Corporation and Business Structure

This document discusses the different types of legal entities and their business structures, along with the associated costs and administrative burdens. It explores the liability of partners and directors in partnerships and companies, as well as their duties in maintaining fair and transparent business practices.

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Corporation and Business Structure
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Corporation and Business Structure 1
Contents
Part A...............................................................................................................................................1
Part B...............................................................................................................................................2
Part C...............................................................................................................................................3
Bibliography....................................................................................................................................5
Books and Journal........................................................................................................................5
Case Laws....................................................................................................................................5
Legislations..................................................................................................................................5
Books and Journal........................................................................................................................6
Other Source................................................................................................................................6

Corporation and Business Structure 2
Part A
Basically there are three types of legal entities formed in the environment that are sole trader,
partnership firm and proprietary company. All the three types of formations have different
business structures that are available for people in the environment. This part of the paper will
adequately explain and evaluate the set up and administration cost along with the administrative
burden in the three different types of legal formations present in the environment. Initially taking
about sole trader formation, it should be noted that under this state a person single handed own
and control the functions of the enterprise. This is the simplest form of the starting the business
as it does not include any legal formalities involved in it.
However, registration of business is required in Australia; otherwise the business will fall under
the category of exemption. Cost of registration for a business is $36 which is also applicable for
a sole trader type of business entity as well. It should also be noted that a separate bank account
is not required for this type business. Low cost of maintenance is an attractive feature of this type
of business however; the burden in a sole trader entity is completely applied to the sole owner
only. It is important for a sole trader to keep the account of minimum five years that involves the
cost factor1.
Second aspect is a partnership business structure which involves two or more people for its
formation. The registration of this business structure is same as sole trader. It is important to
register the name of business along with Australian business number and separate bank account
as well. The trademark of a partnership business costs more than a sole propriety. Administrative
burden and liability is also shared under this type of business structure. Company is most
different form of business structure as in Australia, it is important for every organization to
register themselves under ASIC. The cost of registration of a company is $488 and the annual
review fee is $263 if the proprietary is registered with ASIC. The administrative burden is held
by the directors and other officers of the company2.
1 Shawn Bayern, The Implications of Modern Business–Entity Law for the Regulation of Autonomous
Systems. European Journal of Risk Regulation 7.2 (2016): 297-309.
2 Business.gov.au, What are the set-up steps and costs? (Web Page) <https://www.business.gov.au/change-and-
growth/restructuring/sole-trader-to-a-company/difference-between-a-sole-trader-and-a-company/what-are-the-
set-up-steps-and-costs>.

Corporation and Business Structure 3
Part B
Under the partnership firm, the business partners are personally liable to the third party unlike
separate legal entity. Every state in Australia have different legislation that administer the
structure of business however, the provisions are same to each other. Agency relation is maintain
between the partners for the firm and other partners can also enter in the same contract with the
outsider on behalf of the business as there is no separate presence of the firm from its partners3.
The liability of the partnership firm is considered as the personal liability of the partners in the
environment which means that the partners have unlimited liability to the third party in most of
the events. Partners are liable to third party as well as to themselves4.
The section 9 of Partnership Act 1981 elaborated that the partners of a firm are liable for all the
trades that are conducted on their end on behalf of the firm. In section 12 explains the liability of
partners of the firm that every partner needs to pay the debts of the firm jointly and severally in
the personal manner. The agency relationship explains that implied as well as expressed
authorities are attained to the partners. The expressed authority is attained from the rights
explained under the partnership agreement. It is important for the partners to act under the legal
boundaries of the firm. Partnership agreement is a mutual contract between the partners so third
party cannot attain information about the rights and authority of a partner. In many case the
partner act outside their legal boundaries of a partner. So, under such circumstances the law
secures the rights of third party. Like in the given case of Polkinghorne v Holland5 which held
that the other partner is liable for the unauthorized act of one partner. However, it is important
that the act should be related to the ordinary business activity.
Further, according to the limited liability rule, neither the members nor the director can be held
liable for the functions of the company. It was stated in the case of Salomon v Salomon6 that the
company is a separate legal entity and there is presence of an artificial corporate veil present
between the directors and the company. This rule further added in the case Lee v Lee’s Air
farming Ltd7. On the basis of this case, directors and officers are not personally liable for the
3 MyLawyer, Liability of existing partners (Web Page) < https://www.mylawyer.co.uk/liability-of-existing-partners-
a-A76058D76098/>.
4 Leslie Corwin, and Ciampi Arthur, Law Firm Partnership Agreements. Law Journal Press, 2018
5 1934 51 clr 143
6 [1896] UKHL 1, [1897] AC 22
7 [1960] UKPC 33

