Comparison of Liabilities in Partnership and Company Structures

This article compares the liabilities that arise for partners in a partnership structure versus the owners of a company when entering into contracts with outside parties. It discusses the legal status of each structure, the extent of personal liability, and the duties owed by partners and directors to their respective entities.

COMMERCIAL AND CORPORATION LAW
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PART A
The set up costs in each of the different legal structures is dependent on the underlying
formalities involved with regards to set up. These set up related formalities tend to minimal for a
sole proprietorship where typically a business name is registered. Besides, an ABN and GST
number would be required. There is choice with regards to the registration period available in
sole proprietorship with $36 being the fee for one year and $ 84 for three years1. With regards to
setting up of a partnership, only a partnership agreement is required which may or may not be
registered. As a result, the only set up costs with regards to partnership relates to the enactment
of the partnership agreement which often may not require the services of a lawyer. However,
with regards to setting up of a proprietary company, significant amount of legal formalities are
involved which consume time and cost. The documents required include MOA/AOA, copy of
company constitution, details about directors and company secretary, place of incorporation,
written undertaking from directors, shareholders details and ownership structure. Additionally,
the fee for registering a proprietary company (assuming no broker services) is $488 which is
quite high2.
The administration and other ongoing costs are also significant different across business
structures. For a sole proprietary, renewal of registration needs to be carried out before expiry
with $ 36 being the renewal fee for one year and $ 84 for three years renewal. Besides, there is
no ongoing compliance or administration cost associated with this business structure. With
regards to the partnership structure, the ongoing administration, operating and compliance
charges are practically nil with minimal regulatory burden3. However, a significant amount of
administration and ongoing costs would be incurred by the proprietary company. This is because
there is a requirement of audited annual financial statements being presented to the ASIC.
Besides, there are other provisions applicable such as the presence of company secretary which
1 Clive Turner & John Trone, Australian Commercial Law, (Thomas Reuters, 32nd ed., 2019) 131
2 Julie, Cassidy, Corporations Law Text and Essential Cases, (Federation Press, 4th ed., 2015) 148
3 Jason, Harris, Corporations Law, (LexisNexis Study Guide, 2nd ed., 2014)101

are highlighted in Corporations Act 2001 that are applicable. Additionally, an annual review fee
of $263 would need to be paid to ASIC4.
PART B
The objective is to draw a comparison between the potential liabilities that would arise for the
partners in comparison to that liability which would arise for the owners of the company when
contracts are enacted with outside parties. A pivotal factor which has significance in regards to
determining the liability on account of contracts enacted with outside parties is the legal status of
the underlying business structure. In the context of partnership, it is noteworthy that partnership
is not a separate legal structure from the partners5. This implies that the partnership firm is
known by the partners only. As a result, any contractual agreement that the partnership firm
enters into is essentially enacted on the behalf of the partners. If there is any change in the
ownership of the partnership, then the underlying firm would have to be dissolved. The above
features clearly highlight that the existence and legal identity of partnership is dependent on the
partners6.
The above description is sharply in contrast with the company structure. As per s. 124-1 of
Corporations Act 2001, company has a separate legal entity. This implies that the existence of
the company is not dependent on that of the shareholders. As a result, the shareholding pattern
for the company may alter without impacting the company structure. Also, the fact that the
company is a separate legal entity implies that the company can execute various contractual
agreements that are required to conduct business7. Thereby the business agreements are enacted
on behalf of the company and any contractual benefit or obligations would be applicable for the
company directly and not for the shareholders. Also, since company is a separate legal person,
hence the assets and liabilities of the company are not to be treated as personal assets or
liabilities of the owners8.
4 Athule Pathinayake , Commercial and Corporations Law, (Thomson-Reuters, 2nd ed., 2014) 141
5 Andy Gibson & Douglas Fraser, Business Law (Pearson Publications., 8th ed, 2014) 190
6 Shayne Davenport, Business and Law in Australia (Thomson Reuters, 4th ed, 2014) 213
7 Robert Bryan Vermeesch and Kevin Edmund Lindgren, Business Law of Australia (Butterworths, 12th ed. 2014)181
8 Wayne Pendleton & Roger Vickery, , Australian business law: principles and applications, (Pearson Publications,
5th ed., 2015) 187

