Understanding Different Business Structures and Legal Obligations in Australia

This article discusses the various forms of business structures in Australia, including sole proprietorship, partnership, and company structures. It also covers the legal obligations and advantages and disadvantages of each structure. The article recommends a proprietary company structure for Harry, Meghan, William, and Kate based on their requirements and circumstances. The obligations of directors in a proprietary company are also discussed.

Running Head: BUSINESS LAW
Business Law
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Author Note

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THE VARIOUS FROM OF BUSINESS STRUCTURES WHICH ARE CONSIDERED IN
COURTS
A business has to be carried out within the community in accordance to legal business structures
so that the business can be recognized in the court of law. As sourced from Baumfield et al. a
person in the society can initiate a business as a single person through the use of sole
proprietorship business, where the people involved in the business are more than two they can
utilize the business structure of a partnership and when the business is to be out in large scale the
people involved in the business may use the structure of a public or proprietary company1.
Through this section of the advice information has been provided to Harry, Meghan, William,
and Kate through which they will become familiar with the above discussed business structures
and will get to know what advantages and disadvantages they bring for those who are involved in
the business.
The Sole Trading business structure
The Sole Trading business structure is the most inexpensive business structure which can be set
up by a person for continuing business activities. The business structure is also very simple to
establish. As the name signifies this type of business structure is only carried out by one single
person. This person being the sole trader or the sole proprietor is to be held responsible for all
portions of the business. The person is allowed to employ other people also in the business and
all decision in relation to running and managing the business is taken by such person. This
1 Richard Baumfield, Richard P. Copp, Robert Cunningham, Paul Harpur, Alex Wong, Company Law: An
Interactive Approach. (John Wiley & Sons Australia, 2016)

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business structure has its own set of advantage and disadvantages which are discussed as
follows:
Advantages to a sole trader
 The sole trader will find it very simple to initiate and run the business
 The sole trader retains supreme control over the assets and decisions in relation to the
business
 The sole trader has very few reporting requirements
 The loss incurred by a sole trader is eligible to be offset and deducted from his personal
income tax assessment
 The sole trader can use his own Tax File Number to for lodging a Tax return
 The sole trader does not have to pay superannuation, payroll or workers compensation tax
 The sole trader can easily change the business structure if there are expansion
requirements
Disadvantages to a sole trader
 The sole trader has an unlimited liability which signifies that the personal assets of the
trader would be at risk in case where thing go wrong in the business
 There are very limited opportunities provided in relation to tax planning as business
profit and losses cannot be divided into family members and the tax has to be paid on all
the income earned by the business.
The partnership form of business structure

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Brenda has defined partnership as the situation where two or more individuals conduct a business
activity mutually and have a common purpose of making profit2. In this form of business all
owners are legally entitled to act on each others’ behalf. This form of business has no distinct
existence from its owners. This business structure has its own set of advantage and
disadvantages which are discussed as follows:
Advantages of partnership business structure
 When compared to companies the setting up of partnerships is easy and less expensive
 The business may be carried out by the partners under a business trading name
 The resources and expertise of people are combined in partnership form of business and
thus the business can function more efficiently as compared to a sole trader
 This form of business is also simple to administer. Any profit and loss are shared between
the partners based in the agreement between them or their contributions to the business
 The profit in a partnership business is not required to be disclosed to the public unlike in
that of companies
 A partnership can easily change the business structure if there are expansion requirements
Disadvantages of partnership business structure
 Personal differences may hamper business activities
 Personal tax rates are imposed on the business
 All partners can participate in the management which may create differences
2 Hannigan, Brenda. Company law. (Oxford University Press, USA, 2015.)

