The Business Structures of a Company and a Partnership
Any person willing to start a new business has to consider the various business structures that are available to such person for the purpose of starting the new business. For this purpose, generally the business structures of sole trader, partnership, a company and a trust are adopted by the parties. In this report, an attempt has been made to briefly describe the business structures of a company and a partnership.
A partnership can be described as an association of persons who are willing to jointly carry on the business and to distribute the income or the losses of the business. For example, when a person starts a business with a friend or a family member, it can be operated in the form of a partnership (Ciro and Symes, 2013,). The establishment of a partnership is relatively inexpensive and easy. In the same way, learning the business as a partnership is also inexpensive as compared to company. In case of partnership, the income of the losses and the control of the business is shared by all the partners (Austin and Ramsay, 2012). Similarly, the law does not provide that the parties should enter into a written agreement in order to establish a partnership. But it is always preferable to have a written partnership agreement.
The partnership agreement can describe the ways in which the income or loss of the business can be distributed among the partners. Similarly can also describe the ways in which the business is going to be run by the partners. Therefore, it is advisable to have a written partnership agreement because the agreement is a significant document that helps in avoiding misunderstandings and disputes between the partners regarding the check that each partner is entitled to receive from the income of the partnership business. It is also significant for the tax purposes, where the prophet or the loss generated by the business is not to be distributed equally by the partners. At this point, it also needs to be stated that the partners are not considered as the employees of the business, but the partnership business may employ other workers.
The next business structure commonly used for running a business is that of a company. According to the law, a company is treated as a distinct legal entity. However, the cost of setting up and operating a business as a company is higher, as compared to the business structures. At the same time, the corporations’ law has also imposed certain additional reporting requirements on the corporations (Baxt, Fletcher and Fridman, 2008). The responsibility to manage the affairs of the company has been imposed on the directors of the corporations and a corporation is owned by its shareholders. The business structure of a company provides certain protection to the assets but in some cases, the directors may be held personally liable for their actions and in some cases even before the debts of the company. The regulator of the companies in Australia is the Australian Securities and Investments Commission (ASIC). As mentioned above, a company has its own legal identity as compared to the business that is being run as a sole trader or partnership business. Due to this legal fiction of separate identity, a corporation has the same rights that are available to any natural person. Hence, a company can incur debts in its own name. Similarly it is possible to sue a company in its own name. As a result, the owners of the company (shareholders) are generally considered to be personally liable for the debts incurred by the company. But it also needs to be acknowledged that the corporation is a complex business structure. The setting of the structure and the administrative costs are also high as a result of the additional reporting requirements that have to be fulfilled by the corporations. A company needs to be registered with the ASIC (Cassidy, 2013). The directors and the offices of the corporations have to fulfill the legal obligations described for them by the Corporations Act, 2001.
Partnership Structure and its Characteristics
In this way, the key features of a corporation are as follows. Corp. has distinct legal identity. It also enjoys limited liability and is considered as separate from its shareholders and directors. But the business structure of a corporation is quite complex to set up and operate. The starting and running costs of corporation are also higher. At the same time the Corporations Act also imposes a number of obligations on the companies.
Due to the fact that a corporation has distinct identity in the eyes of law it can incur debt, and it can sue and be sued. The shareholders of the company, which are also its owners, are able to limit their personal liability regarding the debts and obligations of the corporation and generally they are not liable for the deaths of the corporation. The business sector of a company is quite complex and therefore the setup and reporting costs are also higher as compared to the business structures. A company can be formed as a private (proprietary) or a public entity. A registered corporation is required to have at least one director. Managing the business activities of the corporation is the responsibility of the directors. In order to become a corporation, the entity should be incorporated under the Corporations Act and it should be registered with the ASIC
A significant decision as to whether a person was going to start a business. This issue is related with the business sector that the person is going to adopt for running the business. The business structure, adopted by the person has an impact on the personal liability of the person, taxes and the way business is going to be operated. Therefore in this report, the differences existing between the business structure of a company and a partnership has been discussed. The purpose of this report is to make it easy to decide which business structure is suitable for both the clients in the present case.
There are certain differences present between a partnership and a corporation. The business structure of a company is much more complicated. Similarly, more persons are occupied in a company in the decision-making procedure (Cassidy, 2013). A company is a distinct entity in the eyes of law. It is owned by the shareholders. Similarly, the shareholders have the authority to decide how to manage the affairs of the company and who will administer the affairs of the company. But in case of a partnership, two or more persons have the ownership of the business. In case of a general partnership, the duties concerning the management of the business, profits, expenses and the liability of the business has to be shared by the partners (Ciro and Symes, 2013). On the other hand, in limited partnerships, the general partners share the ownership, while the limited partners are only the investors in the business.
The Company Structure and its Characteristics
Regarding the cost related with setting up the business, it has to be knowledge that the setting up cost in case of a company is more expensive. Similarly, a company is more complicated to incorporated as against a partnership. The creation of a corporation involves a number of administrative fees. Similarly there are complex tax and legal requirements (Fisher, Anderson, Dickfos, 2009). The law requires that the company has to file articles of incorporation. A company is also required to get state and local licenses and permits.
Another difference present between the two is related with the liability of the owners of the business. The partners are treated as accountable for the business debts. Consequently the personal assets belonging to the partners are liable for repaying the obligations of the business. Usually, the partnership agreements precisely prescribed the liability of each partner. However, as mentioned already, in the eyes of law company is a distinct entity. The result is that the debts and obligations of the business can be imposed only against the company and not its shareholders (owners). Therefore the personal assets of the shareholders are not at risk even if the business fails.
