of a partnership, it is decided by all the general partners how the business is going to be run. Generally, management responsibilities are assumed by the general partners or all of them take part in the decision making process. On the other hand, the shareholders govern the corporations. They conduct regular meetings for deciding the management of the company and its policies. However, generally has been seen at the shareholders do not have much say in the routine management of the affairs of the company and the only oversee the managers running the company (Levinson, 2005).
Taxation: the partnerships are not required by the law to pay business taxes. Instead, the profit and loss made by the business is “passed through” to the individual partners. Therefore the law requires that the partners should include their share of profit and loss in the return. On the other hand, in case of a company it has to pay tax at the rate that has been fixed for this purpose. Generally it has been seen that the rate of corporate tax is lower as compared to the individual rate of income tax.
In this report, the advantages and disadvantages related with partnership and the incorporation of a company have been discussed. After going through these advantages and disadvantages, it can be said that in the present case, it will be advisable for the family to incorporate a company. The reason is that the incorporation of a company will provide certain benefits that will not be available in case of forming a partnership. A major benefit that is available to a corporation is that of limited liability. The shareholders of the company are not personally liable for the debts of the company. As a result, the personal assets of the shareholders of the company are not at risk in case the company fails to repay its debts.
The case of ASIC v Adler provides a obvious reminder according to which corporations and the directors should make sure that successful corporate governance framework has been put in position in order to protect the corporation against any inappropriate acts of the directors. There should be ample checks and balances, present in the process to make sure that it is not easy to sidestep the system. In ASIC v Adler, the matter concerned the payment of $10 million by a subsidiary of HIH to a corporation which had Rodney Adler as its only director. The trust mechanism was used for making the below mentioned investments: nearly $4 million were applied for acquiring HIH shares: venture capital unlisted investments are being bought from one more corporation of Adler; loans were given to the entities associated with Adler. This happened without the approval of the board or any of its members. No collective disclosures were made to the board or to its investment committee. The loans have been given without any proper security or documentation at the payment has been made so that it will not come to the notice of other directors of HIH. It was found by Santow J. that semi-covert bypassing of the appropriate corporate safeguards reveals consciousness regarding the impropriety in which Adler was involved. Therefore the court found that Adler had breached for sections of the Corporations Act, 2001.. The sections were related with the duties of the directors:
Structures
The duty to act with care and diligence (s180)
The duty to act in good faith and for proper purpose (s181)
The duty not to use position improperly (s182)
Duty not to use information improperly (183)
At the same time, the other two directors of the company, Williams and Fodera were also liable for the breach of their duties to a lesser level.
The decision given by the court in this case has significant implications for the business judgment rule and the arm’s-length provisions mentioned in the Act.
The business judgment rule has been initiated for providing a safe harbor in case of personal decisions that have been made in good faith and by exercising due care. In this case, all the three directors of the company sought the protection provided by this rule. The court, however found that in order to rely on the business judgment rule, it is necessary for the director to first of all make a business judgment. Then such judgment is required to satisfy the requirements of being made in good faith and for proper purpose. On the contrary, it was found by the court that Adler had a material personal interest in the matter. It could not be shown that the business judgment had been made for a proper purpose and in good faith, and consequently the rule was not held to be applicable. Similarly, the rule was not held to be applicable in case of the other two directors. While Williams was found to have failed to make the business judgment, in case of Fodera it was found that no business judgment has been made at all. The breach of duty by Fodera as the director of the company was that he did not brought the matter to the notice of the other directors of the company.
Arm’s-length exceptions: it is provided by s208 that shareholder approval is necessary when a financial benefit is given to a related party by a public company. However, one exception is for the arm’s-length exception. However in this case the court established that the terms on which the payment of $10 million was made, meant that it was not arm’s-length and it was clearly in breach of s208. It was also found by the court that under the circumstances it was not reasonable for the transaction to involve the purchase of shares in the patent corporation that was going to be paid by its totally owned subsidiary and in the absence of any security and legal documentation.
The court found that deal’s terms were totally insufficient for protecting the interests of the corporation. After money was transferred to the trust, absolutely no mechanism was present through which HIH could dictate how the money was going to be spent. No report from independent experts has been taken and clearly there was a need of adequate protections. Although there is a lack of discussion regarding the legal concepts related with the arm’s-length terms, it was suggested by the court in this case that regarding this type of transaction there is, at least a need for adequate legal documentation and the prospect of providing security. Under these circumstances, the court came to the conclusion that Adler, Williams and Fodera were also liable for the breach of s208 and as a result, the breach of s209.
References
Crosling G M, Murphy H M, 2009, How to Study Business Law 4th Edition, Butterworths,.
Deakin, Simon; Johnston, Angus; Markesinis, Basil (2007) Markesinis and Deakin’s Tort Law, Oxford University Press
Harris, J. Hargovan, A. Adams, M. (2015) Australian Corporate Law LexisNexis Butterworths 5th edition
Levinson, Justin (2005) “Vicarious liability for intentional torts” Journal of Personal Injury Law (Sweet & Maxwell)
Lipton P, Herzberg A and Welsh, M, (2016) Understanding Company Law, 18th edition Thomson Reuters.
Pentony, Graw, Lennard & Parker, 2009 Understanding Business Law 3rd ed Butterworths,.
Vermeesch, R B, Lindgren, K E, (2005) Business Law of Australia Butterworths, 11th Edition
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