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 The partners are severally and jointly liable for the debts and liability incurred by the
business through any other partner
The company form of business structure
A company is an entity of its own. This means that its existence is totally different to the
existence of its owners. It is alive even where its owners have died. It is a citizen of the society
and has to pay tax based on its own income. However as it is artificially formed it cannot take
decision of physically operate itself. The responsibilities of its operation are provided by its
owners to officers and directors3. A company can be further subdivided in a Public and a
proprietary company. The former can raise public funds and is subjected to increased regulatory
obligations as compared to the latter which cannot raise funds4. This business structure has its
own set of advantage and disadvantages which are discussed as follows:
Advantages of a company structure
 The form of business provides limited liability for all owners (shareholders)
 Ownership can be transferred through the sale of shares to any other person
 A company can employ its own shareholders as its employees
 The rate of taxation is more favorable
 The company is allowed to trade in any place within the country
 This form of business structure provides access to broad skill base and capital
3 Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. (Nelson Education, 2015.)
4 Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and cases in the legal
environment. (Wolters Kluwer Law & Business, 2015).

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Disadvantages of the company structure
 The setting up, maintenance and winding up of this form of business can be expensive
and complex.
 There are complex reporting requirements in this business
 All financial affairs are made public under this business structure
 Where there is a failure in the part of the directors to meet the duty imposed on them by
legal provisions they can in their personal capacity be held liable by the company or its
creditors
 Profits which are distributed to the shareholders are taxed
THE LEGAL REGULATIONS APPLICABLE ON THE ABOVE DISCUSSED
BUSINESS STRUCTURES AND THE RECOMMENDED BUSINESS STRUCTURE FOR
HARRY, MEGHAN, WILLIAM AND KATE
Each of the above discussed structures through which business activities are carried out is
imposed with specific obligations by law which needs to be complied to avoid legal sanctions.
The advantages and disadvantages of the structures have already been discussed and thus Harry,
Meghan, William, and Kate would be recommended a business structure based on its feasibility
to their business.
Legal obligations in a sole trading business
As this form of business structure is managed by only one person and there is no difference
between the person and the business there is no specific law which have been enacted to deal
with this form of business structure. This form of business structure is subjected to general legal
principles. These include legislation in relation to Employment which is the Fair Work Act 2009

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(Cth) dealing specifically with employment issues such as unfair dismissal, sham contracting and
National Employment Standards5. The provisions of the Australian Consumer Law are also
applicable on this form of business which implies that they must treat and consumers fairly and
not indulge in deceptive and misleading activities. The type of business carried out by this
structure will generally derive the law which is applicable in relation to it.
Form the analysis in the previous part it is clear that the business structure of sole trading would
not be applicable on the business activity planned by Harry, Meghan, William, and Kate as they
are four individuals and this business is applicable only on one individual.
Legal obligations in a partnership
Unlike a sole trader partnership in Australia are governed by their own specific legislation which
at the federal level is the Partnership Act 1963(Cth)6. In addition to the federal legislation each
state in Australia has been provided with a specific partnership legislation which governs
partnership business structures in the particular state. The definition of who is a partner is
provided through section 6 of the legislation7. There are various rules for analyzing whether a
person is a partner or not such as joint ownership, participation in gross returns, intention of
operating for profit, sharing of profit and losses and exercise of partners’ rights. It has been
provided through the provisions of section 9 of the legislation that the scope of liability of a
partners is potentially very large8. Every partner is an agent as well as the principal of the
partnership business. In the case of Lang v James Morrison & Co Ltd (1911) 13 CLR 1 the court
had provided a ruling that where authority provided to a partner has been exceeded by him or
5 Fair Work Act 2009 (Cth)
6 Partnership Act 1963(Cth).
7 Partnership Act 1963(Cth) s 6.
8 Partnership Act 1963(Cth) s 9.

