Comparison of Set Up and Administrative Costs in Different Business Structures

This article compares the set up costs and administrative costs in different business structures such as sole trader, partnership, and proprietary company. It discusses the registration fees, documentation requirements, and ongoing administration costs associated with each structure. It also explores the liabilities and duties of partners and directors in these business structures.

COMMERCIAL AND CORPORATION LAW
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PART A
The objective of this part is to draw a comparison of the set up costs along with the
administrative costs involved in the different business structures. It is noteworthy that the set up
cost associated with each business structure is driven by the extent of formalities that are
involved. For instance, in relation to starting a sole trader business, only business name ought to
be registered. Additionally, an ABN (Australian Business Number) and GST number may also
be required. The registration fee in this business structure is quite nominal at only $ 3 per
annum. The partnership business structure also has only minimal costs since the only
requirement to start this type of business structure is the partnership agreement. Also, the
registration of this agreement is also optional1. Thus, for an unregistered partnership agreement,
the cost of the lawyer in drafting the agreement might be the only cost involved. But the set up
costs associated with a proprietary company are significant higher coupled with the underlying
formalities involved that require both cost and time2. The registration of a proprietary company is
mandatory with ASIC (Australian Securities and Investments Commission). A host of
documentation would be required before registration. This includes documents such as
Memorandum of Association, company constitution(if present), name and consent of directors,
name and consent of company secretary, ownership details along with incorporation place
details. Also, the registration costs paid to ASIC amount to $ 488 for a proprietary company
which is significantly high in comparison to other business structures3.
The administration cost is minimal for sole trader with the only cost being annual renewal fee of
$ 36 for registration. With regards to partnership also, the ongoing administration costs along
with compliance burden is practically non-existent4. This is however, not the case for a
proprietary company which needs to submit audited financial statements on an annual basis to
ASIC. Also, it needs to comply with the applicable provisions of Corporations Act 2001
including need for company secretary, minimum directors and their conduct. Also, an annual
review fees of $263 is charged by ASIC5.
1 Athule Pathinayake , Commercial and Corporations Law, (Thomson-Reuters, 2nd ed., 2014) 132
2 Clive Turner & John Trone, Australian Commercial Law, (Thomas Reuters, 32nd ed., 2019) 93
3 Jason, Harris, Corporations Law, (LexisNexis Study Guide, 2nd ed., 2016)121
4 Robert Bryan Vermeesch and Kevin Edmund Lindgren, Business Law of Australia (Butterworths, 12th ed. 2014)145
5 Julie, Cassidy, Corporations Law Text and Essential Cases, (Federation Press, 4th ed., 2015) 191

PART B
Scope of liabilities of the concerned contracting parties mainly depends on the title of type of
business structure owned by the contracting parties while enacting the contract with the outside
parties. In regards to partnership firm, it is essential to note that partnership business structure
does not has a separate legal entity which means the partnership is represented through its
partners only. Also, when the partnership firm enacts any contract with the outsider parties, it
essentially means that partners of the partnership firm have enacted the contract with outsider
parties6. Further, if the partners want to make any changes in the ownership of the firm, then the
existing firm would have to be ended and then new partnership firm would be formed. This
indicates that the existence of the partnership firm depends on the legal identity of the partners.
Partners would be personally held responsible for the contract which has been enacted in the
name of the partnership firm7.
For a partnership business structure, the contractual liabilities or benefits are imposed on the
partners only based on their respective contribution of investment while making partnership firm.
The asset or/and liabilities of the partnership firm essentially belong to the partners collectively.
As a result of this, in regards to discharge the outstanding debt of the partnership firm, the
private assets or capital of the partners would be liquidated8. Further, if the partners have made
the limited partnership, then the corresponding liabilities would also be limited with the same
proportion. However, if the partners have not limited their scope of liabilities for outstanding
obligations, then the contractual obligation for the partners for any undischarged liability will be
potentially indefinite9.
The above understanding is not valid for a company structure where the extent of liabilities is
limited. According to s. 124-1 of Corporation Act 2001, the company holds a separate legal
identity10. It means the company and its shareholders are two different legal entities. The change
in the ownership of the company does not depend on its shareholders. It indicates that the
ownership of the company can be altered without affecting the existing company business
6 Ibid. 1, 157
7 Wayne Pendleton & Roger Vickery, , Australian business law: principles and applications, (Pearson Publications,
5th ed., 2015) 210
8 Shayne Davenport, Business and Law in Australia (Thomson Reuters, 4th ed, 2014) 178
9 Andy Gibson & Douglas Fraser, Business Law (Pearson Publications., 8th ed, 2014) 198
10 Austlii, Corporations Act 2001- Sec 124 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s124.html

