Corporate Law For Business Continuity

Advantages and Disadvantages of Partnership

Describe about the Corporate Law for Business Continuity.

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1. The factual scenario suggests that Jack, Jill and Max are the owners of a business. No appropriate business structure is formulated by them even though they are doing the business from past 12 months.  Since the business is progressing rapidly, thus, there is a need to update the structuring of their business. In such scenario, an advised is furnished to them only after availing the advantages and disadvantages of the prevailing business structures. Generally the two options to conduct business are either by way of a partnership or by way of a company.

A partnership is a business organization which can be established by two or more persons with the motive to seek profit and to carry business in continuity (Egert 2007). Thus, since all Jack, Jill and Max are three personnel’s thus they can carry their business by way of partnership and there are various advantages attached to the same. Such as, if a partnership is formed by them, then, (Legal Vision 2015)

Confidentiality can be established as no outsiders are permitted to take part of the business. So, only Jack, Jill and Max will be liable to conduct business and maintain the secrecy of the company.

All Jack, Jill and Max can avail several tax gains which are provided only when the business is running in a partnership form.

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All Jack, Jill and Max can easily avail investment as they will themselves provide finance for the business.

They have to spend much less for the formulation of a partnership

But, there are few difficulties that can also be faced by them, for instance. (Legal Vision 2015)

All Jack, Jill and Max are agents of each other and the firm and they will be personally liable to all the liabilities of the firm as a partnership is not a separate legal entity and has no separate existence in the eyes of law.

Further, Jack, Jill and Max have to face capital gain tax if there is a mere change in the partnership of the firm.

Also, minor change of the partnership will result in its dissolution.

In order to resolve the disadvantages, Jack, Jill and Max, may also establish a company.

A company can be formed by registration. Once a company is formed then it is considered as an artificial person in law and has its separate legal entity (Kobras 2016). If a company is formed by Jack, Jill and Max then the various advantages that can be availed by them are: (Whiteside 2014)

Advantages and Disadvantages of Company

There liability would have been limited as once a company is firmed then it separate from its members and the acts of the company are of its own ad alone. Jack, Jill and Max are liable only to the value of their shareholdings.

They can acquire property in the name of the company.

They can sue in the name of the company and it is the company who would be sued and not the members directly.

There would be no disputes amid Jack, Jill and Max as not all the members take part on the working of the company.

The company would not be dissolved even if anyone of Jack, Jill and Max will leave the company.

But, there are few drawbacks of a colony. Such as:

Huge costs are faced by Jack, Jill and Max for the registration process.

The tax liability is heavy on a company.

Jack, Jill and Max have to comply with ASIC rules violation of which will make them liable personally.

After comparing the structuring of a partnership and a company, it is advised to Jack, Jill and Max that they must form a company as their liability will be limited and there are chances of less disputes when compared with a partnership. there is no easy dissolution and they can also seek investment easily.

Thus, they should form a company instead of a partnership.

There are two basic issues that are raised.

Whether Betty actions would make Child Toys Pty Ltd (company 1) liable to corporate liability?

What kind of actions can be taken against Charles by company 1?

When any company is formed din Australia, then, it has a separate legal entity in the eyes of law and the actions which are undertaken by the company officers are in the name of the company alone (Salomon v Salomon & Co Ltd (1897)) (Puig 2000). However, if any agent acts on behalf of the company and within his authority then such actions of an agent will make the company liable for the same under the law of vicarious liability and is held in Hollis v Vabu (2001) (Carthy 2004). However, if an employee undertakes an action then a company can still be held liable for the actions of such an employee under the concept of corporate liability. But, in United States v Milwaukee Refrigerator Co (1905) court has submit that if the employees of the company undertake actions to defeat the public good then the corporate veil of the company can be pierced and the company can be held liable directly for the actions of the employee. A company can be held liable both under the criminal law and civil law for incurring frauds, deception and for avoidance of crime. (Schulte 1994)

Comparison between Partnership and Company

Also, when a company is formed then such company takes several contractual relationships with its employee. One of the general terms that is used while making such employment contracts is non-compete clause. According to a non-compete clause whenever an employee leaves the company then he is not permitted to carry out the similar business within soc specific geographical region or within some limited time frame, etc. Such clause is valid because the company needs to protect his confidentially and good will which may get hampered if the ex-employee is permitted to exploit the sources of the company to his own benefit (AGA Assistance Australia Pty Ltd v Tokody (2012)). However, such clauses are valid only when are limited to number of years, or not against public policy and must be legitimate in its operations. (Hill 2015)

When the ex-employee forms a new company and tries to take the benefit of the new companies separate legal existence in order to avoid the legal implications of the non-compete clause, then, the courts have pierced the veil of the new company in order to make the ex-employee liable for the breach of non-compete clauses.

