Overview of Partnership and Corporation Structures
Introduction
Parties who wanted to operate their business in Australia can select between a partnership and a company structure. Both of these structures are popular between parties who are starting their business in Australia. Each of these structures is governed by different legislation which provides various guidelines for parties to comply with while forming these business structures. In this report, legislation and cases relevant to partnerships and corporations will be discussed to understand their characteristics.
Corporation Structure
A company is a common business structure which is selected by parties if they wanted to grow their business quickly. The registration of a corporation is mandatory after which it gains a separate personality from its promoters along with various rights given under the Corporations Act 2001 (Cth). Due to its separate personality, its members or directors cannot be held liable for its debts, and they are only liable up to their share price. Furthermore, Salomon v Salomon & Co Ltd is a relevant case regarding the separate personality of companies. In this case, the court provided that even if the company is wholly owned by a family, still it has a separate personality which cannot be rejected by the court. Other parties can sue it, and it can also sue them in order to a legal conflict arises.
The incorporation costs of a company are higher than compared to other business structures in Australia, and it has to comply with the highly complex legal structure as implemented by the Corporation Act. Since a company is an artificial person, its decisions are taken by its directors. They have to comply with various duties imposed by the Corporations Act to ensure that they take business decisions which are in the interest of the corporation. Moreover, a company can be public or private; the key difference between these two is that public company can raise capital by issuing its shares to the public whereas it is not the case for a private company. The Corporation Act imposes a number of duties over directors of a company which they are necessary to comply with in order to avoid legal consequences.
Partnership Structure
As discussed above, forming a corporation is a complex procedure which required compliance with various regulations, thus, parties form a partnership structure. It is easier for parties to form a partnership business structure because the legal compliances are comparatively low. Partnership is agreement between two or more parties who agreed to control the operations of business together which is formed to generate profit for the parties. In Tiffin v Lester Aldridge LLP case, the court provided that relationship between parties is a key element of partnership, and they must enter into such relationship to carry out the operations of the business.
Advantages and disadvantages of Partnership and Corporation Structures
Another key element is that the business must be run in common by the partners. In George Hall & Son v Platt case, the court provided that a business which is run by two parties with a common objective is considered as a partnership. Lastly, the objective of the partnership must be to generate profit. The joining of two or more parties for an objective other than generation of profit is not considered as a partnership. However, in Cox v Hickman cases, the court provided that only having the right to share in the profits of the business did not form a partnership between parties. It is necessary that other elements are present as well.
Conclusion
To conclude, parties who are thinking about starting their business in Australia can select between a partnership and corporation structure. Each of these structures has separate legislation which provides guidelines for parties which they have to comply with. While forming these businesses, parties have to evaluate their characteristics to ensure that they meet their requirements which enable them to achieve their targets more effectively.
Introduction
Partnership and company are two common business structures both of which have different characteristics which provide both advantages and disadvantages to parties who select these structures. It is necessary that parties weight up both pros and cons of the attributes of these structures to select the one which is more suitable for them. In this report, arguments regarding the suitability of a structure will be given based on evaluation of both merits and limitation of partnership and company structure.
Advantages
Corporation
- The company has a separate personality, and it can enter into contracts under its own name. Based on this ability, the liability of its members is limited up to their share in the company.
- There are various sources available for a corporation to raise capital for its operations. For example, it can take loan under its name or issue its shares in the public which makes it easy to raise capital for its operations.
- The ownership of shareholders is easily transferable to anyone which attracts more investors to the company.
- Decisions of a company are taken by directors who are experts in different fields, and they ensure that the objectives of the corporation are being fulfilled by such decisions.
- The responsibility and authority of each member are divided properly in a company which avoid confusion and increase the efficiency of decision making.
Partnership
- The legal regulations for partnership are comparatively lower, and partners did not have to comply with strict legal obligations regarding reporting, filing of documents and others.
- The cost of forming a partnership is low as compared to a company. Partners have to spend less on registration and preparation of necessary documents.
- Sharing of profits and losses is easier for partners since they divide them based on their profit sharing ratio.
- Partners can join together their resources and expertise to expand their business and taking effective decisions.
- The books of accounts of partnership are private which cannot be accessed by anyone.
