Why Partnership is the Best Fit for the Client
Question:
Discuss about the Branch of Commercial and Maritime Jurisprudence.
The choice of business structure is a crucial one. This is the reason why all the factors surrounding the client, their needs and their requirements are carefully analysed, before any business structure is selected. Last week, one of the clients of the firm was visited to get insights on their situation. This report highlights the research undertaken based on the needs of the client regarding the laws which apply on the business structure which best suits the client.
The needs of the client were to keep the business simple, to involve her family in the business and to have control over the business. Based on these requirements, the most suitable business structure for the client is partnership. There are a number of reasons for stating this. The first thing is that the client wants to keep the business simple. For this, a sole trader form can be selected. However, the key matter is that the client does not want to run the entire business by herself and wants to involve her family members in the business[1]. And due to her needs of keeping the business simple, a company form does not suit her, due to the plethora of legal compliances which have to be fulfilled under this business structure. The Companies Act, 2001[2] provides the details on the requirements of starting up a business and the compliances which have to be met. These are complex and not suited for small businesses[3].
When the client decides to opt for a partnership form of business structure, she would have the ease of business formation. In Australia, each region has its own partnership legislation. For Victoria, the Partnership Act, 1958[4] becomes applicable. Section 5 of this act gives the definition of partnership, where the individuals carry on business for earning profits and in common manner[5]. Section 6 gives out the rules which are used for determining if a partnership is present[6]. Where these requirements are fulfilled, the partnership is deemed to be present, even when there is a lack of written agreement, or the partnership deed. This act also presents some of the disadvantages of being in a partnership form of business. This is the unlimited liability of the partners; and the liability to be bound by the acts of other partners[7].
So, in partnership, there is the disadvantage of unlimited liability and liability for other partners is unlimited. This means that in the event when the partnership is unable to pay off its liabilities, all the partners would have to pay the debts of the partnership, and this includes their personal assets being attached or sold off to pay the debts. They are jointly and severally liable for the debts of the partnership. Further, owing to the operation of agency law, the acts of one partner bind the others. There is also the risk of partnership coming to an end due to disagreement between thee partners[8].
However, there are a number of advantages of partnerships, which particularly suit the requirements of the client in the present instance. The first is the ease of formation of partnership. The client can simply draw up an arrangement on a document, and this would be effective document and would be considered as partnership deed. Further, the partners can be named in this deed, along with the money which is being contributed by them in the partnership, which would become the capital of the business. By restricting the number of partners to three or four, the entire control can be in the hands of the client, or in that of her family. There is just the need of fulfilling the criteria laid down under the partnership act, where there is a need to show that the partners are running business for common purpose and for earning profits[9].
Laws Governing Partnerships in Victoria
The other advantage of partnership is that the client and her family can contribute the capital required for starting the business. They can distribute the functions between them to bring a proper structure in the partnership, where one person handles the cooking and the other person handles the financing. Where they require more capital, they can add in more partners, or contribute more capital. The start-up costs of partnership are minimalistic and the business can be kept small as per the needs of the client. This business form allows the business to keep the matters private, which would enable the client in keeping their recipes and other information away from public eye, along with the financial position. The business can be kept simple owing to the limited external regulations[10].
Conclusion
Thus, from this discussion it can be concluded that by opting for partnership, the clients would have to follow the Partnership Act, which is way less complex then the legislation governing the companies; and would also suit their requirements.
The choice of business structures requires evaluating the different options and weighing in the pros and cons of each structure. This report weighs up the alternatives and presenting the arguments for the recommendation made for the client for choosing a partnership form of business.
In the previous report, the recommendation to the client for choosing up partnership form of business structure was given, based on this structure fulfilling the requirements of the clients. This report also highlighted the pros and cons of getting in a partnership, along with the relevant law applicable on partnerships in Victoria. However, where the client still wants to consider the other forms, this discussion would be of help.
The client can opt for a sole trader form of business structure. This is because the client wants to keep the business simple and have the control over the business. However, as they want to share the burden of work with her family, she was suggested to opt for partnership. There is one alternative here. The client can employ the family members as workers in sole trader. This would allow her to distribute some of the work to the family members working as workers and at the same time, keep control over the business. This would though, restrict the capital pool and for funds, the client would have to rely on external sources alone[11].
The client also has the option of creating a company. This would allow the client to raise money from public. Where they want to restrict the raising of money for business from her family only, she can opt for a propriety company. These companies can only raise funds from friends and families and not from general public. In comparison to public companies, the affairs of proprietary companies are still more private. Unlike partnership and sole trader, the shareholders and owners of company have limited liability. Further, the work of the company is undertaken by key personnel like CEO, directors and the like, which would take the control away from the present client. A company form though would come with increased compliance requirements and would make the business complex, which is against the key focus of the client[12]. Owing to these reasons, despite the different advantages of company form of business structure, it would not suit the client, based on their requirements. Though, this mode can be kept as an alternative for future, where the business grows and the clients of feel the need of expanding their business.
Conclusion
Thus, on the basis of the discussion undertaken in the previous segments, it can be concluded that the best suited business structure for the client is partnership. Where the client wants to opt for an alternative business structure, they have to go for sole trader. And where in the future the clients want to expand their business, they can opt for company form of business structure.
Carrington A, Business Structures and Incorporation (Aauvi House Publishing Group, 2012)
Cassidy J, Concise Corporations Law (The Federation Press, 5th ed, 2006)
Gibson A, and Fraser D, Business Law (Pearson Higher Education AU, 2013)
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
Lipton P, Herzberg A, and Welsh M, Understanding Company Law (Thomson Reuters, 18th ed, 2016)
Story J, Commentaries on the Law of Partnership, as a Branch of Commercial and Maritime Jurisprudence, with Occasional Illustrations from the Civil and Foreign Law (The Lawbook Exchange, Ltd., 2007)
Vickery R and Flood M, Australian business law: compliance and practice (Pearson Australia, 2012
[1] Andy Gibson and Douglas Fraser, Business Law (Pearson Higher Education AU, 2013)
[2] Companies Act, 2001 (Cth)
[3] Phillip Lipton, Abe Herzberg, and Michelle Welsh, Understanding Company Law (Thomson Reuters, 18th ed, 2016)
[4] Partnership Act, 1958 (Vic)
[5] Partnership Act 1958, s5
[6] Partnership Act 1958, s6
[7] Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
[8] Joseph Story, Commentaries on the Law of Partnership, as a Branch of Commercial and Maritime Jurisprudence, with Occasional Illustrations from the Civil and Foreign Law (The Lawbook Exchange, Ltd., 2007)
[9] Roger Vickery and MaryAnne Flood, Australian business law: compliance and practice (Pearson Australia, 2012)
[10] Ann Carrington, Business Structures and Incorporation (Aauvi House Publishing Group, 2012)
[11] At 1
[12] Julie Cassidy, Concise Corporations Law (The Federation Press, 5th ed, 2006)
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