Partnership
The aim of this memorandum of advice is given advice to Oliver and Emma regarding which is the most suitable business structure for them between the partnership, trust, and company. Each of these structures has separate characteristics due to which Oliver and Emma will have to deal with different legal requirements. If the parties select an unsuitable business structure, then they will have to deal with complex legal requirement, and they find it difficult to effectively operate their business. In order to give advice to Oliver and Emma, the nature, characteristics, advantages, and disadvantages of these structures will be evaluated. Rights duties and liabilities of parties will be analysed as well in order to give advice to Oliver and Emma to select the most suitable structure for their business.
A partnership is referred to a formal arrangement which is formed between two or more parties who cooperate to manage and operate a business. The partners can choose between various partnership agreements in which they might share liabilities and profits equally. The Partnership Act 1891 (QLD) is the legislation which governs the partnership relationship between parties. Section 5 of this Act defines partnership structure as a legal relationship which constitutes between two or more parties who agree to join together and manage the operations of a business in common with an objective to generate profit. In Mann v D’Arcy case, it was held by the court that a joint venture which is constituted between parties is considered as “carrying out the business” that forms a relationship between parties, thus, a partnership is formed between parties.
Moreover, the partners must agree to run the operations of the business “in common” in order to form a valid partnership as given in the judgement of Saywell v Pope. Partners receive various advantages while forming a partnership such as easy formation due to lack of legal compliances. The initial cost of forming the partnership is low as well. Partners can equally share profits and losses between each other. Business decisions are made through mutual understanding, and every partner plays a role in decision making. However, there are some disadvantages as well. Partnership firm did not have a separate legal entity based on which partners can be held personally liable towards creditors. The income of the partnership is taxed as the income of partners. Disagreement between partners leads to the dissolution of the firm. Generally, partners are the only ones who brought capital into the business.
A trust is a business structure in which a trustee carries out the business on behalf of the trust’s members or beneficiaries. A trust structure forms between parties through a trust deed in which the parties define the rights and liabilities of the trustee. The nature of the trust is linked with the contractual relationship formed between the parties. Its characteristics are given in the Trusts Act 1973 (QLD). Parties can form a trust through expressed or implied conduct. This structure separates the burden of managing property or business from its benefits. The beneficiary receives all the benefits such as rent, profits, proceeds from sales, and others. The trustee receives the burden of the property such as payment of taxes, insurance of the trust property, taking actions to manage the property, and others. The advantage of a trust structure is that parties are able to maintain privacy in the operations. The beneficiary cannot be held liable by the creditors to made payments regarding the trust property. The distribution of the benefits of the trust property to the trust’s members is made on the discretion of the trustee. The disadvantages of selecting a trust structure are high initial investment made by the parties and a large number of legal complexities in the business. The rights of the trustee are limited by the trust deed based on which he/she cannot act outside the scope of the trust deed. Parties face problems while dissolving the business. They also face difficulties while collecting loan for the trust property. This structure can only be formed for a set period of time.
Trust
A company is referred to a legal entity which made up of an association of people which include legal, natural or a mixture of both that join together in order to carry out commercial activities. The Corporations Act 2001 (Cth) is the legislation which governs companies in Australia. A corporation is an artificial person in nature which means that it has the authority to form legal contracts with third parties. Parties can also sue the company, and the corporation can sue them as well under its own name. The leading judgement given by Salomon v Salomon & Co Ltd established key characteristics of a corporate structure. In this case, Salomon established a company in which he was a majority shareholder along with his family members. He was also a debenture holder of the corporation. The corporation becomes insolvent, and the court ordered its liquidation. The unsecured creditors of the company did not receive payment for their debts; however, Salomon received money for debentures. The unsecured creditors file a suit against Salomon by stating that he is the majority shareholder based on which he is liable to pay their debts and the debentures are a sham.
The court rejected these arguments by providing that the company has a separate legal entity which cannot be changed based on the fact that Salomon is the majority shareholder of the company. The debentures are also valid since they are included in the public documents of the company. A similar judgement was given in Lee v Lee’s Air Farming Ltd case in which the court provided that the shareholders have a separate legal entity from the company. The advantages of a company include limited liability of members, handling through experts, different options to raise capital, easy transferability of shares, perpetual succession, and others. The disadvantages of a company structure include compliance with a wide range of regulations while managing its operations. The books of accounts are public which remove privacy from operations. Members have to pay high registration and other fees while establishing and managing the company. The directors of a company can be held liable for its operations if they failed to comply with their duties.
Different business structures provide different rights, duties, and liabilities to parties who select those business structures. Selection of the right business structure is necessary to ensure that parties are able to get the most out of their business by effectively complying with their rights, duties, and liabilities.
