Types of Business Structures in Australia

1.The purpose of this paper is to discuss the main types of business structures that exist in Australia and recommend a business structure that can be considered to be suitable to Meghan, Kate, William and Harry. This paper will also discuss the advantages, disadvantages of each of the business structures.

It can be stated that there are different types of business structures that exist on Australia. Some of the main business structures existing in Australia include the following:

• Company
• Sole proprietorship
• Partnership

Company- A Company can be considered to be a separate legal entity from the owners of the company. A company is formed by its members for the purpose of carrying on the business of its members under a separate legal name. A company can be both public and private.

The directors of a private company have more control over the operation of the company as compared to a public company. However, in Australia a private company cannot have more than fifty members whereas public company can have unlimited number of members. A private company is not allowed to raise capital by issuing shares to the public. A pubic company can do so. Therefore the scope of growth and expansion is higher for a public company as compared to a private company. However a public company has a higher cost of complying with the regulatory requirements.

A company has many advantages and disadvantages:

The advantages of the company include the following:

• It is a business structure which is commercially well accepted and well recognized
• A company can accommodate multiple members and owners. Such owners and members of the company can have different motives for running the business.
• The members of the company are not personally liable for the debts incurred by the company except inn exceptional circumstances. A company by virtue of being a distinct legal entity legal incurs the liability in its name.
• A company by virtue of having a separate existence can enter into contracts and other agreements in its own name and can be a party to any legal proceeding. Such company can also acquire property in its own name.

The main disadvantages of a company are:

• The directors of the company have strict duties to act in good faith and in the best interest of the company. If any director breaches the duty imposed on them, such director can be held personally liable. They may become subjects of civil as well as criminal proceedings.
• It can be stated that a company’s administrative requirements are onerous in comparison to the other business structures. The duty of managing the company lies on its directors and not the owners.
• Establishing and maintaining a company is expensive. Further it can be stated that the cost of regulating and complying with regulatory requirements is more than other business structures.

A sole proprietorship can be defined as a business structure in which the sole trader carries on the business and is solely responsible for the liabilities of the business. However, the positive side of sole proprietorship is that a sole trader enjoys all the profits made from the business. He does not have to share the profits with anyone else. The sole trader does not have a separate legal entity as opposed to a company.

The main advantages of a sole trader are as follows:

• The Sole trader or Proprietor is in charge of the operations of the business and managing the same. Thus a sole trader enjoys the rights to make decisions for the business solely. He enjoys all the profits solely.
• It is the simplest form of business structure.  Sole proprietorship is easy and inexpensive to set up. The cost of administration involved in a sole proprietorship is the lowest as compared to the other business structures.

The main disadvantages of a sole proprietorship include the following:

• The scope of raising capital for a Sole proprietor ship is very limited. Therefore the growth prospect of this business structure is very limited
• A sole trader by virtue of being in charge of the decisions and the operations of the business incurs full liability for the operations of the business. The principle of limited liability is not applicable in this business structure as opposed to a company.

This is a type of business structure in which two or more people are responsible for carrying on the operations of the business. A partnership has the obligation to comply with the terms that are mentioned in the partnership agreement. A partnership is not considered to be separate legal entity and therefore the partners can be held liable for the liabilities incurred by the partnership.

Advantages and Disadvantages of a Company

The main advantages of a partnership include the following:

• The process of setting up a partnership is comparatively easier and less expensive than a company.
• The partners have the right to make the decisions of the partnership which ultimately results in efficient management.
• The capital in a partnership is contributed by the partners. Therefore is a better scope of raising capital as opposed to a sole proprietorship.

The main disadvantages of a partnership are:

• It can be stated that the partners in a partnership are jointly and severally liable for the acts of themselves and the other partners.
• The agreement of partnership has to be amended in the event of admission of a new partner and the exit of an existing partner. The former partnership agreement will be held to be dissolved in such a situation.
• The principle of limited liability is not applicable in a partnership. Thus the personal assets of the partners may be attached for recovering the debts incurred by the partnership.

