Corporate Law: Comparison of Partnership and Incorporation

This article discusses the advantages and disadvantages of partnership and incorporation in corporate law. It also analyzes a landmark case of corporate fraud and the principles of corporate governance. The article recommends incorporation for family members due to the protection of the corporate veil. The principles of Australian Securities Act and the Corporations Act are also discussed.

Running head: CORPORATE LAW
Corporate Law
Name of the Student
Name of the University
Author Note

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CORPORATE LAW
Part 1
Business structures
Partnership
Partnership is one of the most used business structures which is entered into between the
parties for the purpose of making profits. The goals and objectives of this business structure is to
maximize profit1. The partners enter into a written contract to be bound by the terms of the
agreement. There are various ways to enter into business and it can be done with the help of the
coming together of the partners. When the partners decide that they do not want to take the
burden of the business solely and they want to share the profits and the losses, in that case, they
can go for partnership. In partnership, the members share the liabilities, the losses as well as the
profits. Partnership is based on trust and good faith and the partners are bound by a fiduciary
relationship. Partners are indecently responsible for entering into the contract and they do so in
their individual capacity. The firm does not enter into the contract and the firm is not considered
a legal entity. The Partnership Act, 1891 governs the law of partnership in Australia. The liability
of the partners under the partnership legislation in Australia is unlimited. The agreement
governing the rights and duties of the parties are written and in formal manner and it is called the
partnership deed. The partnership deed governs the rights and in cases when there is no formal
written agreement between the parties, the same can be inferred from the conduct. If the parties
give out the impression by their behavior that they are in a partnership agreement, then it cannot
be denied and the behavior shall be indicative of an agreement2. The behavior could be in the
manner of mutual sharing of profits and losses or being responsible for the conduct of the
1 Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance. Routledge, 2016.
2 Issacharoff, Samuel, and Thad Eagles. "Australian alternative: A view from abroad of recent developments in
securities class actions." UNSWLJ 38 (2015): 179.

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partners in the firm. There is an element of good faith and trust and since the partners are sharing
the profits and the losses, it can be said that there are risks of bearing the losses which might
pose to be a disadvantage for the partners. The partners shall have unlimited liability for the
dents that are incurred by the firm and the partners in the firm can be sued separately. Partnership
can be dissolved and also co-ownership is not a proof of partnership. The partners have to
maintain harmony and they cannot be held to be acting in conflict with the interest of the
partners or the firm.
Company
The law treats companies as legal entities and they also have a fictional character and
they are considered to be judicial where the company can sue and also be sued in its name. The
company can therefore be incorporated as well as unincorporated. There are many advantages of
a company as they have a legal entity and also can enter into contracts and have the power of
owning properties. These are all attributes of being recognized as a judicial body. The common
law does not have a bearing in the initiation of a company and it can be formed by statutes. The
shareholders in the terms of the company parlance are the owners of the rights of the company
and they are held to be liable only for the shares or the issue prices they have invested. The issue
prices are determined by the company and are also issued by the company. The members of the
company are held to be liable for the debts that are incurred by the company and they can also be
sued for fraud. The company in Australia is incorporated as per the statutes and therefore the
principle governing3 the statute is that the shareholders and the members shall be held liable for
the debts that the company incurs4. The benefit of this system is that the company shall sue and
3 Roness, Paul G. "Types of state organizations: Arguments, doctrines and changes beyond new public
management." Transcending new public management. Routledge, 2017. 77-100.
4 Veldman, Jeroen. "The Separate Legal Entity and the Architecture of the Modern Corporation." (2018).

