Choosing the Right Business Structure in Australia

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Commercial and Corporation Law

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Part A
Letter to John Smith for Selection of Business Structure
CPA Accounting Solutions
12 Brunswick Street, Melbourne, Australia
John Smith
9 Riversdale Road, Melbourne, Australia
May 26th, 2018
Dear Mr Smith,
You can choose from a number of business structures to start your business in
Australia based on their characteristics. There are both advantages and disadvantages of
each of these business structures. One of the most common structures for small businesses
is a sole trader. In this structure, one person handles all the operations of the business, and
he/she is liable for its success or failure. It is one of the easier forms of business structure in
terms of legal requirements regarding establishment of the business (Business.gov.au,
2017a). The simplicity maintains after the establishment of the business because sole
traders did not have to send complicated returns or maintain as many books as compared to
other business structures. Although a sole trader is solely responsible for the operations of
the business, however, he/she can hire employees for performing the operations of the
business. The income of the sole trader is not taxed separately, and it is taxed by including
in the income of its owner. It is a key disadvantage of a sole trading business because the
business did not have a separate legal personality from its owner and the owner can be held

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liable for its debts (ASIC, 2018). The owner himself raises the capital in the business and this
structure is suitable for small businesses.
In case people wanted to start and operate a business with other individuals, then a
partnership can be formed. It is governed by the Partnership Act 1891 (SA), and its definition
is given under section 1 (Legislation, 2018a). It is referred to a relationship between two or
more people who decided to enter into an agreement to carry out business in common with
a view of profit; these are the key elements of a partnership. Firstly, the relationship
between parties is a key element of a contract which must be established between two or
more people (Joyce v Morrissey (1998) TLR 707). The objective of a partnership is to carry
out business as given in Mann v D’Arcy (1968) 1 All ER 172 (Duncan, 2012). Generally, the
liability of partners is unlimited which means that its liabilities bind them and the creditors
can hold them liable for the debts of the partnership as given under section 9. The partners
must operate a business in common; if the partners are not running a business in common,
then it cannot be constituted as a partnership as given in the judgment of Saywell v Pope
(1979) STC 824 (Ch) case.
The purpose of the partnership must be to generate profits irrespective of the fact
whether the partners have realised such profits or not (Jennings v Baddeley (1856) 3 K&J 78)
(Mugambwa, Amankwah & Haynes, 2007). Although liability of partners is unlimited,
however, under section 48 (1) two or more individuals can form a limited liability in which
their liability is limited to the amount specified in their partnership agreement. In case of
limited liability partnership, registration of the business is a mandatory requirement rather
than optional as given under section 54 (1). People can also establish trust in order to
operate their business in Australia, however, the formation of a trust is relatively more
complex than compared to other business structures. In a trust, the trustee holds the
property for another person who is referred as beneficiary and the property is held for the
benefit of the beneficiary. A trustee is responsible for the actions taken by him while holding
the property for the beneficiary. While forming a trust, it is mandatory that a trust deed is
signed between the trustee and the beneficiary that provides the rights and liabilities of the
trustee and beneficiary (Business.gov.au, 2017b).

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Lastly, the most common and popular business structure in Australia is a company
which is divided into two types which include the public and proprietary company. The
formation and regulations of a company are governed by the Corporations Act 2001 (Cth).
Unlike other business structure, a corporation has a separate personality from its owners as
given in Salomon v Salomon & Co Ltd (1897) AC 22 case (Whincop, Keyes & Posner, 2018). In
this case, the court provided that the members or shareholders of a corporation cannot be
held liable for its debts and the company has its separate legal personality. A separate
personality means that after its incorporation, the corporation acquires similar rights as a
human being based on which it can sue or get sued by third parties, and it can hold property
under its name. While suffering from a financial injury, a company has the right to sue the
breaching party rather than its shareholders as given in Foss v Harbottle (1843) 67 ER 189
case (Idensohn, 2012).
The capital of a company is divided into small parts called shares, and the
corporation can raise capital by issuing its shares. A public company can issue share to the
public, and there is no maximum limit of shareholders whereas a proprietary corporation
issues share to friends and family and it cannot have over 50 shareholders as given under
section 113 (1) (Austlii, 2018). A corporation can run its operations with a minimum of one
member as given under section 114. Another advantage of a corporation is perpetual
succession which means that it did not get affected if one of its members leave the company
or died. In case of other business structures such as a sole trader, partnership and trust, the
business terminated after the death of its members. However, a company has a separate
personality, and it is not affected by the death of its members. Along with many benefits,
there are few disadvantages of a corporation as well such as complex formation, compliance
with a number of provisions, disclosure requirements, lack of privacy regarding financial
records, and others (ASIC, 2018).
Finally, in order to select a business structure for your business Mr Smith, a
partnership is more suitable than compared to others. Currently, you are just starting in the
fashion industry, and the size of your business is relatively small. Thus, by selection a
partnership business structure you will have to face fewer legal regulations than compared
to a company or a trust while at the same time you will have more rights than compared to
a sole trader. You can partner with local businesses which are operating in the men’s