Corporation
- Incorporation of a company is an expensive procedure because promoters have to prepare various documents and pay registration fees.
- The liability of directors is limited however they can be held liable for breaching their duties based on which the court can hold them personally or severally liable.
- The legal structure of a company is relatively complex which increases issues for its members since the breach of any violation leads to legal consequences or fine.
- The books of accounts of the company are private documents, and anyone can access them.
Partnership
- The liability of partners is unlimited. Since a partnership did not have a separate personality from its owners, they can be held liable for repaying the debts of the business.
- The ownership of partners is fixed, and they cannot easily transfer it to other parties.
- The income of the partnership is included as the personal income of its partners, and it did not tax separately.
- Due to personal differences or hatred between partners, it is difficult for partners to take business decisions quickly which leads to a slow decision-making process.
In the given case study, a suitable form of business structure is a corporation because it provides more growth opportunity to the family. The main argument regarding this is that all the members belong to the same family which limits their capital investment. Thus, to resolve this issue, they can form a company to issue its shares in order to raise capital for their operations. A private company is more suitable for them because it would require them to comply with comparatively lower legal regulations and the cost of incorporation will be low as well. On the other hand, it would be difficult for the family members to make unanimous decisions in the business in case any conflict arises between the parties.
Conclusion
To conclude based on evaluation of the merits and demerits of both structures, incorporation of a private company is more suitable option. It will result in providing the parties more growth opportunities, and it would increase the efficiency of their decision-making process.
Suitability of Corporation Structure in Case Study
Introduction
Directors are responsible for managing the operations of a business, and they are the highest authority in the company. The board of directors forms all the future strategies of a company along with guidelines which are followed by lower level management while performing its daily operations. Thus, in order to ensure that directors did not use their powers for personal gain or negatively affecting the stakeholders of the company, duties are given under the Corporations Act. In this report, ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72 case will be analysed to understand the role and importance of directors’ duties and consequences of breaching of such duties.
Summary of the case
In ASIC v Adler case, an unsecured loan of $10 million was issued by HIH Casualty and General Insurance (HIHC) to Pacific Eagle Equity Pty Ltd (PEE). This loan was not properly documented, and PEE was controlled by Adler. He was also acting as the trustee of the Australian Equities Unit Trust (AEUT). Moreover, he had substantial shareholding interest in HIH, and he was a non-executive director of Adler Corporation Limited. From the $10 million unsecured loan, $4 million was invested in Adler Corporation by purchasing of share at a loss. Another $4 million was invested in HIH for purchasing of its share and soon after those shares were sold at a loss of $2 million. Furthermore, last $2 million was given as a loan by the company to Adler and other parties. Adler played a crucial role in authorising these transactions, and they were not properly documented. Adler was founded guilty by the court for breaching section 180, 181, 182 and 183 of the Corporation Act.
Duties of the Directors
The Corporation Act provides various general duties given below which are necessary to comply by directors of a company.
Care and diligence
While taking business decisions and discharging their duties, section 180 of the Act provides that directors should ensure a level of care and diligence. The care and diligence are required to be maintained by the broad of directors to ensure that they meet the needs of a wider range of shareholders and avoid thinking about their personal interest. Adler did the opposite by allowing an unsecured loan to PEE due to which HIHC suffered a substantial loss, and Adler benefited from the transaction because he invested the money in his company and gave loan to himself.
Directors Duties and Consequences of Breaching Them
Good faith
Since directors have to focus on the interest of the corporation and its stakeholders, they owed a fiduciary duty towards them based on which they have to act in good faith as given under section 181. They should not take business decisions which no reasonable person would in such situation and avoid personal interest interfering with their decision. They should avoid decisions which could harm the company. Adler did the opposite by allowing the loan without taking any security and not documenting the transaction which no reasonable person would in such situation.
Proper use of position
While acting at the top-level in a company, it is easy for directors to misuse their position. Thus, section 182 ensures that they are using their position to fulfil the interest of stakeholders and the corporation rather than gaining personal benefits or adversely affecting the interest of the corporation. Adler used his position to enforce the transaction in his benefit. He misused his position to invest the money in Adler Corporation and also given a loan to him based on which he breached section 182.