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in cases when the company is sued, the members shall not be personally held liable and they will
not have to bear the responsibility individually. The Corporations Act is the legislative authority
that deals with the rights of the shareholders and the directors of the company and lays down the
guiding principles for the conduction and incorporation of the company.
Part 2
Comparison of Partnership and Incorporation
Partnership is based on the element of trust and food faith and the partners are in a
fiduciary relationship. The intention of the partnership firm is to make profits and share the
profits equally between the partners. In the present given situation, it can be said that family
members have a bearing of trust and they are assumed to be acting in good faith and therefore the
business structure suited for them is partnership. The family members can enter into a profit to
share them equally and also benefit from it. In cases when the contract which is entered into
between the parties is authorize, the partners can be bound by the terms of the contract.
Partnership is a very simple business structure and the formalities to enter into an agreement is
not as complex as a company. In cases of written partnership deeds, the statute mandates that the
regulations are upheld and it is not a mandate as partners can also enter into verbal agreements
where the intention as well as the rights of the parties can be inferred from their conduct. The
partners mutually agree on a change or alteration and they also denote among themselves how
they want to be governed by the agreement. The method for the distribution of profits is very
simple as the partners share the profits among themselves. The ultimate goal of a partnership
firm is to make profits. The partners have their specified and denoted interest in the business and
their liabilities are individual where each partner shall be individually liable.5 The interest of the
5 Macey, Jonathan, and Joshua Mitts. "Finding order in the morass: The three real justifications for piercing the
corporate veil." Cornell L. Rev. 100 (2014): 99.

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firm shall be kept at priority and all the accounts of the firm shall be handled with honesty. The
partners shall have their individual and separate share in the returns and they shall be liable for
their parts individually.
Companies, on the other hand, are considered to be legal entities in the eye of law and
they have the power to enter into a contract and also own properties in its own name. The
method of incorporation of a company is a very lengthy process which sets out all the rights and
duties of the members of the company.6 The company is considered to be a juristic person as it
has the power to sue and also be sued. Under the structure of a company, the directors have been
given many powers and they are held to be liable when the company incurs debts7. A company is
limited by shares and in such cases the shareholders are responsible for the shares they have
invested. In cases of company, there needs to be an initial investment which is made by the
shareholder.8 The risk in case of company is lesser and the members are not held to be personally
liable and the company becomes liable. The most important element of a company is the concept
of corporate veil which acts like a shield and protects the directors and the shareholders. The
company has a legal entity which is not the same as the director’s and the property is owned by
the company in its name and not by the members. The company acts and functions independently
and therefore the members of the company are not held liable for the functions of the company9.
The company can raise money from the public and the liabilities are entirely the liabilities of the
company and not of the members.
Recommendation
6 Talbot, Lorraine. Critical company law. Routledge, 2015.
7 Tushnet, Mark. "Comparative constitutional law." The Oxford handbook of comparative law. 2017.
8 Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.
9 Ke, Yongjian, Marcus Jefferies, and Peter Davis. "A Comparison of Public Private Partnership Environment
Between Australia and China." Proceedings of the 21st International Symposium on Advancement of Construction
Management and Real Estate. Springer, Singapore, 2018.

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The two structures are very widely used and both of these have their positive and
negative sides. In the present factual scenario concerning the family members, it can be said that
the company structure would be a better structure for them. Though the partnership is based on
trust and good faith and it follows a simpler step of setting up, the corporate veil saves the
members from any fraud or litigation, The Company is given the status if a separate legal entity
and therefore the company is sued in cases of any unlawful activities. The members are protected
from the shield of corporate veil10. The risk associated with partnership firm is more as the
partners are considered to be liable. If the risk is also assessed in cases of both the structures, it
can be said that company has lesser risks attached to it.
Part 3
Case Analysis
ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72
This is a landmark case as it sets the precedence of corporate governance as well as the
rights and duties of the directors. The case is concerned with company fraud and what are the
actions permissible by a director under the framework of corporate governance. In this case, the
director of HIH was convicted by the court and was held to be indulging in corporate fraud. This
case is remarkable for being one of the greatest cases of corporate fraud in the history of
company law. In this case, there was a collapse of the corporations which are famous for being
effluent and the companies Answett, OneTell and Adler collapsed as a result. The Corporations
Act is the primary legislation that deals with the rights and duties of the directors and their
expected behavior. Corporate Governance is the principle of ethics and principles that govern
the way the companies should function and it also lays down the principles that are held to be
10 Jackson, Kody. "Behind the Corporate Veil." ReVista (Cambridge) 15.1 (2015): 50.

