Partnership Characteristics

When a person decides to start a business, it is important for the person to identify what type of business structure is best for him. The individual should decide whether to start sole trading, partnership, company or trust. Selection of a wrong business structure could have disastrous consequences such as insolvency or loss of everything. In this report, partnership and company structure will be analysed to identify their key characteristics.

Partnership is considered as one of the simplest forms of doing business since it does not have a special organisational structure. Partners have unlimited personal liability towards the contracts and wrongs of the business based on which they can lose all of their personal assets and go broke. People prefer to select a partnership business when they wanted to start a business with two or more parties, and they wanted to join together their expertise to share the work along with capital input and expenses. Forming a partnership is relatively easy, and the expenses are lower as well. It is not a legal entity based on which third parties can sue the partners themselves rather than the partnership itself. Furthermore, partners form a contract with other parties rather than the partnership based on which they are jointly and severally liable for its operations. Partnerships are governed by the contract law and the Partnership Act 1891 of Queensland.

When does a partnership exist?

In order to form a partnership, certain elements must be fulfilled which are given in the definition of the partnership under section 5 of the Act. Firstly, the business must be carried on by the partners that imply repetition of the business operations rather than a single investment as given in the case of Smith v Anderson. The business of the partnership must be carried out by persons in common which means that all partners must play a role in operations of the business, and they must have mutual rights. However, it does not means that all partners have to involved in the decision making process. In Stekel v Ellice  case, the court provided that a person who is a salaried employee in the partnership can be considered as a partner based on the relationship between partners and their mutual interest in the business. Individuals partners have the right to act as the agent for other partners based on which they have a fiduciary duty towards each other as given in the case of Birtchnell v Equity Trustees. Lastly, the partners must have an intention to make a profit in the business; however, loss in the business does not affect their relationship.

When does a partnership exist?

A company has a legal personality, and it is considered as a legal person. It is formed after incorporation after which it is recognised as a legal body. A legal person has a number of rights such as:

• It can own property
• Sue and be sued
• Have various legal obligations and rights
• Enter into contracts

The corporations in Australia did not exist in the common law, and they are formed by statute. The Corporations Act 2001 (‘CA’) applies throughout Australia which provides provisions regarding the formation of a company. Furthermore, corporations are governed by their Memorandum of Association and Article of Association which include its objections, policies, method of administration and other information. In Salomon v Salomon & Co Ltd case, the court provided the principle of separate legal personal and limited liability of its owners. People can purchase the shares of a company to become its owners, and their liability is limited to the amount which they invest in the corporation. The operations of a company are managed by its board of directors who are responsible for taking business decisions in the interest of the business and its stakeholders. Directors have a fiduciary duty breach of which leads to legal consequences as given under the Corporations Act.

In conclusion, partnership and company are separate characteristics, and a person should evaluate them before starting a business in Australia. Effective compliance with policies is necessary for parties while operating these businesses to avoid legal consequences.

In Australia, a variety of business structures are available for people to start their business based on which parties can choose from to evaluate for the purpose of tax benefits, limited liability and gaining additional capital. Thus, analysis of advantages and disadvantage of partnership and company structure is necessary for people to ensure that they select the most suitable structure for them. In this report, elements of both partnership and company structure will be discussed to identify their pros and cons.

Pros

Partnership is one of the easier business structures to form in Australia since partners did not have to comply with a relatively complex organisational structure. There are not rigid and complex legal requirements which they have to comply with while operating their business. It is formed based on conduct or agreement between the partners that did not require partners to invest extensively on the formation process. During the operations of the partnership, the compliance with regulatory requirements is fewer as well. The Partnership Act implements few legal duties on partners which did not bind partners into strict compliances. Partners can simply share profits and losses with each other based on their profit sharing ratio which complexity in the process.

Pros and Cons of Partnership Structure

Cons

Along with pros, there are various cons of partnership structure as well. Firstly, the partners have unlimited liability in the business. It means that the court can use their personal asset for the liabilities and wrongs of the business based on which partners can go broke or face legal consequences. Any disagreement or conflict between partners can lead to dissolution of the partnership which adversely affects other partners as well. The ownership of partners in the partnership is fixed generally which cannot be transferred by them without prior permission of other partners.

