Partnership Firm
Whenever a person thinks to start his/her, own business in addition to other issues such as capital, management, and place of business, the correct form of business is also an important thing to decide. A business can be established in many forms such as sole proprietorship concern, partnership form, and companies. It all depends on the requirement of the person who to start a business. Every kind of business structures has their own characteristics, pros, and cons as well. In this report, the two most common and popular business structure such as partnership and company are described with their basic characteristics as the client wants advice for both these structures only.
A proprietorship concern is a business form in which only one person takes part. The single person owns and runs the whole business. On the other side, in comparison to the proprietorship form of business, partnership, and company consists of two or more people.
A partnership is a group of two or more individuals who come together to start a business. The necessary thing that the purpose of a partnership firm must be a commercial one, that means if two people do some activities which have no economic value, then such collaboration cannot be considered a partnership. Under a Partnership firm, the person who starts the business with other people, is known as “partners.” Partner pool their money, skills, and efforts to success a business. Every nation has it is different legislation to regulate the partnership firms in the country. For instance in Australia, there is no act for the whole nation, rather than this, every state has separate legislation on Partnership.
Further, in general, partners have unlimited liability in respect of debts of the partnership. However, in the case of a limited liability partnership, partners are only responsible to pay out the debts up to the limit of their decided ratio. This is to state that in every partnership, there is a document named “Partnership Agreement” does exist. This confirms the liability and powers of the partners and other terms of business. The same can be in written or in verbal form. In those cases where partnership agreement is in verbal form, chances of disputes are high, therefore this is advisable to develop a partnership agreement in written form in order to ignore the entire possible dispute. In partnership firm, partners do not have their separate identity from the firm; they are personally responsible for every act and deed of partnership firm and are also responsible to act in a fiduciary manner in respect to firm and other partners.
Advantages
On the other side, companies are another business structure. This business structure is more defined in comparison to the partnership. The lead difference between a company and a partnership firm is that in case of a company, the person who runs business is named as director and such person are not personally responsible for any of the act of a company. A company form under a legislation of the nation as for example companies in Australia, incorporate under the purview of Corporations Act, 2001.
Further, there is also an exclusive feature of companies and that is the dissociation of control and management. Directors run a company and manage the day-to-day affairs of the same, whereas the ultimate control lies with the shareholders who are the actual owners of the company. In general, the director cannot be held personally liable for the tasks they do on behalf of the company but it does not mean that directors can do anything behind the artificial veil, which segregates them from the company. It was held in the case of Salomon v A Salomon & Co Ltdthat in those cases where directors act unethically or commit any fraud then the court can uplift the corporate veil and can deny accepting the separate identity of directors. In such as a situation directors will be held personally liable for their tasks. In the case of a company, the charter of the company is a document, which defines the powers and scope of a company. A company cannot go beyond it is charter.
The previously mentioned report was an overview of the two business structures that will guide the client to understand that what exactly these structures are.
As mentioned in the Report 1 that every business structures have some pros and cons, therefore this report is exclusively detailed on this aspect and consists of positive and negative aspects of partnership and companies. The client in the case needs to know that what are these pros and con so they can take a correct decision for themselves and can adopt the right business structure for their business. This report is focused on the advantages and disadvantages of both of the business structure that has discussed in the previous report and at the end, the advice will also be provided to the client that which business structure would be suitable to them as per their requirement. Although this is to declare that, the ultimate decision will be of the client only.
Disadvantages
Partnership Firm: – This is a basic business structure that a person can use if he/she wants to start the business in the association with other people. Following are the advantages and disadvantages of this form of business.
Advantages:-
- This form of business is very simple to establish.
- Flexibility is always there as partners can join and leave merely on the basis of a notice
- Operations of the firm remain secure and confidential, as no financial reports need to make public.
- Partnership agreement decides everything and decreases the chances of fights and disputes.
- Partners divide Profits and losses in the decided ratio.
- Cost of formation and dissolution of a partnership firm is very nominal.
Disadvantages:
- Partners are personally responsible for the acts of a partnership firm.
- Generally, family members or friends adopt this business structures, but it has observed that non-registration of partnership agreement brings out disputes among them, which destroys a mutual relationship for a long term.
- Because of liberal form, partners do not take the business seriously and leave the same at any time, which cause a negative impact on the value of the business.
- Decision-making becomes difficult.
Company: -Similar to a partnership, this form of business also has favor and unflavored points, which are given hereunder.
