Laws20059 | Business | A Assessment Answers

You are working at an accounting firm. Your overall task is to advise clients on how to structure their business – either as a partnership or company. The clients’ circumstances are extremely important considerations.

You should not consider the topic of trusts, as they are used primarily to minimise tax, and tax law is not part of this course. (Assume that the clients instruct you that they’ve had bad past experience with trusts because of the extra administration and accountancy fees that trusts create, and they don’t want to do that again). You should also avoid any advice on tax. The tax implications of business structures are more complicated than websites suggest, and since tax is not part of this course, you should avoid it. (Assume that the clients specifically instruct you not to advise on tax).

In order to provide this advice you need to perform several sub-tasks:-

1. Research the law relevant to your advice.
2. Provide a written report to your supervising partner on your research.
3. Provide a written report to your supervising partner weighing up the alternatives for your clients and making a recommendation for a particular business structure.
4. Provide a separate written report to the supervising partner on the selected case showing the responsibilities imposed on a company director by legislation.
5. Provide an oral advice (in plain language) to the client in the form of a YouTube video, advising on the law, weighing up the alternatives and providing a recommendation.

Part 1:

This report reflects the knowledge related to the two business structures that are operated in Australia in terms of conducting the business operations, and these two structures are company and partnership. These two structures are recognized by the law and regulated by two different Acts that are Corporations Act 2001 and Partnership Act 1891 respectively.

This report is prepared to guide the supervisor about the two business structures (company and partnership), and also about the factors components which affect these business structures. Following are the two business structures:

Partnership: partnership is considered as the structure which operated by two or more number of people. Section 5 of the Partnership Act 1891 states that partnership is the relation that exists between the people for conducting the operations of the business with the common view of earns profit.

These people decide to conduct the operation of the business as the co-owners and they also give their consent to share the profits and losses of the business. It must be noted that, these co-owners are known as partners of the firm. Some essential components related to the partnership firm are stated below:

• Partnership structure is governed by the Partnership Act 1891.
• Partnership is not the separate entity from its partners.
• Partnership firm needs tax file number.
• Partnership firm is not liable to pay any tax.

Section 6 defines the elements which determine the existence of the partnership:

• Whether partners made any profit from the joint tenancy, common property, etc.
• Whether partners share the profits have common interest in the property.

As stated partners are responsible to conduct the business of the firm, and following are the important aspects define by the Act in context of partners:

• Liabilities of the partners in the firm are not limited.
• Partners share fiduciary relation with each other.
• Partners share the relation of agent and principle with the firm.
• Partners hold the power to bind firm from their acts (Section 8).
• Partners also hold the power to bind the other partners also from their actions (Section 9).
• Partners are liable to pay tax on their individual income earned.
• Partners are liable to register themselves for GST if annual turnover of the firm is $75000 or more than that.

Partnership structure consist two forms that are general partnership and limited partnership. In general partnership, liability of the partners is not limited but in limited partnership liability of partners is limited.

Generally, joint venture is considered as partnership but in some particular situation only, and that situation is defined by Court in case Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd [1974] HCA 22; (1974) 131 CLR 321. As per this case, if partners share profits with each other and these profits were earned from the joint tenancy from any property or thing then such venture can be considered as partnership.

Company:

On the other hand, company is the business structure which can be adopted by the person at the initial stage or at the growing stage of the business. Companies do not exist under the common law, but these entities are created by the law. Section 9 of the Corporations Act 2001 defines the meaning of the company and as per this section any company which registered under this Act. This section also states the different types of companies that are company limited by shares, company limited by guarantee, unlimited liability company, and no liability company.

Following are the essential elements of the company:

• Company is the entity which is separate from its owners, and this means that company is the legal person which holds the rights to sue and be sued, enter into contracts, own property, etc. This can be understood through case law Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22.
• Section 124 states that company holds all the rights as the legal person and also includes the right to issue shares and debentures, and also the perpetual succession.
• Owners of the company have benefit of limited liability, which means, shareholders are not personally liable for debts and losses of the company (Macaura v Northern Assurance Co Ltd, [1925] AC 619).
• Directors of the company are responsible to manage the operations of the business.

Part 2:

This report assists the supervisor in terms of advantages and disadvantages of the partnership and company that are define in Part 1 of this assignment. This part further compares both the structures and recommends structure which is suitable to the client.

Partnership: some advantages of partnership are stated below:

• This business structure is less complex and expensive in nature to set up.
• Partnership business is conducted by the partners under the name of the firm.
• This business structure is easy to regulate such as it can be formed through the agreement only.
• Less chances of conflict because profit and losses is shred between the parties in terms of their ratio stated in the agreement.
• Partnership provides thee access to more resources and more number of experienced people for the purpose of conducting their business.
• All the partners of the firm are responsible to manage their business, and this responsibility does not fall on any one person.

However, this business has some disadvantages are also there:

• Liability of the partners in partnership is not limited, which means, partners are liable at personal level towards the third parties.
• Taxes rate in this structure are high because partners need to pay the taxes at individual level in terms of the share they receive as profit.
• It is not easy to change the ownership status I partnership structure because it requires the consent of all the partners.