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her, the act will still bind the business if the person who was dealing with the parties had no
knowledge that the authority prohibits a partner form entering into the transaction9. In addition
other general rules such as the Fair Work Act 2009 and the Competition and Consumer Act 2010
(Cth) are still applicable on the partnership business10. In the given situation it has been provided
by the facts that Harry, Meghan, William, and Kate want to carry out a party planning business.
In addition Harry and Meghan do not want to participate in the business and minimize their legal
liabilities. It has been provided that partnership has unlimited liability. Thus this form of business
structure is not suitable for them.
Legal obligations for a company
A company is a form of business structure which is subjected to the maximum legal obligations.
The main legislation which encompasses the functioning of a registered organization is the
Corporation Act 2001 (Cth). All companies who are operating in the country are dealt with by
the Legislation irrespective of state or federal jurisdiction. The legislation incorporates the
common law principles provided by the case of Salomon v A Salomon & Co Ltd [1896] UKHL
1 that the company has a separate identity from the owners11. For a company to be formed it has
to be registered with the ASIC (Australian Securities and Investment Commission). Companies
can be limited by shares and by guarantees. The ASX (Australian Securities Exchange) sets out
corporate governance principles which have to be complied with by the organizations on a “if
not why not” basis. The powers of the company are set out though its constitution. However as
per the principles of the section 124 of the Act an act which is not within the limits of the
constitution cannot be stated as void just because they are not in compliance with the
9 Lang v James Morrison & Co Ltd (1911) 13 CLR 1
10 Australian Competition and Consumer Act 2010 (Cth)
11 Salomon v A Salomon & Co Ltd [1896] UKHL 1

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constitution12. Further the directors and officers of the company are the agents of the company as
per section 12513. The constitution of the company has the effect of a contract between the
members and the company and the members themselves. The company can execute documents
through a director and secretary or two directors under section 127 of the Act14.
In the given situation Harry, Meghan, William, and Kate are advised to carry out their business
activity in form of a proprietary company. The reasons for this recommendation are as follows.
Firstly it has been provided in the given situation that Harry, Meghan, William, and Kate want to
carry out a party panning business. As this is a large scale operate there are significant legal risks
involved in it such as negligence by employees. In the given situation the risk of Harry, Meghan,
William, and Kate would not include the risk of being liable for negligence unless that act in
personal capacity as a company is a separate legal entity. It has been further provided that
William and Kate do not want to have active participation in the business activity. Where a
proprietary company is selected they can only be the shareholders of the company and leave the
management to Harry and Meghan. Further they also want their liability to be limited in relation
to the business and this can be done through this business structure as a company has limited
liability for their member which is only to the extent of contribution made by them. Further it has
been provided that Harry and Meghan having an ethical nature wish to donate their earnings.
This wish would be difficult to fulfill in case of a public company as the shareholders will
demand more profit for themselves and the company. Thus it can be provided evidently that a
proprietary company is the best suitable business structure for Harry, Meghan, William and Kate
based on their requirements and circumstances.
12 Corporation Act 2001 (Cth) s 124
13 Corporation Act 2001 (Cth) s 125
14 Corporation Act 2001 (Cth) s 127

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THE OBLIGATIONS OF HARRY, MEGHAN, WILLIAM, AND KATE IN A
PROPRIETARY COMPANY
The main legislation which governs the obligations of those who are in charge of a Proprietary
company in Australia is the Corporation Act 2001.
The individuals who are the mangers of a company are known as its directors under the meaning
of s 9 of the CA15. As discussed above a company is an artificial legal person which means that
its operations have to be managed by natural persons. In addition as a proprietary company may
have up to 50 members it would not be feasible to involve all of them in the management. Thus
those who manage such organizations have to ensure that they work in favor of the interest of the
other shareholders as well. In order to ensure that such principles as followed the CA
incorporates general duties for directors. These duties are set out via section 180-183 of the Act
and also include section 191. The directors of the company are further imposed with a duty not to
trade while the company has become insolvent under section 588G of the CA16.
The duty under section180 entails the responsibility of an officer or a directors to perform
obligations which due diligence and care. However the interpretation of due diligence and care
can be very wide and therefore to address the issue the section entails a specific test17. The test is
applied to analyze compliance with this section. Under the test the situation is analyzed through a
process of comparison where the actions of the directors are compared with a reasonable
director. This duty is owed by the directors to the company. Further it the case of ASIC v
Cassimatis (No. 8) [2016] FCA 1023 it had been ruled by the court that the duty under this
15 Corporation Act 2001 (Cth) s 9.
16 Corporation Act 2001 (Cth) s 588G
17 Corporation Act 2001 (Cth) s 180