Advantages:-
- This is a more legal and regulated form.
- Companies have their different legal personality and directors cannot be held personally liable for the acts of companies.
- Financial raising is easy as funds can raise from the public.
- Companies have their unlimited life.
- In case of winding up, personal property of shareholders cannot be called upon to pay the debts of the company.
Disadvantages:
- Lots of costs are involved in the formation of a company.
- A separate legal entity can be denied by the court in some of the cases.
- In case of winding up, there is additional, cost comes out in the form of a fee of the liquidator.
- Secrecy cannot be maintained in the case of a company, as financial statements of the same are need to be submitted to authorities and shareholders.
- Some decisions cannot be taken without the prior permission of shareholders.
- Many legal formalities are involved that sometimes affect the working of the company.
- Under corporations Act 2001, many strict provisions and penalties are described in the case of non-compliances of relevant sections.
Advice:
In the current case, the client has a family relationship with each other and this is assuming that they have a certain level of trust, therefore this is to advise that they should form a partnership firm. Companies are proved a correct business structure in those cases where people from different areas are involved and there are more chances of disputes. If the client would adopt this business structure then many of the legal formalities will have to follow. No doubt that company structure has many advantages but the same have more negative impacts also. Further, a partnership firm will prove better for the client as the same will lead to a very low cost. In conjunction with this client can also escape the strict provision layout in the Corporations act, 2001. The partnership will be established with low cost and efforts. Being the family members, there will be no need to do additional formalities such as the formation of the partnership agreement in writing, yet this is advisable to the client to form a partnership firm and to get the partnership agreement in a written form.
Directors and officers of the company and they have some duties towards the company. There are many of the cases held that results in a principle named as “piercing of corporate veil.” According to this principle, the court can pierce the artificial veil from between directors and the company in those cases where a director breaches their duties.
One of the lead cases in this area is ASIC v Adler. In this case a company Pacific Eagle Equity Pty Ltd (PEE) ha received an undocumented and unsecured loan of $10 million from the other company named HIH Casualty and General Insurance Ltd (HIHC). After the afore mention loan, PEE has become the trustee of Australian Equities Unit Trust (AEUT). The control of PEE was with an individual Adler. In addition to PEE, Adler also owned another company “Adler Corporation Limited” (ACL) in which he was a non-executive director. He was also a director and shareholder in HIH. Later on from the loan amount PEE has purchased the shares of HIH worth million from the stock market and sold the same for the value of $2 million. PEE has purchased these investments of HIC to uplift the demand of the shares of the company (HIH) and to mislead the investors that HIH is doing well in business. Further, PEE has also purchased shares of other companies from ACL and later on sold them all. There was a total loss worth $4 million. Under the trust, Adler has received $2 million. All these transactions were in the knowledge of Adler. Although these transactions were not approved in the board meetings of the involved companies. Being the director of ACL, it was the duty of Adler to work in the best interest of the company but he did not do so. When this case went to the court, it was held in the decision of the case that Adler has breached his duties as an officer in respect of HIC and HIHC.
It was also held that Adler is liable to breach the duties that are required to perform by a director and officer of the company under section 180 to 183 of the Corporations Act, 2001. The fact and decision of this case are focused on the duties and responsibilities of directors under the act. According to the decision of this case, Adler was required to perform his duties as under following sections
- Section 180- Section 180 of the act demands a director and officer of the company to work with due care and diligence, this section says that while performing the provided duties, directors and officer must be so careful and take the decisions wisely.
- Section 181- this section says that this is a statutory duty of every director and officer of the company to act in good faith of the company that which the intention must be a good one. Further, the purpose is also an important element in this section. Behind every act of an officer, there must be the proper and reasonable purpose.
- Section 182- This is a very significant section of the act in the area of director duty. A director has a very sound position in a company, therefore, the same has the power to take the decisions on behalf of the company. This section demands that a director must not do improper use of his/her position, as this is not ethical.
- Section 183- All the crucial and confidential data and information of a company are available with management. As directors are a part of the management, therefore such people know every bit of a company. Many of the times they use such information for their personal benefits, therefore this section controls such unethical practices and says that a director must not use the available business information for an improper purpose.
In case of non-compliance with these sections, penalty provisions are very high. As Adler has breached all the aforementioned duties, therefore in the decision given he has held ineligible to act as director of any company for the next 20 years.
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References
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