Advantages and disadvantages of a Sole Trader

This section of the paper provided advice to Harry, Meghan, William, and Kate in relation to the types of business structures and their advantages and disadvantages. There are three primary types of business structures which can be selected for the purpose of indulging into business operations. These are as follows

1. A sole proprietorship
2. A partnership
3. A company

• Public Company
• Private company

This section of the paper provides a discussion in relation to all three types of business structures and discusses their advantages and disadvantage

Sole Trader

This is a form of business activity which is carried out by a single person. No other person has any control or obligation in relation to a proprietorship business. The business and the person who is in control are one and the same before the law. Thus the rights and duties of the person are the same as the rights and duties of the business. The business is carried out by the proprietor in its own name. The advantages and disadvantages of a sole trader are as follows.

Advantages-

1. The business of proprietorship is the simplest form of business to be set up. The form of business structure needs the lowest cost as compared to the other business structures in relation to set up as well as administrative requirements.
2. The sole responsibility of the business is on the sole owner. This means that the person has supreme Control over the operations of the business. He has the right to take all decisions in relation to the business and is under no obligations in relations to the decisions taken by him as compared to that in other forms of business structures.

Disadvantages

1. The advantage of limited liability is not provided to the sole trader from a commercial perspective which is otherwise available in a company form of business structure. In case there is a failure in relation to the business then the proprietor will have to take sole responsibility in relation to the failure and the liability may extend towards attachment of personal assets of the person.
2. The form of business structure has scope of raising capital from the public and thus if the proprietor wishes to expand the business the structure is not reliable. 

A partnership is a form of business structure in which two or more people indulge in carrying out a commercial activity or a business having a mutual purpose of gaining profit. The business is governed by the terms set out in the partnership agreement or deed. However there is no feature of a separate legal entity in a partnership. Any loss or profit which is made by the business is shared by the partners based on the terms of the partnership agreement. The tax obligation of the partnership is also solely on the partners.

Advantages

1. The process of setting up a partnership is comparatively simple and cheap  to that of a company.
2. Partners are able to get additional funding in relation to the business from each other which is not possible in a sole proprietorship
3. In a partnership the partners are able to share their responsibility which may lead to effective management
4. Partners have a relatively high level off control as compared to that of a company

Disadvantages-

1. The nature of liabilities of a partner is that they are severally and jointly liable in relation to all liabilities which arise out of the partnership. This signifies that the debts of a partner in relation to the business are binding on all partners in the partnership.
2. Protection through the concept of limited liability is not available in a partnership and the partners are liable personally for the debts incurred by the business. This means that the personal assets of the partner may be attached to the liabilities of the business.
3. The business is dissolved when a new partner is admitted or an existing partner leaves the firm. A new partnership agreement has to be created in the situation.

A company at law is a separate legal person and in its own a legal entity. A company can be further divided into a public and a private company. The advantages and disadvantages along with differences are as follows:

Advantages:

1. The primary advantage which a person has wile choosing to operate a business with a company structure is that of limited liability. This means that members cannot be personally liable in case debts are incurred by the company. They only can be made liable in relation to the amount of inspection which has been made by them to the shares.
2. A well recognized and commercially accepted structure is provided through the use of a company structure.
3. Multiple owners can be accommodated into a company more easily as compared to that of partnership and these owners may have different motives.
4. A company operates as a distinct entity and can get into contract and be a party to a legal proceedings in its own name it can also own property in its own name and therefore prevents misuse of power.

Disadvantages

1. The administrative requirements in relation to the company are quite onerous such as maintaining share registers and directors’ certificates. The control of the company is in the hands of the directors and not the owners.
2. Strict duties are imposed on the directors of a company by law and they may be subjected to criminal and civil proceedings on personally for the breach of such duties.
3. The cost of compliance with all regulatory requirements is very high in company as compared to the other business structures.

Public and private company

A private company in Australia is only allowed to have 50 members and in a public company there may be unlimited members. The burden of compliance is much more on a public company as compared to a private company. A public company is allowed to issue shares and raise funds from the public; however these features are not available to a private company. The cost of compliance with all regulatory requirements is higher in a public company as compared to a private company. On the other hand directors of a private company have more control over its affairs as compared to a public company.

