Letter of Advice on Business Structure

This letter provides advice on the best business structure for a small business, including partnership, trust, sole proprietorship, and company. It discusses the advantages and disadvantages of each structure and recommends a proprietary company limited by shares as the best option for a small business. The letter also provides information on the registration process and the liabilities of shareholders and directors.

Running head: BUSINESS LAW
Business Law
Name of the Student
Name of the University
Author Note

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Letter of Advice
To- Mr John Smith
From- Accountant
Date- 28 May 2019
Subject- Letter of Advice regarding best business structure
There are several business structure under which a small business could be registered
for deriving optimum benefit from it, like partnership, trust, sole proprietorship and a
company form of business structure. All of these business structures yields profit and growth
for the business and therefore could prove to be beneficial for the trader. However, they have
different approach and therefore the process to conduct them are different as well. Some of
these are expensive to set up yet they are time effective and serves the purpose of the trader
better.
A Partnership requires the involvement of two or partners to operate where the
partners work as principal as well as agent. It is easier to set up a partnership form of
business, as it is cheap and easy to work with. A partnership form of business makes the
partners liable for all the debts and losses of the firm, thereby making them unlimitedly liable
for the firm’s liabilities (Mersky1962). The partners are the principal as well as the agent who
are responsible for every kind of transactions of the firm. The partners share the profits of the
firm as per their contribution to start the firm. With the death of a partner, the partnership
firm gets dissolved, when there were only two partners running the firm, for it disrupts the
basic necessity of the formation of a partnership firm which requires at least 2 partners to
operate (Mersky1962). As the partners are the owner of the business, therefore it is easier to
operate the firm and the firms becomes secured from any external supervision and control.
However, due to the factor of unlimited liability of the partners, they are being held liable for

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the debt of the company and their personal assets are often liquidated to incur the dues of the
investors and creditors. In addition, in a partnership form of business, one partner can be held
liable for the actions of another partners, and therefore could be penalized for the same.
Similarly, all the partners shall be made liable to share the burden of debts and the losses of
the firm in accordance to the contribution of the partners. Despite several benefits and
advantages, it becomes difficult to divide the fund and asset of the firm when a partner leaves
the firm or dies (Mersky1962).
On the other hand, a Trust form of business involves a trustee to take the
responsibility of the trust and carry out its operations for the benefit of the beneficiaries. The
trustee is vested with the duty to take care of the trust business as an officer who is in charge
and therefore he has no authority to utilise the benefits incurred out of the trust; he is only
liable to receive are-agreed salary or remuneration on monthly or annual basis, as agreed
before creating the trust property and vesting powers upon the trustee (DeMott 2014). A trust
business is not a separate legal entity unlike a company, yet it does not face difficulty to raise
fund when required. However, alike a company it bears a limited liability and thus the
beneficiaries are not affected due to the debt of the trust. A trust must have a trust deed which
clearly demarcate the shares of the beneficiaries along with mentioning the duties and the
responsibility of the trustee. A trustee must take up the duty of undertaking administrative
task yearly. It is the trustee who is to be held responsible for the all the business operations of
the trust which may even include a company for being the trustee of the trust. A trust business
is required to pay tax on its general income alike a company. However, creation of trust is
complex and involves lot of expenses and even more difficult to divide the trust property to a
beneficiary when demanded for it usually involves an asset which cannot be easily severed
into pieces. A trust business usually suffers due to the restricted powers and authority of the

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trustee which restricts them to carry out several necessary operations at a time of emergency
(DeMott 2014).
While, a sole proprietorship is a business structure that includes the involvement of a
single person as the owner of it who bears all the power, responsibility and authority to take
all kinds of business related decisions on behalf of it. The sole trader is not answerable to
anyone or bound to any external control; acting as the owner, principal as well as an agent on
his own. However, the sole trader can always hire employees who would be obliged to follow
his instructions and derive daily, monthly or weekly remuneration for their service. The sole
trader shall be liable to bear the losses and debts of the proprietorship all alone and the
burden cannot be put upon the employees. It is the simplest form of business structure
involving a person to bear all the duties and liabilities and operation of the business and often
recommended for small businesses. However, the only drawback it faces is the factor of
unlimited liability of eth sole trader which often affects his personal asset due to the debts and
losses of the business. It requires less capital investment and therefore, suits small businesses.
The proprietorship does not require to pay tax separately; the sole trader pays personal tax for
his income from the business. A sole trader arranges for his own superannuation from the
profits made out of the business.
In Australia, a proprietary company limited by shares is the business structure
suggested by the Corporations Act 2001 (Cth) for small businesses to follow, under Part 1.5
of the Act. A company is a legal entity separate from its shareholders. It is a body corporate
which has the authority to sue and be sued in its name. It has a perpetual succession for it
does not get dissolved even if its shareholders dies or leaves the company. The company has
the authority to acquire property under its own name (Barraket et al. 2017). Under the
Corporations Act 2001, a company can be proprietary limited and public which differs in
terms of collection of fund and the power to issue shares. A public company is liable to issue

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shares to the public in order to generate fund for the company as well as during its
incorporation for raising capital. While the proprietary limited companies do not issue shares
to the public for raising fund. A company being a legal entity separate from its shareholders,
a principle of limited liability is vested upon the shareholders which do not make them liable
for the debt of the company. It is the company that bears the burden of debts and losses. In
Australia, a company is required to be registered with the Australian securities and
investments Commission which acts as the guardian of all listed companies, along with
keeping a record of their activities and protecting the investors from the payment defaults of
the company. However, a company having a turnover lesser than $75000 needs no
registration (Barraket et al. 2017). Transferring shares in case of public company is easier
than a proprietary company, for the public companies deals with buying and selling of their
shares, while the proprietary company do not. A proprietary company limited by share
usually follow a principle of selling shares to the internal shareholders in case one of the
shareholders leaves the company. It is expensive and more complex to set up a public
company in comparison to a proprietary company. Except for when the court decides to lift
the corporate veil for addressing important issues related to the company, the director and the
shareholders are not held responsible for the debt of the company, both in case of public as
well as proprietary limited company (Barraket et al. 2017).
The above-mentioned four business structure are all suitable for a small company in
their own ways, all having their benefits and drawbacks. However, as recommended by Part
1.5 of the Corporations Act 2001, a proprietary company limited by shares is the best suited
business structure for a small business. A small business for men’s clothing would be best
handled by a proprietary company which would not require the shareholders to issue its
shares to the public, thereby involving no external control. John is advised to keep in mind
the procedure of registering a company under the Australian Securities and Investments

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Commission and the matters related to the demarcation of the duties of the director. He also
needs to remember about the liability that he would bear as a shareholder or director, which is
mostly the amount of the unpaid shares that they hold in the company.

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References
Australian Securities and Investments Commission
Barraket, J., Douglas, H., Eversole, R., Mason, C., McNeill, J. and Morgan, B., 2017.
Classifying social enterprise models in Australia. Social Enterprise Journal, 13(4), pp.345-
361.
Corporations Act 2001 (Cth)
DeMott, D.A., 2014. Relationships of Trust and Confidence in the Workplace. Cornell L.
Rev., 100, p.1255
Mersky, R.M., 1962. The Literature of Partnership Law. Vand. L. Rev., 16, p.389.