Legal Opinion on Suitable Business Structure

This document provides a legal opinion on the suitable business structure for operating a new venture in the men's fashion industry. It highlights the importance and significance of forming a limited liability company and explains the advantages it offers compared to other business structures.

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TO DATE: 26TH MAY 2019
JOHN
MENS FASHION INDUSTRY BUISNESS
GAUTENG STREET
P. O BOX 3333456
MELBOURNE .
Dear Sir,
RE: LEGAL OPINION ON SUITABLE BUSINESS STRUCTURE
The above matter refers.
At the onset, it is prudent to bring to bear the fact that a ‘Limited Liability Company’ is to all
intents and purposes the most suitable business structure that you use to operate you new
business venture in the men’s fashion industry. It therefore gives added relevance to highlight the
importance and significance of forming a limited liability company.
A limited liability company exists as a separate legal entity from the person or investors who
registered it (Tomasic et al, 2002). The principle of separate legal personality was first conceived
in the landmark case of Salmon vs. Salmon (1897) where the court held that once a company was
registered a separate entity from the members who formed it or the shareholders. This implies
that John company will be a separate legal entity from him. Section 124 of the Corporations Act
2001 (cth) echoes the overarching principle in Salmon by providing that once company has been
registered it acquires a separate legal personality. The significance of a separate legal personality
is that the company will be able to sue and be sued in its own. In addition the company is also
able to enter in to contracts and agreements in its own name and own property in its name. It is
imperative to note that once a business has incorporated the company can neither sue in the name
of its shareholders nor enter into a contract in the name of the shareholders. The company will be
personally liable where it is sued. In Lee v Lee’s Air Farming Ltd (1961) the court firmly held
that one a company has been incorporated the shareholders and the company should exist
separately and have a separate legal capacity. It is worth noting that a company will still enjoy its

separate legal personality even in cases where the company has majority shareholder or is owned
by one person (Broderip v Salomon, 1895).
The following cases illustrate the nature and scope of separation according to the as the doctrine
of separate legal personality;
a) In Salmon vs. Salmon (1897) suggests that a company that is registered is separate from
the people who virtually control it.
b) In Macaura v Northern Assurance Co Ltd (1925) the court observed that company that is
registered is a separate its members.
c) In Lee v Lee’s Air Farming Ltd (1961) the court was of the view that a registered
company exists separately from its employees.
Business structures such as partnerships and sole proprietorship that do not have the advantage of
a separate legal personality expose owners and investors to risks such as direct and personal
liability for contracts signed or any other activity undertaken for and behalf of the business. Due
to the apparent inability to enjoy a separate legal personality, partnerships and sole proprietorship
business structures cannot own property, sue and be sued in their own name or enter into
contracts in their own name.
The separate legal personality of the company leads to the creation of a corporate veil . The
essence of the corporate veil is that it shields the shareholders from liability. In Dennis Willcox
Pty Ltd v Federal Commissioner of Taxation (1988) the court took the view that the separate
legal personality of a company creates a corporate veil that protects shareholders of the company
from liability. The corporate veil thus protects John from liability. However, it should be borne
in mind that the protection of shareholders by the corporate veil is not absolute. This veil may be
lifted with a view of holding the shareholders, directors or any other officer of company
personally liable. In Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) (1991) the court
favored the view that in the event that the corporate veil of a company is lifted, the shareholders,
directors or any other officer of the company no longer enjoy protection from liability.
The following cases exemplify instances when the corporate veil ceases to protect shareholders
and members of a company from liability.

a) In Gilford Motor Co Ltd v Horne (1933) it was held that the shareholders and members of
a company will no longer enjoy protection of the corporate veil if the company was
established to avoid a contractual obligation.
b) In Creasey v Breachwood Motors Ltd (1993) it was held that the corporate veil may be
disregarded and find shareholders and members personally liable if the primary aims of
registering the company was to escape a legal obligation.
c) In Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) it was held that a company
that where it is found that a company is a mere sham or cloak the veil of incorporation. A
company is a sham or cloak if it the business activities it carries are inconsistent with its
memorandum and articles of association. Shareholders and members of the company will
also not enjoy the advantage of a corporate veil if the company is found to be engaging in
fraudulent business.
It is of particular significance to note that, whilst members of a company and its shareholders
enjoy the advantage of members and owners of a partnership or sole proprietorship do enjoy
protection from liability. This stems from the fact that they are not separate legal entities from
the member, owners or people who control them. In a nutshell, they are not insulated by a
corporate veil. The aforementioned, is a clear disadvantage of establishing partnership or sole
proprietorship.
As the term ‘Limited Liability Company’ suggests the liability of a limited liability is limited to
the amount of shares being held or by the amount of guarantee given by an investor. According
to section 516 of the Corporations Act 2001 if a company limited by liability in debts, liability
for the debt is limited to the amount of shares that one holds. In The King v Portus; ex parte
Federated Clerks Union of Australia (1949) Latham CJ held that limited liability of a company
implies that the investors, shareholders or directors of the company will not be liable as
individuals if the company incurs a debt but the debt will be recovered from the amount of shares
owned by each member and the assets of the company. The personal assets of the shareholders
cannot be used to recover the company’s debts. Partnership and Sole proprietorships have
unlimited liability. This implies that debts incurred by the business can be recovered from their
personal assets. Since the company is able to sue and be sued in its own liability for debt will not
be extended to shareholders.

Another advantage of a company is that it enjoys perpetual succession. This implies that once it
has been registered it will continue to exist even if the members die unless it is desisted.
Partnership and Sole proprietorships do not have perpetual succession. Therefore they can cease
to exist where one of the members dies.
From the forgoing reasons it can be concede that the most suitable business structure is a limited
liability company. This is majorly predicated on the fact a limited liability company affords more
legal protection to investors of the business compared to Partnership and Sole proprietorships.
Yours Faithfully
Xxxx

References
Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769
Broderip v Salomon [1895] 2 Ch 323.
Corporations Act 2001 (cth)
Creasey v Breachwood Motors Ltd [1993] BCLC 480
Gilford Motor Co Ltd v Horne [1933] Ch 935
Lee v Lee's Air Farming Ltd [1960] UKPC 33
Macaura v Northern Assurance Co Ltd [1925] AC 619
Salomon v A Salomon & Co Ltd [1897] AC 22
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530
The King v Portus; Ex parte Federated Clerks Union of Australia [1949] HCA 53.
Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia. Federation
Press.