Rights
In a partnership firm, the partners have the right to contribute their capital in the business operations. They also have the right to contribute to the decision-making process. The business decisions are taken with joint approval of all partners. Partners are also allowed to access the books of the firm. They have the right to share the profits of the business and also its losses. Partners can receive interest for the capital which they invested in the company in advance.
Along with various rights, there are different duties which partners owe towards other partners and the business which they have to comply with. It is their duty that they use their knowledge and skills to make decisions in the business in order to maximise its benefits. They have a duty to act diligently since they act as the agent for one another. The actions of partners which are taken within the scope of the business can bound other partners liable based on which they have a duty to ensure that they maintain a level of care and diligence while taking business decisions. They also owe a duty to ensure that they disclose full and accurate information to other parties regarding the business.
Company
There are various liabilities which are imposed on partners while they manage their business operations. All partners are jointly and severally liable towards the debts of the business, and the court can use their personal assets to set off the debts of the creditors of the firm. Since partners act as agent for one another, they are bound by the actions of other partners which are taking within the scope of the business. Liability can also be imposed on partners for wrongful act or omission of another partner for actions which are taken within the ordinary course of business operation.
The rights of parties in a trust are defined by the trust deed. As per this deed, the beneficiary has the right to receive the benefit of the trust property from the trustee. The beneficiary has the right to sue the trustee in case of violation of the terms of the trust deed. The rights of the trustee are also highlighted in the trust deed in which the trustee has the right to distribute the benefits of the property to trust’s members as per his/her discretion. The beneficiary also has the right to protect the trust property based on which the trustee cannot sell the property without getting permission from the beneficiaries. The trustee also has the right to receive decided remuneration for the services which by him to the beneficiaries.
The duties of a trustee are also included in the trust deed which is formed between parties. These duties include making timely payment of the benefits of the trust property to the trust’s members. The trustee also has to ensure that he/she maintains care and diligence while taking decisions regarding the trust property in order to comply with his/her duties. Protection of the trust property is a part of duties of the trustee along with effective management of the property to avoid causing harm to the interest of the beneficiaries. Proper book keeping is also a duty of the trustee to ensure that records of the benefits and their payments are correctly documented.
The trustee is considered as the owner of the property based on which he/she is liable towards third parties for the debts of the trust property. Liability is also imposed on the trustee in case he/she indulge in any activities relating to the violation of the trust deed. The trustee can be held liable for misusing the trust funds and for conducting fraud or sham in the business. Failure to comply with the appropriate standard of care can also result in imposing legal liabilities on the trustee.
The shareholders of a company have the right to receive dividends on a regular basis from the profits of the company. They are allowed to access the books of the company and request copies for personal use. They have the right to attend and vote in general meetings of the corporation. The directors of the company also have various rights which include right to receive remunerations for their services. The shareholders have the right to freely transfer the shares of the company to third parties.
Rights in Partnership
Duties
While managing the operations of the company, various duties are imposed on the directors since they act as the mind of the company. They have to comply with these duties in order to avoid legal penalties. The Corporations Act provides these duties for directors. Section 180 provides that the directors must maintain a degree of care and diligence while discharging their duties. Section 181 provides that they must act in good faith for the company and avoid the conflict between their personal interest and the interest of the company. Section 182 provides that the directors must avoid misuse their position for gaining personal advantage or causing harm to the company or its stakeholders. Section 182 provides that they must avoid misusing the confidential information about the company for personal gain or causing harm to the company.
The shareholders are liable to pay the unpaid amount at the time of liquidation of the company to the creditors of the company. Liabilities are imposed on the directors to ensure that they comply with their duties to avoid legal consequences. They could be held liable by the court for the debts of the corporation if they did not discharge their duties appropriately. Shareholders and directors have to comply with the terms included in the constitution of the company to avoid legal penalties.
Memorandum of Advice
To: Oliver and Emma
From: Beanstalk
Subject: Recommendation for selection of business structure
The objective of this memorandum of advice is to evaluate key information regarding different business structure to give recommendation to Oliver and Emma regarding which is the most suitable business structure for them. Oliver and Emma should incorporate a company since it is the most suitable option for them which would assist them in sustains their growth in the market. The parties wanted to start a business of cloud-based solution through which they wanted to manage facilities for their clients. This is a promising project, and they are likely to succeed after few years. If they select the right business structure for them, then it will assist them in ensuring that they are able to achieve their goals of expanding their business. The corporate structure is the most suitable option available for Oliver and Emma due to many factors; however, it is important to understand why other structures are not suitable for Oliver and Emma. Selection of a partnership structure will provide various advantages to Oliver and Emma since they will be able to save their initial costs incurred in the registration of the business. While managing the operations in a partnership business structure, Oliver and Emma will not have to comply with a wide range of legal requirements. The process of managing the business will be easier for them, and they will be able to easily manage the operations of the business. However, the problem arises because the business will not have a separate legal entity due to which both Oliver and Emma will have unlimited liability in the business It means that the court will be able to use their personal assets to pay off the debts of the business.