Proper use of information
As discussed above, directors have information regarding all the key aspects of a company, and they should use this information for the benefit of the company and its stakeholders rather than using it for personal gain as given in section 183. Adler misused the information which he had to invest in shares of HIH and Adler Corporation to gain personal benefits.
Conclusion
To conclude, various provisions are imposed on directors to ensure that they discharge their duties in the interest of the company and its stakeholders. These duties keep a check on the actions of the directors and force them to take business decisions which are in the interest of a wider range of stakeholders rather than fulfilling personal interest.
Hello. Before starting a business in Australia, people have to select the right business structure for them. The business is selected by them based on their characteristics and features. Partnership and company are the most common business structure which parties choose while starting their business in Australia. Both of these structures have separate characteristics which differentiate them from each other. Before starting their business parties have to evaluate their attributes in order to select the right business structure for them which suit their requirements. In order to advise our client, it is important to evaluate the characteristics of each structure to understand which of the structure is more suitable for them. Firstly, partnership is one of the most popular business structures which parties choose while operating their business in Australia. One of the key reason due to which parties choose partnership business structure is because it is simpler to form. Forming a partnership is easy then compare to incorporating a company. Partners have to comply with less legislation requirements, and the process of formation is straightforward. Partners can simply start their business by entering into an agreement with each other. In this agreement, they have to specify the profit sharing ratio based on which they divide the profit and loss of the business. The income of the partners is included in their personal income.
Conclusion
Partners themselves manage the opeations of the partnership business, and they take business decisions by consulting with each other. They are solely responsible for bringing the capital into the business and managing its operations. Partners cannot transfer their ownership to another party without the permission of other partners. In case of a partnership, the growth opportunities are comparatively lower since it is difficult for partners to raise capital for its operations. On the other hand, the process of forming a company is complex. A corporation is incorporated by promoters; however, it has a separate personality from them. The cost of incorporating a company is comparatively high because promoters have to pay various administrative fees and prepare necessary documents. After the registration of a company, it gained a separate personality from its promoters. Based on such personality, the company can enter into a contract with other individuals or businesses in its own name. It also has separate liability from its members, and they cannot be held liable for its debts. A corporation has to comply with various regulations and guidelines while operating its business. The board of directors of a company is responsible for managing its operations. They are the highest authority in a company. They have a fiduciary duty towards the company to ensure that its operations are performed correctly.
In order to ensure that directors did not misuse their position or power, they have to comply with various legal duties. These duties ensure that directors act in good faith and maintain a level of care and diligence while taking business decisions. They also have to avoid misusing their position and information to gain personal advantage or causing harm to the company. Violation of these policies leads to legal consequences. In case of a partnership, the main advantage parties get fewer regulations and low starting fees. On the other hand, parties that incorporate a corporation are likely to get growth opportunities which benefit them in the long run. Another advantage of a corporation is that parties are able to manage its operations more effectively. The main advantage of partnership is that it allows partners to join together their capital along with their expertise while operating their business. However, in case a conflict arises between partners, then it became difficult for them to take a unanimous business decision that benefits the entire partnership. Personal disputes or indifference between partners can make it difficult for them to manage their business and expand its operations. However, this is not the case with the corporation since it follows a hierarchical model. The operations of a corporation are handled by its director who keeps their personal interest and difference aside while taking business decisions. Similarly, it is easier to take professional decisions in case of a private company.
Moreover, a company has more options to raise capital for its operations since it can get a loan or issue its shares in the public or in private. It enables a company to raise capital for its operations which is crucial for its growth. Therefore, it can be concluded that incorporating a company is more beneficial for parties than compared to a partnership. They get more growth opportunities along with more options to raise capital for their business. In the case of the real estate field, it is beneficial for parties to incorporate a company since it enables them to expand their business at a larger scale. In case of our clients, they all belong to the same family which makes it difficult for them to raise capital for operations in order to expand their business. Incorporating a private company would allow our clients to raise capital for their business operations from various sources. Since it would be a private company, the legal requirements would be relatively low which would benefit them in easily managing their operations. Thus, as per my advice, incorporating a private company is a suitable option for our clients.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