Advantages and disadvantages of a Partnership

This section of the paper discusses the law applicable on the above discussed business structures and further provides an advice to Harry, Meghan, William, and Kate in relation to the best suited business structure for their proposed business activity and their requirements.

There are no specific regulations which have been enacted in relation to governing the business activities of sole traders. General business law is applicable on the way in which a business activity is carried out by a sole proprietor. A sole proprietor needs to obtain an Australian Business Number in order to carry out business activities in Australia. The sole trader has to register for Goods and Services Tax if the yearly income is $75,000 or more. Where a sole trader employs other persons in the business they have to comply with employment regulations such as the Fair Work Act 2009. There are no separate duties which are imposed on a sole trader in relation to the way in which it carries on its business. Sole proprietorship is subjected to law has any other natural person would be subjected.

Law in relation to partnership is governed by specific legislations in Australia along with the provisions of common law. The legislation which governs Partnership at the Federal level is the Partnership Act 1963. Each state has its own Partnership Act which has comparatively similar rules in relation to partnership as compared to the federal legislation. Across all jurisdictions in Australia partnership is established when there is a valid agreement between two or more parties for the purpose of carrying out a business activity and having common intention of making profit.

Whether a person is a partner or not is analyzed by the application of section 6 of the PA. For a person to be a partner there must be a participation in the gross returns of the business along with sharing of profit and losses and being able to exercise rights of a partner in the light of joint ownership.

The most significant part of law relating to partnership is that of the liabilities of a partner in a partnership business. The liability of a partner in a partnership is of a significantly large nature. Any person who is determined to be a partner in the business is deemed to be both the principal and agent of the business. Therefore each partner has the right to bind other partners, which means the business as a whole to any act done by him. According to the case of John Grimes Partnership Ltd v Gubbins all partners in a partnership business are both financially and legally responsible for the other partners action conducted in the general course of business. Therefore when it has been determine that a partner has acted in and negligent manner all other partners of the business would be liable to the negligent act. Even if the partner holds only 10% of the shares in the business any liability incurred by him in the course of business would be binding on the business in full. Even in situation where the partner has acted beyond the authority provided to him by the partnership agreement and the third party did not have an idea that the authority has been exceeded the partner would bind the business to his actions.

Advantages and disadvantages of a Company

The law in relation to companies is governed by the Corporation Act 2001 in Australia. The legislation primarily deals with business entities at both inter-state and Federal level. According to the legislation a company has an identity which is different from its owners and is created legally by the legislation. A company comes into existence when it has been registered with the Australian security and Investment Commission. The most common types of companies are those which have share capital. This means that the company is limited by shares. It is the duty of the company to incorporate the corporate governance principles provided by the Australian Securities Exchange and if it is not done so by the company they must notify the ASX as to why the principles are not being followed. A company has to have a constitution which sets out the powers of the company. The office holder or the director of a company has to be a natural person of an age of 18 years. These persons have been provided with several legal duties by the legislation as well as common law which they must comply with while discharging the power. This is to ensure that the shareholders of the company are not exploited by the directors. There are various other regulations imposed on a company such as disclosure obligations and auditing requirements. The burden of compliance is much more on a public company as compared to that of a private company.

It has been provided in the scenario that William and Kate do not want to be active members in the management of the business and want to Limit their liability. In the given situation the best possible structure which would suit their requirement based on the above discussed law would be that of private company. In addition it has been provided by the case study that Harry and Meghan wants to direct 50% of the profits of the company for homeless Australians. However it is to be noted that an organization can only be registered as a non-profit organization if it does not have any intention of making profit. In addition where 50% of the profits are to be directed towards charity it is very likely that public funding would not be provided to the company. Therefore in the given situation according to the requirements of Harry and Meghan the best suitable structure through which they can carry out their business activity would be that of a private limited company by shares. Through this form of company William and Kate would not have to participate in the management as they can only act as shareholders or non executive directors of the company and can also limit their liabilities to the amount of investment which has been made by them towards the share of the company. In addition Harry and Meghan would have the required control through which they can direct 50% of the profits of the company towards charity without much intervention through a private company.