Duties in Partnership
Both of them will have to actively participate in the management of the partnership firm and involve in the decision-making process. They will have to invest equal capital in the business in order to receive equal profits as well. In the case of Oliver, he did not want to actively participate in the operations of managing the business. Emma has no problem with involving in the management process; however, she is not prepared to invest in the business. It will create problems for Oliver and Emma since this structure did not meet their requirements. Moreover, Oliver has been imprisoned for six years for misappropriation of funds in multiple failed companies. Emma has also been mounting personal debts, and two of her creditors have sent her a notice to receive the payment. Since they will be acting as an agent for each other in the partnership business, one partner might suffer loss due to the illegal actions of another partner which are taking within the scope of the business. Therefore, partnership business structure did not meet the requirements of Oliver and Emma. In the case of a trust structure, the parties will receive advantage of privacy of books of accounts and clearly defined rights and duties of parties in the trust deed. Oliver can become the beneficiary and Emma can act as the trustee to conduct the business. However, it is also not a suitable business for the parties because they will not be able to expand their business in the future. As a trust, they will fine difficulty in collecting loan on the property since Emma is mounted by personal debts.
Similarly, the bank will also less likely to give a loan to Oliver due to his charges of misappropriating of funds. The business will not have a separate personality from its owners. Due to lack of availability of finance source, the growth of the business of Oliver and Emma will suffer; therefore, the trust structure is not a suitable option for them as well. However, in the case of a company, Oliver and Emma will receive various advantages which will benefit them and their business. The company will have a separate legal entity from Oliver and Emma based on which their past will not affect its operations. Both of them can acquire equal shares in the company; Oliver can pay complete amount of his shares, whereas, Emma can pay some portion and she can later pay the rest of the unpaid amount. It will remove burden from both parties. Emma can become the director of the company based on which she will be able to manage the operations of the company, whereas, Oliver will not have to engage in the operations of the company. In case any disagreement arises between the parties, then they will be able to easily transfer their shares to third parties and get out of the business which will not result in dissolving the company. As a corporation, they will have various options to acquire capital for their operations such as through issuing shares or debentures in public, taking a loan under the company’s name, getting credit from creditors and others. All these factors will result in contributing to the growth of the company. Conclusively, a corporate structure is the most suitable option for Oliver and Emma since it fits their requirements which will make it easier for them to expand their business and sustain its growth in the future.
A Articles/Books/Reports
Anderson, Helen, ‘Piercing the veil on corporate groups in Australia: the case for reform,’ (2009) 33 Melb. UL Rev. 333.
Duncan, William D., Joint ventures law in Australia (Federation Press, 2012).
Gans, Jeremy and Andrew Palmer, Australian principles of evidence (Routledge, 2013).
Graw, Stephen, An outline of the law of partnership (Thomson Reuters, 2011).
McBeth, Adam, International economic actors and human rights (Routledge, 2009).
Ong, Denis, Trusts Law in Australia (The Federation Press, 2012).
Roach, Lee, Company law (Oxford University Press, 2016).
Setia-Atmaja, Lukas, George Tanewski and Michael Skully, ‘The role of dividends, debt and board structure in the governance of family controlled firms,’ (2009) 36 (7) Journal of Business Finance & Accounting 863-898.
Steele, Myron, ‘Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies,’ (2009) 46 (2) American Business Law Journal 221-242.
Stephenson, Margaret, ‘To lease or not to lease? The leasing of indigenous statutory lands in Australia: lessons from Canada,’ (2009) 35 (3) Commonwealth Law Bulletin 545-570.
Ward, David and David Ward, Private ancillary funds trustee handbook (Philanthropy Australia, 2009).
B Cases
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Mann v D’Arcy (1968) 2 All ER 172
Salomon v Salomon & Co Ltd (1897) AC 22
Saywell v Pope (1979) STC 824 (Ch)
C Legislation
Corporations Act 2001 (Cth)
Partnership Act 1891 (QLD)
Trusts Act 1973 (QLD)
D Others
Legal Vision, Partnerships (2018) < https://legalvision.com.au/partnerships/>.
Legal Vision, What are the rights and responsibilities in a trust relationship? (2014) < https://legalvision.com.au/rights-responsibilities-trust-relationship/>.
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