2.The relevant laws that are applicable to the business structures as discussed above will be discussed in this answer. The best suited business structure for the parties as mentioned in the case will also be recommended in this answer.

The operations of companies are governed by the Corporations Act 2001 (Cth) in Australia. This legislation is prevalent in both Federal as well as interstate level. It can be stated that a company only comes into existence after it has been registered with the Australian Securities and Investment commission (ASIC). It has been provided in the Corporations Act that company is to be treated as separate legal entity and therefore the owners of the company will not incur unlimited liability for the operations of the company. It can be stated that a company is required to incorporate the principles of corporate governance which has been provided in the Australian Securities Exchange (ASX). It is also the responsibility of a company to notify the ASX if it does not incorporate the principles of corporate governance providing appropriate reason for not doing so. It has been stated in section 9 of the Corporations Act that a director or an office holder of a company must be a natural person. The directors of companies are responsible for the operations of the same and therefore they have several duties to the shareholders of the companies and the public in general which are provided section 180- 184 of the aforementioned act. A company has several other obligations such as the obligation to disclose the financial statements of the company and the obligation of complying with auditing requirements. A company can only exist if it has a constitution. The constitution of the company provides sets out the powers of the company.

A sole proprietorship is not a separate legal entity as a company and therefore Sole proprietors are not subjected to any specific regulations which govern the operations of the sole trader. The Sole trader must be registered for the Goods and Service Tax if the income of such sole trader is more than 75,000 dollars. However, a Sole proprietor for the purpose of carrying on the business is required to acquire Australian Business Number. It can be stated that a sole trader although is in charge of the operations of the sole proprietorship, has the right to employ other people to conduct the operations of the sole proprietorship. A sole proprietorship has to comply with the employment regulations such as the Fair Works. General laws of business are applicable on the sole proprietorship.

Advantages and Disadvantages of a Sole Proprietorship

The legislation Partnership Act  gives the rules and the regulations of Partnerships. The Partnership Act prevalent in the Federal level. However, each of the states of Australia has separate legislation which deals with the laws of Partnership. A partnership is held to be established in all jurisdictions in Australia once an agreement between two or persons has been made. Such agreement must contain the purpose of the partnership which is to carry on business with the common intention of making profit.

The definition of a partner has been provided in section 6 of the partnership Act. Thus whether a person can be considered to be a partner can be assessed by the application of the definition as provided in section of the aforementioned Act. It can be mentioned that the liabilities of the partners in a partnership firm are significantly higher than that of companies. The partners in a partnership are joint and severally liable for the liabilities of all the partners. It can be said that partners in a partnership are generally treated as the principal and agent of the business. In the notable case John Grimes Partnership Ltd v Gubbins, it had been held by the court that all the partners in a partnership are both legally and financially responsible for the actions of the other partners that are conducted in general course of business. Therefore it can be stated that all the partners will be liable for the negligent act of any of the partners in the partnership. The value of shares held by the partners in a partnership is not considered when determining the liability of the partners. In case a partner has acted beyond his authority and the third party did not have any idea that such partner was acting beyond the scope of his authority, all the partners would be jointly liable.

As provided by the facts of the case it can be stated that Harry and William plan to start a business. They want to involve William and Kate to raise capital. However, Kate and William do not want to take involvement in management of the business. They also want to limit their liabilities. Therefore after analyzing the facts of the case it can be stated that the best suitable business structure for the parties would be a private company limited by shares. Further it has been provided that 50% of the profits of the business would be directed to the Homeless Australians. Thus the business structure can only be registered as a nonprofit organization which undertakes charitable actions. The likelihood of getting public funding for the company would be difficult as 50% of the profits made by the company would be used for charitable purposes. Thus in this given scenario the only feasible option that can be considered by the parties is a private company which is limited by shares. In this business structure Kate and William will not have to take involvement in the management of the company and can only remain as shareholders of the company. They can even exist as non-executive directors. The liability of KATE AND William would only be limited to the value of the shares held by them. Further it can be stated that Meghan and Harry would remain in charge of the operations of the company and would be able to direct 50% percent of the profits earned by the business for charitable purposes without much intervention from any other party