structure. Also, the company itself has the legal position to enact the contract with the outside
parties and would be held liable for the contractual obligations11. The shareholders of the
company would not be personally held liable for the liabilities of the company. Further, it is
noteworthy that as the company holds a separate business legal entity and hence, the
assets/obligations of the company would not be considered as private assets/obligation of the
shareholders12.
As per the legal status of the company, it is noticeable that the obligations of the shareholders are
restricted to the proportion of the capital which has been invested in the company. Bankruptcy of
the company or liquidation of the company would not extend any liabilities onto the
shareholders. It means the shareholders of the company would not be held liable in personal
capacity for any unsettled/undischarged creditors or liabilities of the company13. The leading case
is this regard is Salomon v A Salomon and Co Ltd14 .
As per the relevant facts of the above case, Mr. Salomon conducted a shoe business as a sole
trader. However, his sons wanted to have ownership rights in the business , hence a company
was established named “A Salomon and Co Ltd”. This company purchased the shoe business and
issued shares to Mr. Solomon and his family. However, his wife and sons only had one share per
person in the company and about 12,000 shares were held by Mr. Salomon. Incremental money
was infused by Mr. Salomon for which debentures were issued by the company. However, when
the company’s financial health deteriorated. Mr. Salomon liquidated his debentures. Soon after,
the company declared itself bankrupt leaving a significant amount of unsettled creditors. These
creditors held Mr. Salomon personally liable as they claimed that company structure was formed
to escape personal liability but the decision was made in Mr. Salomon’s favor. It is noteworthy
that this limited liability protection provided by the company structure is vulnerable to be abused
owing to which in selected instances, the courts may decide to pierce the corporate veil15.
11 Ibid. 3. 133
12 Ibid. 5, 179
13 Ibid. 1. 123
14 Salomon v A Salomon and Co Ltd [1897] AC 22
15 Ibid. 5, 213

PART C
In this part, the key aim is to highlight the duties that are owed to each other by partners and
compare the same with those duties that directors owe to the company.
In context of duties imposed on the company’s directors, it is noteworthy that these are dictated
not only by statute (Corporations Act 2001) but also by common law. The basis for common law
duties can be traced to the existence of agency relationship between the directors and the
underlying company. Even though the company structure is a distinct legal entity but still it
cannot execute contracts on its behalf owing to which requisite authority is given to directors to
act in the capacity of agents16. The key duty under common law is the duty to care as per which it
is essential that powers should be deployed in a manner which is in the best interest of the
company (principal). Further, the directors are also required to ensure that they deploy
independent and informed judgment with regards to making decisions about the company. Also,
the power provided to directors is not meant to be deployed for improper purpose as it would
lead to breach of fiduciary duties that the director owes to the company directly and indirectly to
the owners. Besides, it is imperative that directors must avoid situations where conflict of
interest is involved since there would be potential loss of objectivity as the decision making
might be driven by maximizing personal interests instead of the company17.
Besides, general duties, statutory duties are also applicable on the directors taking into
consideration their key role in managing the affairs of the company. The statutory duties have
been inserted owing to high profile corporate bankruptcies that shook Australia during the
1990’s with cases such as HIH Insurance and ABC learning. The first key statutory duty relates
to acting with care and due diligence so that there is no reckless exercising of the powers
provided to the directors18. Also, it is essential that the use of powers by directors must be for
proper purpose and in good faith19. Owing to the privileged position of director, a plethora of
confidential information is available which must not be used for deriving any material benefit for
either oneself or others20. Directors must avoid situations involving conflict of interests and must
16 Ibid. 3. 148
17 Ibid. 1. 199
18 Austlii, Corporations Act 2001- Sec 180 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s180.html
19 Austlii, Corporations Act 2001- Sec 181 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s181.html
20 Austlii, Corporations Act 2001- Sec 182 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s182.html

intimate the board in case of any situation where potential conflict of interest can arise21. This
would allow the board to exclude the concerned member from discussions or voting as may be
concerned requisite. It is also obligatory for the directors to be present at the board meetings
along with participating in these coupled with casting vote independently. Further, in accordance
with s. 588G Corporations Act 2001, it is imperative that incremental debt which would lead to
the company towards bankruptcy must not be assumed and hence debt should be raised to the
extent that the corresponding liabilities can be furnished by the company22. In case of the duties
above being violated, penalties would be imposed on directors which would range from
monetary fines to capital punishments depending on the nature of violation23.
In relation to partnership, a noticeable aspect is that the nature of relationship between the
partners is fiduciary as has been highlighted in Birtchnell v Equity Trustees, Executors and
Agency Co Ltd24 case. Further, a key aspect between partners is that there has to be trust and
confidence on each other as can be seen from the discussion in the Cameron v Murdoch25 case.
Further, it is expected that the conduct of partners would be carried out in good faith. This is
essential as any particular partner would represent the partnership as a whole and is capable of
enacting legally binding agreements with outside parties. This is the case when a given partner is
enacting a contract on behalf of the partnership firm. Such contracts are binding on all the
partners irrespective of whether the partner executing the contract has the requisite authority26.
Further, the partners must not engage in any action that gives rise to potential conflict of interest.
Such situations can result in action by the concerned partner which can be detrimental to the
interest of the partnership which would be borne by innocent partners27. Also, it is expected that
the opportunities arising on account of the partnership must not be used to derive personal profit
and the business should be reflected in the partnership only. Additionally, there is a duty of
21 Austlii, Corporations Act 2001- Sec 191 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s191.html
22 Austlii, Corporations Act 2001- Sec 588G
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/588G.html
23 Ibid. 1, 189
24 Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384
25 Cameron v Murdoch (1986) 63 ALR 575 at 587
26 Ibid. 7, 178
27 Ibid. 8, 214

disclosure with regards to material information that may relate to accounts and assets owned by a
given partner especially when this concerns the partnership28.
28 Ibid. 9, 205