Company: some advantages of partnership are stated below:

• Liability of the members in this business structure is not unlimited, which means, shareholders does not have any personal liability towards the creditors if company incur any debt.
• Transferring the ownership is not difficult in this business structure, because it only involves the transfer of shares from one person to another.
• Rates of tax in this business structure are auspicious in comparison of partnership, because tax is paid at income earned by company and not individuals.
• Options to arrange the capital in this business structure is wide.
• This business structure is more organized, as it is regulated by more strict laws.

However, this business has some disadvantages are also there:

• It is very expensive and complex to set up or incorporate the company, because it involves large number of regulations.
• Directors of the company are held personal liable in case they fail to fulfil their duties defined by the Corporations Act 2001.

Comparison between the two:

This section of the report compares both the structures by their different elements, and recommends the best to the clients.

After considering the components of both the structures, it can be said that Company is more suitable for the clients, because it provides more number of benefits to the clients in following manner:

• Company provides the benefit of the limited liability which work as protected shield for the owners of the business in case anything goes wrong, but no such protection is provided by the partnership because in this liability of the partners is not limited.
• Company is more organized structure and determine as legal entity under the Corporations Act 2001.
• Transfer of ownership in this is very easy, but the same is difficult in the partnership.

Part 3:

This report highlights the duties of directors under the Corporations Act 2001, and also states the relevance of these duties in carrying on the business under the company structure. These duties and its relevance are described through the ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.

This case is very unique and reflects the perfect example of the director’s responsibility towards the shareholders and other stakeholders of the company.

Facts of this case involve the breach of number of provisions of the Corporations Act 2001, and all these provisions deals with the duties imposed by Corporation Act 2on the directors of the company. It   must be noted that, collapse of HIH was happened because of the bad corporate governance on part of the directors.

In case of ASIC v Adler, Santow J evaluates various statutory provisions in terms of determining the duties owned by the directors of the company towards the company and shareholders. Following are some important provisions of the Act which are defined by the Court in this case:

Section 9 of the Corporation Act 2001 states the definition of the directors and other officers. In terms of this section, Court held that persons who hold position of directors in HIH were also determine as officer of their wholly own subsidiary. Court further states that, similar approach was also adopted for Adler also even in situation when he was not appointed as director of the subsidiary in proper manner.

Section 180 of the Corporation Act 2001 states that directors of the company are under obligation to conduct their action and fulfil their obligations with due care and diligence. This responsibility is determined in terms of the obligations fulfilled by any reasonable person if such person holds the similar position in the company. In the present case, Court held that, Williams and Fodera fails to fulfil their duty under section 180 of the Act as both fails to fulfil their duty with due care and diligence. William was the managing director of the HIH and also of HIHC, but he fails to take measures of safety before allowing the HIHC to give loan to the PEE. In context of Fodera, Court held that, Fodera was the finance director of the HIH, but she fails to discuss the matter of giving loan to PEE with the board.

Clause 2 of this section provides the statutory defence of business judgment rule, but it was not possible for both the directors to use this defence because they breach clause 1 of this section, as they fail to use due care and diligence while performing their duties.

Section 181 of the Act states that company’s directors are under obligation to conduct their operations with good faith, for proper purpose, and in the company’s best interest. Court stated in   ASIC v Adler that this section was contravened by the Adler. Adler does not conduct its operations in good faith, for proper purpose, and in the company’s interest. In this case, all transactions are used by the Adler in the HIH, HIHC and PEE for his own benefit and also in manner which was not proper.

Section 182 of the Act states that directors are under duty to use the position they hold in the company for proper purpose and in the interest of the company only. In other words, directors cannot use their position for their own personal advantage. In the present case, court stated that this section was breached by both Adler and Williams, as they use their position of director in the company for manner which was not proper. Adler breaches this section by using his position of director for his own advantage that was for Adler Corporation. William breaches this section by using his position to give advantage to the Adler.

Section 183 of this section imposes duty on the directors to not use the information they receive as the director of the company in improper manner. In other words, they cannot use the information for their own benefit.

After considering the facts of this case, it is clear that directors of the company are liable to act only in the interest of the company and own number of duties under both common and statutory law towards the company.

Bibliography

ATO, Partnership, < https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Choosing-your-business-structure/partnership/>.

DIIS, Company, (2017), < https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-structure/Business-structures-and-types/Company>.

Business Queensland, Partnership business structure, < https://www.business.qld.gov.au/starting-business/types-legal-structures/legal-structures/partnership>.

Jonathan Korchakk, Advantages and disadvantages of a public limited company, (2016), < https://www.informdirect.co.uk/company-formation/public-limited-company-advantages-disadvantages/>.

TIA, Legal Business Structures, < https://dpipwe.tas.gov.au/Documents/Legal-Business-Structures.pdf>.

Thommson reuters, Part 2D.1 – Duties and powers, < https://legal.thomsonreuters.com.au/browse/law-annuals/pdf/corporations-legislation-2014-key-section-annotation-example-thomson-reuters.pdf>.