Corporation and Business Structure 4
contract of the company with the outsiders. In case of breach of the contract made by outsider,
then the responsibility will be on the whole company.
However, many exception cases can also be seen under which the directors can be held
personally liable. This situation includes the circumstances under which the director is involved
in fraudulent activities and according to the opinion of court, it is important to hold them
personally liable for their work. This type of circumstance is known as lifting the corporate veil
under which the company is not assumed as a different legal entity and the person is held liable
by the court for the wrongful actions performed by them. So, it should be noted that the above
mentioned are the liability of the partners in a proprietary company8.
Part C
In a company and partnership firm, partners and directors do not have their only liability to the
third parties but they are also liable to each other while acting on behalf of the firm. As explained
above that there is presence of agency relationship in mutual and they are liable for the conduct
of each other which subsequently create a fiduciary relationship between them. The common law
as well as legislation laid emphasis on the duties of a partner. The part 3 of Partnership Act 1981
defined the agency relationship of the partners with each other. The provision of Section 31 of
the Partnership Act 1981 (hereinafter referred to as an act) states that it is the duty of each and
every partner to provide the true and fair accounts of the firm which may also affect the interest
of other partners in the environment.
The section 32 states that partners that are acting in behalf of the firm should proceed in a fair
manner and should not make any secret profits. Transactions made under the name of the
business should be informed to other partners as well. Also, it should be noted that a partner
should not work on any personal business that can be a competitor for the partnership firm9.
Under the section 33 of the act, if a partner performs such act then they need to return all the
profits earned by their personal business to the partnership business. This is one of the statutory
liabilities that a partner owes to other partners. Further, in case of Birtchnell v Equity Trustee,
8 Rebel Cole and Sokolyk Tatyana, "How do firms choose legal form of organization?." 31st Australasian Finance
and Banking Conference. 2018.
9 Law Insider, Liability of Partners Sample Clauses (Web Page) < https://www.lawinsider.com/clause/liability-of-
partners>

Corporation and Business Structure 5
Executors & Agency Co Ltd10, it was explained that the partner should not perform any action
that contradicts with the best interest of the business. The common law states that every partner
of the company should perform all the actions fairly and they should not make undue advantage
of their position held in the business11.
Further, talking about the duties of the directors of the company, it should be noted that the
Corporation Act of 2001 is the main legislation of Australia that evaluates the duties of the
directors. The duties of general director are explained in the sections 180 to 183 of the
Corporation Act 2001. Section 180 of the act explains that it is the responsibility of every
director and officer of the company to perform all the actions diligently with care. The section
181 section explained that every officer and director of the company needs to perform duties that
are in the best interest of the company and are purposeful.
The Directors of the company should be held responsible for the company, thus they are the
people who make crucial decisions in favour of the growth and financial position of the
company12. Being placed on such a position, there are higher chances that they can misuse their
position in the company. The section 182 forbids such action as according to this section, no
officer or director make use of their position in the company to attain personal gains in a
wrongful manner or to provide benefits to other people who can harm the activities of the
company13. These people cannot make use of price sensitive information for their personal gains
that can affect the activities of the company. Along with the general duties, the officers and
directors also hold special duties in the environment. Section 191 of the act states that the
transactions in which personal interest of the director are involved so it becomes the duty of the
director to disclose such information to the other directors as well. The section 588G explains
that it also becomes their duty to not involve in such transactions during the period of
insolvency. Similarly in case of the partnership firm, the directors are liable to provide an
independent as well as informed judgement while performing their duties in the business14. The
section also explained that the directors of the Australian companies also need to disclose their
10 (1929) 42 CLR 384
11 Classic.austlii.edu.au, Partnership Act 1958 - SECT 34 (Web
Page) <http://classic.austlii.edu.au/au/legis/vic/consol_act/p84a1958135/s34.html>.
12 Malcolm Burrows, Director’s duty to prevent insolvent trading (Web Page) <
https://www.dundaslawyers.com.au/directors-duty-to-prevent-insolvent-trading/>.
13 Lawhandbook.sa.gov.au, General Duties of Directors - Corporations Act 2001 (Cth) (Web Page)
<https://lawhandbook.sa.gov.au/ch05s04s02.php>.

Corporation and Business Structure 6
actions and personal benefits while working in behalf of the corporate. Division 3 of the act halts
the activities that are related to secret profits and insider trading. According to this provision, the
price sensitive information should be used in favour of the business only and not to provide
personal gains in the environment.
Bibliography
Books and Journal
Case Laws
Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 384
Polkinghorne v Holland 1934 51 clr 143
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Legislations
Corporations Act 2001 (Cth)
Partnership Act 1958 (Vic)
Books and Journal
Shawn Bayern, The Implications of Modern Business–Entity Law for the Regulation of
Autonomous Systems. European Journal of Risk Regulation 7.2 (2016): 297-309.
Leslie Corwin, and Ciampi Arthur, Law Firm Partnership Agreements. Law Journal Press, 2018.
Rebel Cole and Sokolyk Tatyana, "How do firms choose legal form of organization?." 31st
Australasian Finance and Banking Conference. 2018.
14 Legal Nature, What Is Your Liability In a Partnership? (Web Page) < http://help.legalnature.com/articles/what-is-
your-liability-in-a-partnership>

Corporation and Business Structure 7
Other Source
Malcolm Burrows, Director’s duty to prevent insolvent trading (Web Page) <
https://www.dundaslawyers.com.au/directors-duty-to-prevent-insolvent-trading/>.
Classic.austlii.edu.au, Partnership Act 1958 - SECT 34 (Web
Page) <http://classic.austlii.edu.au/au/legis/vic/consol_act/p84a1958135/s34.html>.
Business.gov.au, What are the set-up steps and costs? (Web Page)
<https://www.business.gov.au/change-and-growth/restructuring/sole-trader-to-a-company/
difference-between-a-sole-trader-and-a-company/what-are-the-set-up-steps-and-costs>.
Lawhandbook.sa.gov.au, General Duties of Directors - Corporations Act 2001 (Cth) (Web Page)
<https://lawhandbook.sa.gov.au/ch05s04s02.php>.
MyLawyer, Liability of existing partners (Web Page) < https://www.mylawyer.co.uk/liability-of-
existing-partners-a-A76058D76098/>.
Legal Nature, What Is Your Liability In a Partnership? (Web Page) <
http://help.legalnature.com/articles/what-is-your-liability-in-a-partnership>
Law Insider, Liability of Partners Sample Clauses (Web Page) <
https://www.lawinsider.com/clause/liability-of-partners>