Thus, the application of non-compete clause is very essential for the preserving of the interest of the company.

Now as per the facts, Company 1 is a registered incorporation and thus has a separate legal existence in the eyes of law. Its only director is Marty. As per Salmon principle Company 1 is distinct from Marty and the actions of the caiman are of its alone and will not make Marty liable. However, Betty is an employee of Company1 and acts like a sales Peron. He has used harmful plastic chemicals in the toys which has caused a serious injury to a child. By applying the law of corporate liability, company 1 will be held directly liable for the actions of Betty and civil and criminal actions must be imposed upon it, a commons cannot take the shield of a separate legal existence when fraud or public harm is caused because if the actions of its employee.

Further, Charles is the employee of the company he is very senior in his post and thus is aware of the company major clients and requirements. But, the company has made a contract with Charles according to whom whenever Charles will leave the company then he has restrictions under the non-compete clause for two years.

Application of Non-compete Clause

It is submitted the non-compete clause are valid provided the same are necessary for preserving the good will and confidentiality of the company. It is submitted that Charles is at a senior post and is aware of most of the confidential matters of the company, thus, the non-compete clause is valid

But, he tried to form a new company with May and deals in a business which is in competition with his old company, it is submitted that ins such situation, the veil of the new company should be pierced in order to consider Charles and the new company as one and the non-compete clause must be applied in order to apply the interest of the company and the public.

Thus, company can take actions against Charles for the breach of non-compete calk use.

Conclusion

It is concluded that Betty is the employee of Company 1 and his actions will make the company liable under corporate liability concept and civil and criminal liabilities can be imposed upon the company.

Also, Charles is an ex-employee of the company and formation of the new company by him wills not relieve him from the application of non-compete clause as the veil of the company will be pierced on order to make him liable personally.

Reference List

AGA Assistance Australia Pty Ltd v Tokody (2012).

Egert G (2007) Defining a Partnership: The Traditional Approach Versus An Innovative Departure – Do Queensland Appeal Court Decisions Point to the Need for a Review of the Traditional Approach to Interpretation Adopted by Australian Courts? (Online). Available at: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1332&context=blr. Viewed on 8th September 2016.

Hollis v Vabu (2001).

Hill (2015) Are non-compete clauses worth the paper they’re written on? (Online). Available at: https://community.hrdaily.com.au/profiles/blogs/are-non-compete-clauses-worth-the-paper-they-re-written-on. Viewed on 8th September 2016.

Kobras S (2016) Business structure in Australia (Online). Available at: https://www.schweizer.com.au/articles/Business_Structures_in_Australia_(SK00125445).pdf. Viewed on 8th September 2016.

Legalvision (2015) Business Structures: The advantages & disadvantages of operating under a partnership model (Online). Available at:  https://legalvision.com.au/business-structures-the-advantages-disadvantages-of-operating-under-a-partnership-model/. Viewed on 8th September 2016.

McCarthy (2004) Vicarious Liability In The Agency Context (Online). Available at:  https://webcache.googleusercontent.com/search?q=cache:5GF9en2dc1EJ:https://lr.law.qut.edu.au/article/download/204/198+&cd=1&hl=en&ct=clnk&gl=in. Viewed on 8th September 2016.

Puig EV (2000) A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine, Volume 7, Number 3.

Salomon v Salomon & Co Ltd (1897).

Schulte R (1994) The Future of Corporate Limited Liability in Australia (Online). Available at: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1088&context=blr. Viewed on 8th September 2016.

United States v Milwaukee Refrigerator Co (1905).

Whiteside (2014) Starting a Business: Sole Trader vs Company (Online). Available at: https://easycompanies.com.au/blog/starting-a-business-sole-trader-vs-company/. Viewed on 8th September 2016.