Pros

The biggest merit of forming a company is that its owners have limited liability, and they are only liable up to the amount which they invest in the organisation. Corporations have a number of different sources from which they can easily raise capital for their operations. For example, they can issue their shares in the public or get a loan under their own name. The operations of a company are handled by directors that generally have knowledge regarding the industry, and they are able to take expert business decisions. The ownership of a corporation can be easily transferred by its owners without prior permission of other owners. After its incorporation, a company can trade anywhere in Australia freely which assist it in expanding its operations.

Cons

The process of incorporating a company is complex which required the parties to comply with a number of legal regulations. The process is expensive as well since parties have to pay various registration and other fees. The companies have to disclose its books of accounts which eliminate privacy. Directors have to ensure that they comply with duties issued by the Corporations Act or else they have to face legal consequences.

Recommendations

Based on the evaluation of both pros and cons, the formation of partnership business is more suitable for the clients. Since they are frustrated by the legal complexity of trust structure, they should form a partnership to avoid strict legal requirements. The formation is easier than a company and expenses are fewer as well. The books of accounts of the clients will be private as well whereas it is not the case in a corporation. They will not have to form legal documents such as Memorandum of Association and Article of Association, and it will be easier for them to share their profits and losses.

In conclusion, there are different advantages and disadvantages which parties receive while selecting a business structure between partnership and company. Based on evaluating these factors, parties can choose a suitable structure which benefits them in the long run.

Company Characteristics

The Corporations Act imposes a number of legal duties on the directors of a company to ensure that they did not violate their fiduciary and general duties. ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72 is a recent example in which the director was held liable for breaching various duties. In this report, the relevancy of ASIC v Adler case will be discussed to understand the importance of director duties.

In this case, Adler was acting as a director, and he breached various duties given under section 180, 181, 182 and 183 of the Corporations Act. By using his position as the director, Adler authorised a loan of $10 million from HIHC to PEE which was unsecured. This loan was not properly documented in the books of accounts. From $10 million, PEE invested $4 million in purchasing the shares of Adler Corporation Limited. This purchase was made at a loss. Another $4 million was invested in acquiring the shareholding of HIH which were soon sold at $2 million. The rest $2 million were given as a loan by the company to Adler and other parties. Adler misused his position for personal gain and authorised all these transactions which were detrimental to the interest of HIHC. Due to lack of care and non-compliance with duties, Adler violated his duties given under section 180, 181, 182 and 183.

Following are various general duties imposed on directors by the Corporations Act.

Duty to maintain care and diligence (s180)

Directors a fiduciary duty towards the company and people who have an interest in its operations, thus, they have to ensure that they maintain a level of care and diligence while taking business decisions. They should maintain a degree of care and diligence which any reasonable person would in such position to avoid causing loss to another party. By authorising the unsecured loan, investing in own company and giving loan to himself are some decisions in which Adler did not maintain a degree of care and diligence due to which he breached section 180.

Duty to act in good faith (s181)

It is a duty of the directors that they must exercise their power for proper purposes and in good faith while ensuring the interest of the company. By acting in good faith, directors focus on benefiting the company as a whole and reinforcing its success. However, any unfair practice of personal gain or causing detriment to the company can result in a breach of this duty. The decisions taken by Adler were focused on his personal benefits by causing detriment to the organisation based on which he breached his duty.

Duty to properly use the position (s182)

A company is a legal person, and its decisions are taken by its directors for its benefits, thus, they have the superior position in the corporation. Along with these responsibilities, authorities comes as well based on which directors have to ensure that they did not misuse their position for gaining an advantage for themselves or causing harm to the company. Adler gave the company’s money as an unsecured loan for personal benefits which caused harm to the company and its stakeholders. Based on which he breached his duties given under section 182.

Duty to properly use the information (s183)

In order to form future policies and take business decisions, directors have access to all the confidential information about the corporation. It is their duty that they should not misuse the information which they have for personal benefits or cause detriment to the company. Adler had the information about the internal procedures and operations of the corporation, and he misused such information for giving a loan of $10 million to PEE. Based on these decisions, he gained personal advantage while causing detriment to the interest of the company, thus, he breached his duty given under section 183.

Conclusion

In conclusion, directors have to ensure that they comply with various duties imposed by the Corporations Act in order to avoid legal consequences. The objective of these duties is to safeguard the interest of the company from unfair practices of directors.