Public and Private Company

This section of the paper specifically sets out the obligation, rights and liabilities which Harry, Meghan, William, and Kate have in relation to a private company. The Corporation Act specifically obligation, rights and liabilities of directors of a company. These rights and liabilities are also based on the provisions of common law. In Australia directors have both statutory and equitable duties in relation to the company. The statutory duties of directors are stated in section 180 to 184 of the Act. These duties are consistent to those which are set out by common law and principles of equity. The first and foremost duty of a director is to ensure that they are working in “good faith” and “proper purpose” towards ensuring the best interest of the company. This duty is imposed on the directors by Section 181 of the Act as well as common law. This duty signifies that while discharging their functions in relation to the organization the directors must Act in good faith and ensure that their Act is for a proper purpose and would result in the best interest of the company.

The next duty which would be imposed on Harry, Meghan, William, and Kate is the duty of care and diligence. This duty is specifically set out through the provisions of s.180 of the Act. A specific test is provided under the section which is applied by the judges to analyze compliance of the directors with this specific duty. The test applies the principles of the objective test at common law. Therefore where in an objective test breach of Duty is identified by comparing of actions to a reasonable person, in this situation breach of duty is identified by comparing of actions to a reasonable director in the same position.

Section 182, 183 and equitable duties impose particular duties on directors of a company which are not to misuse the position they hold in the company for any information which have been achieved by them through their powers in the company for personal interest at the cost of the company. At common law it is the duty of a director in case of a situation of conflict of interest to ensure that priority is given at all times to the interest of the company over personal interest as they are in a fiduciary relationship with the company. Therefore Harry, Meghan, William, and Kate would have to ensure that they have to give priority to the company as a separate legal person and not their personal interest at any time while discharging the duties. These duties are not only applicable on executive directors but also to non executive directors as provided through the case of ASIC v Healey. Therefore, if William and Kate do not want to participate in the management of the business as non executive directors, the duties would still be binding on them. In case the directors inevitably fall into a situation which creates a conflict of interest between personal and company interest they have a duty under section 191 to disclose any interest in relation to the particular transaction to the board of directors of the company.

Best suited structure for proposed business activity

The directors of the company have a right to receive appropriate remuneration for the efforts provided by them in relation to managing the affairs of the company. They have the right to take any decision which is in the best interest of the company. The right of making decision is subjected to the business judgment rule as incorporated through section 180 (2) in the Corporation Act. This means that only when no reasonable director would have taken a similar decision can the directors be held liable for the breach of the duty.

It is also the obligation of the board of directors to conduct an Annual General Meeting in relation to the company the directors also have a duty of ensuring that all financial records in relation to the company and kept up to date. The records must be accurately documented so that they can provide a correct explanation in relation to the transactions of the company and appropriately outline its financial position.

In addition to these duties s. 588G of the Act prohibits the directors from carrying out business activities when the company has become insolvent or it is reasonably believed by the directors that the company may become insolvent if they indulge into the proposed transaction. Insolvency is the situation where the company is not able to pay its debts and the liabilities of the company has become more than its assets. This duty is imposed on the directors so that a company is not able to defraud any investor or creditors. In relation to this duty specific defenses are provided under s. 588H of the Act. According to the section if the director had a genuine belief that the company would not become insolvent due to getting into a transaction they cannot be held liable for the breach of the duty. The directors can be made personally liable for any loss incurred by the company during the time of insolvent trading where it is found that the duty has been violated.

In situation where it is identified that the directors of the company have been involved in violation of duties owed by them to the company they may be made personally liable. It has been provided through s.184 of the act that where the directors are involved in a reckless and deliberate breach of duties they are subjected to criminal liabilities under the provisions of s. 6.1 of the criminal code. In addition to the criminal liabilities the directors are also subjected to civil liabilities which are provided in section 1317E of the Act. Under the provisions of civil liability the court may impose a financial penalty on the directors for not complying with their duties if the breach made by them is of a serious nature. In addition the court also has the right to suspend a director from managing a corporation for a period at the discretion of the court where breaches of directors’ duties have been identified.

Therefore Harry, Meghan, William, and Kate have to take into consideration these obligation rights and duties while managing the affairs of the company.

ASIC v Healey (2011) FCA 717 at [166]

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