Advantages and Disadvantages of a Partnership

3.The rights, duties and the obligations of the parties involved in the private company are to be discussed in this answer. As discussed above The Corporations Act governs the operations of companies in Australia. The aforementioned act specifically sets out the duties and the obligations of the directors of the company. The rights and the liabilities of the directors of the companies are also based on the common law provisions. It can be stated that directors of companies in Australia have both equitable and statutory duties. The duties of directors have been provided in sections 180-184 if the Corporations Act. In accordance with provisions as provided in the aforementioned sections it can be stated that the first and foremost duty that imposed on a director of a company is to act in good faith and proper purpose so as to ensure the company’s best interest.   This duty has been provided in the section 181 of the Corporations Act . Thus it can be stated that Harry, Meghan, William and Kate must act in good faith and in a manner which is fit for the purpose of the company while discharging their duties as directors of the company.

Further it can be stated that the aforementioned parties would also have the duty to act with due care and diligence. The duty of directors to act with due care and diligence has been provided in section 180 of the Corporations Act 2001. This section has clearly provided that a test can be applied in order to assess whether the directors of the company as complied with a specific duty. This test is consistent with the objective test at common law. The purpose of this test is to assess whether any reasonable person acting in the same circumstances as the director would have acted in the same manner as the director or would have taken additional care. If the answer to the aforementioned question is found to be yes, such director would be considered to have reached this specific duty.  

In section 182 and 183 of the aforementioned Act it has been provided that directors have equitable duties to not misuse their position in the company. This section states that the directors must not misuse any information which has been obtained by them by the powers vested in them due to their position in the company for personal interest or interest of third parties.  It can be stated that at common law directors are required to give priority to the interest of the company over personal interest or interest of third parties whenever a conflict of interest arises. Directors have a fiduciary relation to the company. Such duties are imposed not only on active directors but also on non executve directors as held in the notable case ASIC v Healey & Ors  

Applicable Laws for each Business Structure

Therefore in this given situation Harry, Meghan, William, and Kate must ensure that they give priority to the interest of the company and not misuse their powers for personal interest or interest of the third parties. Therefore by the application of the principle of ASIC v Healey, it can be stated that Kate and Willam will also be bound by this specific duty. Further it can be stated in accordance with section 191 of the aforementioned act, in case of conflict of personal interest and the interest of the company, the directors are required to disclose the conflict of interest to the board of directors of the company.

As provided in section 180(2) of the Corporations Act 2001 the directors have the right to make decision which is in the best interest of the company. However it has also been provided that the right of the directors to make business decision is subjected to the business judgment rule. The business judgment rule states that if any director of a company makes any decision which would not have been made by any other director of the company, such director would be considered to have breached his duty. Directors have the right to receive appropriate remuneration for their efforts to manage the business. Thus in relation to this given case study it, can be said that Harry and Meghan will have the right to receive remuneration for managing the affairs of the company and also have the right to make decision for the company.  

Further it has been provided in section 588G of the Corporations Act 2001 that directors must not carry put any business activity which might make the copy insolvent or it is reasonably believed by the other directors that such decision has a probability of making the company insolvent. This duty seeks to protect the right of the creditors and the investors. Specific defenses to directors are provided in section 588H. A director can become personally liable to pay the debts of the company if it is established that such director breached his duty.

Reference List:

ASIC v Healey & Ors [2011] FCA 717 – JWS

Corporation Act 2001 (Cth)

Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and cases in the legal environment. Wolters Kluwer Law & Business, 2015.

Fair Work Act 2009 (Cth)

Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.

Jones, L. (2017). Introduction to business law. Oxford University Press.

Kubasek, Nancy, et al. Dynamic business law. McGraw-Hill Education, 2015.

Lowry, John P., and Alan Dignam. Company Law. Oxford University Press, 2016.

MacIntyre, Ewan. Business law. Pearson UK, 2018.

Partnership Act 1963 (Cth)

Stout, Lynn, et al. “The modern corporation statement on company law.” (2016)