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section is also violated when the company incurs the loss of a reputation18. Further in the case of
Shafron v Australian Securities and Investments Commission [2012] HCA 18 the court made it
clear that the duty under this section can be contravened where the directors have contravened
any other provision the legislation as a director is expected to know the law and no reasonable
director would violate legal provisions in any given situation19. Thus Harry, Meghan, William,
and Kate would have to keep in mind that they act with care and diligence. In addition it was
stated in the case of ASIC v Healey (2011) FCA 717 at [166] that the duties are also applicable
in non-executive directors and where William, and Kate do not want to be a part of the
management and be executive directors they can be held liable for contravention of the duties20.
The provisions of Section 181 of the legislation further provide a duty to Harry, Meghan,
William, and Kate to act in “good faith and proper purpose”21. Their actions should be form the
interest of the company and not for their own interest. They have a fiduciary obligation to the
company and should act within the limits of their powers. They should known that when they
have inevitable fallen into a situation where there is a contradiction between their own personal
interest with the interest of the company, the interest of the company has to be given priority.
The provisions had been discussed by the court in the case of Asic v Adler and 4 Ors [2002]
NSWSC 171. Further under the rules provided in section 182 and 183 of the CA Harry, Meghan,
William, and Kate cannot use to the detriment of the company their position or any confidential
information of the company22. It has been provided under the rules of section 191 that any sort of
personal interest in relation to a transaction which is to be entered upon by the company has to be
18 ASIC v Cassimatis (No. 8) [2016] FCA 1023
19 Shafron v Australian Securities and Investments Commission [2012] HCA 18
20 ASIC v Healey (2011) FCA 717 at [166]
21 Corporation Act 2001 (Cth) s 181
22 Corporation Act 2001 (Cth) s 182 & 183

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disclosed by a director to the board or else this would lead to the contravention of this section 23.
Where it has been found that the directors have violated these duties recklessly and intentionally
criminal sanction under The Criminal Code is imposed on them by section 18424.
Further implications will be imposed on Harry, Meghan, William, and Kate in relation to
insolvent trading under section 588G. They are not allowed to enter into a transaction when a
company is insolvent or when they have a reasonable belief that the company may become
insolvent if it enters into the transaction. The directors may be liable in personal capacity under
section 588G when they do not obey the rules of this section. However under section 588H of the
Act where the director had made reasonable reliance on advice provided by others that the
company is solvent they may be avoid liability for insolvent trading.
When the directors fail to comply with the civil penalty provisions under section 1317E they can
barred for managing any organization for a certain period as per 206C and pecuniary penalties of
up to $200000 to be paid to the commonwealth under section 1317S25.
23 Corporation Act 2001 (Cth) s 191
24 Corporation Act 2001 (Cth) s 184
25 Corporation Act 2001 (Cth) s 1317E, 206C & 1317S

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Bibliography
ASIC v Cassimatis (No. 8) [2016] FCA 1023
ASIC v Healey (2011) FCA 717 at [166]
Australian Competition and Consumer Act 2010 (Cth)
Corporation Act 2001 (Cth)
Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and
cases in the legal environment. (Wolters Kluwer Law & Business, 2015).
Davidson, Daniel V., Lynn M. Forsythe, and Brenda E. Knowles. Business law: Principles and
cases in the legal environment. (Wolters Kluwer Law & Business, 2015).
Fair Work Act 2009 (Cth)
Hannigan, Brenda. Company law. (Oxford University Press, USA, 2015.)
Hannigan, Brenda. Company law. (Oxford University Press, USA, 2015.)
Lang v James Morrison & Co Ltd (1911) 13 CLR 1
Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. (Nelson
Education, 2015.)
Mann, Richard A., and Barry S. Roberts. Business law and the regulation of business. (Nelson
Education, 2015.)
Partnership Act 1963 (Cth)
Richard Baumfield, Richard P. Copp, Robert Cunningham, Paul Harpur, Alex Wong, Company
Law: An Interactive Approach. (John Wiley & Sons Australia, 2016)

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Richard Baumfield, Richard P. Copp, Robert Cunningham, Paul Harpur, Alex Wong, Company
Law: An Interactive Approach. (John Wiley & Sons Australia, 2016)
Salomon v A Salomon & Co Ltd [1896] UKHL 1
Shafron v Australian Securities and Investments Commission [2012] HCA 18