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acceptable by the law. In cases of breach of corporate fraud, the companies shall be held liable
and they shall have to pay damages. The director of the company HIH was accused of indulging
in corporate fraud and it was held that he had mislead the company into making profits which
turned out to be fraudulent because he had the intention of deceiving the company and its
members11. The corporates in Australia are governed by the principles of Australian Securities
Act and as per its provisions, the corporates are made to abide by their rules and governance. The
companies should abide by these rules and they shall also ensure that the members do not
knowingly hamper them and therefore they should be penalized in cases of breach of those
principles. The Australian Securities Exchange has also imposed certain recommendations which
needs to be followed by the companies and if there is a violation of those, the directors and the
shareholders shall be made liable. In this present case, there was an accusation of corporate fraud
against the directors as he had used information that were not meant to be divulged and the
director had very knowingly mislead the company into making losses. The director with the
intention of defrauding the company indulged in corporate fraud as he sanctioned certain acts
which had adverse effect on the economy of the company. The court held that Rodney Adler had
committed fraud and therefore he was ordered to stay away from the functioning of the company
and was declared to be barred from working for the company, the court sentenced him to 20
years of imprisonment and was held that he had mislead the company into making losses. The
director should act in the best interests of the company and shall not advance his own profits
ahead of the company’s. The company be led by the directors and therefore the directors have to
keep the fiduciary relationship enact. The directors cannot act in their personal interest and shall
not harm the country knowingly. The intention of the director is of essence. As per section 180
11 ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.

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of the Corporations Act, the director shall maintain the fiduciary relation and shall act in good
faith12. The director has to advance the best interests of the company and has to act with proper
care as well as with due diligence.13 The director shall also maintain transparency and efficacy of
his actions. Section 181 of the Corporations Act deals with the core obligations of the director
where he shall be responsible for the proper conduct of the company14. The provisions of the
Corporations Act was laid down in the landmark judgment of Howard Smith Ltd v Ampol
Petroleum Ltd [1974] AC 821where the court held that the director is duty to bound to act in
good faith and also exercise due diligence and care in exercise of their duties.15 As per the
provisions of section 206A of the Corporations Act, the information which is gained by the
director shall be properly used by him and he shall not cause any unjust information to deceive
the public16. In cases when the director is accused, he can take the defense that he did not have
the intention to dupe the company.
Video Script:
0:00-1:20- The company can therefore be incorporated as well as unincorporated. There are
many advantages of a company as they have a legal entity and also can enter into contracts and
have the power of owning properties. These are all attributes of being recognized as a judicial
body. Partnership is one of the most used business structures which is entered into between the
parties for the purpose of making profits. The goals and objectives of this business structure is to
maximize profit. The partners enter into a written contract to be bound by the terms of the
agreement
12 Corporations Act, 2001 S. 180.
13 Méndez, Carlos Fernández, Shams Pathan, and Rubén Arrondo García. "Monitoring capabilities of busy and
overlap directors: Evidence from Australia." Pacific-Basin Finance Journal 35 (2015): 444-469.
14 Corporations Act, 2001 S. 181.
15 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
16 Corporations Act, 2001, S. 206A.

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1:21-1:40- There are various ways to enter into business and it can be done with the help of the
coming together of the partners. When the partners decide that they do not want to take the
burden of the business solely and they want to share the profits and the losses, in that case, they
can go for partnership. In partnership, the members share the liabilities, the losses as well as the
profits. The common law does not have a bearing in the initiation of a company and it can be
formed by statutes. The shareholders in the terms of the company parlance are the owners of the
rights of the company and they are held to be liable only for the shares or the issue prices they
have invested. The issue prices are determined by the company and are also issued by the
company.
1:41-2:00- Partnership is based on trust and good faith and the partners are bound by a fiduciary
relationship. Partners are indecently responsible for entering into the contract and they do so in
their individual capacity. The firm does not enter into the contract and the firm is not considered
a legal entity. The Partnership Act, 1891 governs the law of partnership in Australia. The liability
of the partners under the partnership legislation in Australia is unlimited. The agreement
governing the rights and duties of the parties are written and in formal manner and it is called the
partnership deed. The members of the company are held to be liable for the debts that are
incurred by the company and they can also be sued for fraud. The company in Australia is
incorporated as per the statutes and therefore the principle governing the statute is that the
shareholders and the members shall be held liable for the debts that the company incurs.
2:01-3:00- The benefit of this system is that the company shall sue and in cases when the
company is sued, the members shall not be personally held liable and they will not have to bear
the responsibility individually. The Corporations Act is the legislative authority that deals with
the rights of the shareholders and the directors of the company and lays down the guiding