The implication of the discussion with regards to legal status of company is that the liability of
owners is limited to the share capital invested in the company. In case of liquidation or
bankruptcy of the company, the owners are not personally liable for the undischarged creditors
or outstanding liabilities. Further, the personal assets of the owners cannot be liquidated for
settling the outstanding contractual liability enacted with the company since both the entities that
the company and owners are separate. A landmark case in this regards is Salomon
v A Salomon and Co Ltd9. In this case, Mr. Salomon had a leather shoe business. As his sons
wanted to be co-owners, a company was set named A Salomon and Co Ltd. For this company,
there were seven shareholders from Mr. Salomon’s family. However, Mr. Salomon had more
than 99.5% of the shares of the company with his wife and sons holding just one share each. The
company purchased the show business of Mr. Salomon at higher than market price. Additionally,
debentures were issued to Mr. Salomon for the incremental money put by him in the company.
Owing to slowdown in orders from the government, the company’s financial situation
deteriorated.. Very soon afterwards, the company declared bankruptcy. The unpaid creditors
highlighted that Mr. Salomon should be personally held liable for the outstanding liabilities as
the company structure was used with the sole purpose of limiting liability10. However, it was
decided that Mr. Salomon would have no personal liability to pay for the unpaid creditors of the
company which is a separate legal entity. Considering that this immunity can potentially be
abused, hence over time the courts have developed the concept of piercing the corporate veil in
selected cases as highlighted in Gilford Motor Co Ltd v Horne11. Here the concerned individual
(Mr. Horne) tried to escape from liabilities related to breach of non-compete clause.
In case of partnership, any contract that the partnership firm enacts is essentially on behalf of the
partners only since partnership firm lacks a separate legal entity. As a result, the contractual
benefits and liabilities directly are attributed to the partners only in the proportion of their profit
sharing in the firm12. Further, the assets and liabilities of the firm are essentially personal for the
partners. In this backdrop, any contractual liability on account of any contract executed with the
outside parties would be extended to personal assets of the partners. If the partnership is limited,
9 Salomon v A Salomon and Co Ltd [1897] AC 22
10 Ibid. 2, 107
11 Gilford Motor Co Ltd v Horne [1933] Ch 935
12 Ibid. 6, 134

then the extent of personal liability may be limited or else the personal liability for the partners
for contractual liabilities of the partnership firm would be infinite13.
PART C
The objective of this discussion is to compare the duties that the partners owe to each other with
the duties that are owed by the directors to the company.
With regards to duties owed by the directors to the company, there are duties that are imposed by
both common law as well as relevant statute i.e. Corporations Act 2001 (Cth). The common law
duties arise from the agency relationship that exists between the company and the directors. It is
noteworthy that despite the company being a separate legal entity, it is unable to execute its own
contracts and the same is carried out by the directors who act as agents. The foremost general
duty is the duty to care considering that agents need to safeguard the interest of the principal
while exercising their powers14. Additionally, it is expected that directors have a duty to exercise
discretion whereby informed and independent judgment ought to be used for managing company
affairs. Besides, there is a general duty on directors whereby the powers ought to be used for
proper purpose. Any use of wrong for a wrong purpose would lead to a breach of common law
duties. Additionally, directors ought to avoid any conflict of interest as in such situations
objectivity may be lost and decisions made may not be in the best interests of the principal i.e.
the company15.
As mentioned above, there are significant statutory duties levied on the directors considering the
pivotal role that they play. These have been incorporated in the aftermath of various corporate
scandals that occurred in Australia in the last decade of 20th century and highlighted the pivotal
role played by directors in these scandals. As per s. 180 Corporations Act 2001, it is essential
that the directors should take care and diligence while exercising their powers16. Further, s. 181
highlights that the directors ought to use their powers in good faith and for proper service 17.
Additionally, there is statutory duty on directors not to use the privileged information available
in the position of director to derive benefit for self or for associates. Besides, it is imperative that
13 Ibid. 7, 123
14 Ibid. 1, 134
15 Ibid. 3, 144
16 Austlii, Corporations Act 2001- Sec 180 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s180.html
17 Austlii, Corporations Act 2001- Sec 181 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s181.html

directors ought to avoid conflict of interests. In case of any conflict of interest, it is obligatory on
the concerned director to provide a written intimation about the same to the board. Further, there
are general obligations with regards to attending board meetings and actively participating in
these especially on matters that require voting18. Also, s. 588G places an obligation not to assume
incremental debt which renders the company insolvent. As a result, decisions with regards to
incremental debt funding should be taken keeping in mind the paying capacity19. Violation of the
above duties leads to various penalties depending upon the nature of violation. Criminal
proceedings may also be initiated against directors if they make attempts to commit fraud and
display intentional misconduct20.
With regards to partnership, it is noteworthy that Dixon J highlighted in Birtchnell v Equity
Trustees, Executors and Agency Co Ltd21 case that relationship between partners is fiduciary in
nature. It has been indicated that the partnership is based on mutual trust and confidence
between the partners as indicated in the Cameron v Murdoch22. A key duty which this case
indicated amongst the partners is to act in good faith. This is pivotal considering that the various
partners tend to act as both principal as well as agents for each other. For instance, when a given
partner is executing a contractual document with a third party on behalf of the firm, then the
contract is being entered into on behalf of all the partners23. As a result, the representing partner
is acting as an agent to all the other partners who are the principal for the given contract. Further,
any contract enacted by a partner in the context of business would be binding on all the partners
irrespective of whether the contract enactment authority was given to the underlying partner or
not. As a result, a dishonest partner could lead to sizable liabilities for the innocent partners24.
Additionally, it is imperative that the partners should avoid any conflict of interest. This is
pivotal as any action by a partner which is adverse for the partnership would lead to adverse
impact on the interests on the other partners. Further, any partner must not obtain personal profits
based on information or opportunities provided on account of partnership as this would have
18 Ibid. 3, p. 130
19 Austlii, Corporations Act 2001- Sec 588G
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/588G.html
20 Ibid. 4, p. 167
21 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384
22 Cameron v Murdoch (1986) 63 ALR 575 at 587
23 Ibid. 5, 189
24 Ibid. 7, 201

adverse impact on the partnership profit. Also, it is expected that the partners would disclose all
material information regarding accounts and assets in possession which are related to the
partnership25.
25 Ibid. 8, 234