While in case of a partnership, the management structure is simple, but this is not the case with the company. The general partners have the authority to decide how they’re going to run the business (Hanrahan, Ramsay and Stapledon, 2013). In most of the cases, the responsibilities related with the management of the business are assumed by general partners and in this way, all the partners take part in the process related decision-making. But the corporations are governed by the shareholders. Regular meetings are conducted by the shareholders to decide the issues related to the management of the corporation, as well as its policies. However, generally the shareholders do not have much authority to deal with the day-to-day management of the corporation. The shareholders only oversee the managers who manage the affairs of the company.
The law does not require a partnership to pay taxes. As a result, the profit or the loss of the firm is transferred to partners. In this regard, it is required by the law that the partnership includes the share of profit or the loss received by them in the tax return. But in case of a corporation, it is required by the law that the corporation has to pay tax at the fixed rate. However, generally, the rate of corporate tax is lower than the individual income tax rate.
Differences between a Partnership and a Company
In the present report, the advantages and disadvantages associated with two commonly used business structures, partnership and a company was discussed. After considering the many advantages and disadvantages, the conclusion arises that in the present case, the family should go for the incorporation of a company known to run their business (Harris, 2009). The reason behind his conclusion is that certain benefits will be available due to the incorporation of a company while these benefits will not be available in case of the partnership. One of the main benefits available will be of limited liability. The family will not be personally liable for the deaths of the business. In this way the personal assets of the members of the family will be safe even if the business of the company fails.
This case is related with the duties that have been imposed on the directors of corporations. It reminds that corporations and directors should ensure that effectual corporate governance frameworks have been put in place, which can protect a corporation against any inappropriate acts of the directors. It is also important that sufficient checks and balances exist in the process due to which it is not easy to circumvent this process. In the present case, the issue concerns the disbursement of $10 million by a subsidiary company of HIH. Rodney Adler was the sole director in this company. The parties used trust mechanism in order to give the following amounts. They gave $4 million to acquire HIH shares; similarly venture-capital unlisted investments were purchased from one would company of Adler and loans were given to the entities with which Adler was associated. All these payments were made without taking the approval from the board of the company. Similarly, no selective disclosure was made to the board or to the investment committee of the company. While giving the loans, no security was taken and proper documentation was also missing so that the transaction may not be noticed by the other directors of the company (Harris, Hargovan and Adams, 2013). Under these circumstances, it was discovered by the court that clandestine bypassing of the installed protections shows the impropriety of Adler’s conduct. As a result, it was held that Adler was responsible for the breach of the following sections of the corporations regulated with directors’ duties. These included the duty to act with care and diligence (s180), duty to act in good faith and proper purpose (s181) duty not to use position improperly (182) and not to use information and properly (183). In this way, the decision given in ASIC v Adler has considerable connotations for business judgment rule and also for arms length provisions mentioned in Corporations’ Act.
Comparison of Cost of Setting Up a Business
The purpose of business judgment rule is to provide safe harbor to the directors regarding the decisions made by them in good faith and by using due care.
In the present case too, all the three directors wanted to rely on the protection of business judgment rule. However, the court found that for the purpose of relying on this rule it is required that the director should have made a business judgment. It will also require that such business judgment should not be made in good faith and proper purpose. But in the present case, the court discovered that in this matter, Adler had a personal interest. Therefore it could not be established that the business judgment made by them was for a proper purpose and in good faith. As a result, it was held that the rule was not applicable in this case (Li and Riley, 2009). It was held by the court that the business judgment rule also did not apply to the rest of the two directors. While it was found that Williams had not made a business judgment, Fodera also did not make any business judgment at all. The breach of duty took place on part of Fodera when there was a failure to inform other directors regarding the deal.
Among the relevant findings of the court, it was discovered that the conditions of the deal failed to defend the interests of the company. After the money was transferred, HIH did not have any mechanism through which it could dictate the way money should be spent. The company failed to take a report from independent experts. In this way, there was a clear deficiency of proper safeguards. In view of the circumstances, it was held by the court that the three directors, Adler, Williams and Fodera for responsible for the breach of the duties imposed on them as the directors of the company
References
Austin R.P. & Ramsay, I., (2012), Ford’s Principles of Corporations Law, Butterworths, Australia, 15th edition
Baxt, R., and Fletcher, K.L., Fridman, S., (2008) Corporations and Associations Cases and Materials on, Butterworths, Australia, 10th edition
Cassidy, J. (2013) Corporations Law Text and Essential Cases Federation Press, 4th edition Sydney
Ciro T, Symes C, (2013), Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition
Fisher S, Anderson C, Dickfos, (2009) Corporations Law – Butterworths Tutorial Series, 3rd Edition Butterworths, Sydney
Hanrahan, P., Ramsay I., Stapledon G., (2013) Commercial Applications of Company Law. CCH 14th edition
Harris, J. (2009) Butterworths Questions and Answers Corporations Law:, LexisNexis, 3rd Edition Sydney
Harris, J. Hargovan, A. Adams, M. (2013) Australian Corporate Law LexisNexis Butterworths 4th edition
Li, G, Riley, S. (2009) Applied Corporate Law: A Bilingual Approach, LexisNexis 1st Editio
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