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CORPORATE LAW
principles for the conduction and incorporation of the company. The partnership deed governs
the rights and in cases when there is no formal written agreement between the parties, the same
can be inferred from the conduct. If the parties give out the impression by their behavior that
they are in a partnership agreement, then it cannot be denied and the behavior shall be indicative
of an agreement. The behavior could be in the manner of mutual sharing of profits and losses or
being responsible for the conduct of the partners in the firm.
3:01-3:45- The partners shall have unlimited liability for the dents that are incurred by the firm
and the partners in the firm can be sued separately. Partnership can be dissolved and also co-
ownership is not a proof of partnership. The partners have to maintain harmony and they cannot
be held to be acting in conflict with the interest of the partners or the firm. The company is
considered to be a juristic person as it has the power to sue and also be sued. Under the structure
of a company, the directors have been given many powers and they are held to be liable when the
company incurs debts. A company is limited by shares and in such cases the shareholders are
responsible for the shares they have invested. In cases of company, there needs to be an initial
investment which is made by the shareholder.
3:46- 4:20- Market risk as well as risk assessment are two important factors that should be taken
into account while dealing with business structure. If the risk is also assessed in cases of both the
structures, it can be said that company has lesser risks attached to it. The ultimate goal of a
partnership firm is to make profits. The partners have their specified and denoted interest in the
business and their liabilities are individual where each partner shall be individually liable. The
interest of the firm shall be kept at priority and all the accounts of the firm shall be handled with
honesty.

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4:21-5:00- The ultimate goal of a partnership firm is to make profits. The partners have their
specified and denoted interest in the business and their liabilities are individual where each
partner shall be individually liable. The members in the company are not held liable and the
company is made accountable.

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References
ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance.
Routledge, 2016.
Corporations Act, 2001 S. 180.
Corporations Act, 2001 S. 181.
Corporations Act, 2001, S. 206A.
Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
Issacharoff, Samuel, and Thad Eagles. "Australian alternative: A view from abroad of recent
developments in securities class actions." UNSWLJ 38 (2015): 179.
Jackson, Kody. "Behind the Corporate Veil." ReVista (Cambridge) 15.1 (2015): 50.
Ke, Yongjian, Marcus Jefferies, and Peter Davis. "A Comparison of Public Private Partnership
Environment Between Australia and China." Proceedings of the 21st International Symposium
on Advancement of Construction Management and Real Estate. Springer, Singapore, 2018.
Macey, Jonathan, and Joshua Mitts. "Finding order in the morass: The three real justifications for
piercing the corporate veil." Cornell L. Rev. 100 (2014): 99.
Méndez, Carlos Fernández, Shams Pathan, and Rubén Arrondo García. "Monitoring capabilities
of busy and overlap directors: Evidence from Australia." Pacific-Basin Finance Journal 35
(2015): 444-469.

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Roness, Paul G. "Types of state organizations: Arguments, doctrines and changes beyond new
public management." Transcending new public management. Routledge, 2017. 77-100.
Talbot, Lorraine. Critical company law. Routledge, 2015.
Tushnet, Mark. "Comparative constitutional law." The Oxford handbook of comparative law.
2017.
Veldman, Jeroen. "The Separate Legal Entity and the Architecture of the Modern Corporation."
(2018).