Corporation and Business Structure: Advantages, Disadvantages, and Recommendations

This report discusses the advantages and disadvantages of different business structures such as partnership and corporation. It provides recommendations on which structure to choose and explains the significance of the ASIC v Adler case. The report also covers the legal requirements and characteristics of each structure.

Running Head: BUSINESS AND CORPORATION LAW 0
Corporation andbusiness
Structure
LAWS20059 – TERM
2, 2018

Corporation and Business Structure
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Contents
Part 1:- A report on research describing the two business structures..............................................2
Part 2 (A) Weighing up the advantages and disadvantages of the two alternatives........................4
Part 2 (B) Recommendations...........................................................................................................7
Part 3:- Significance of the case, ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72,....................7
Part 4:- Video Transcript..............................................................................................................10

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Part 1:- A report on research describing the two business structures
A person can run his/her business in many forms. Several business structures are there that a
person can choose while initiating or carrying his/her business. Sole Proprietorship, Partnership,
and corporations are the lead kind of business structures. Where a Sole Proprietorship is a
business form that consists of a single person, Partnership Firms and Corporations are more
organized in a structure.
As the lead focus of this report is to provide a glance over Partnership Firm and a Corporation, to
the client, therefore the following discussion is focused on these two terms.
In order to describe two of the aforesaid business structures i.e. Partnership Firm and a
corporation, this can be stated that Partnership is an association of at least two or more than two
of the persons. Such Persons are known as Partners of the firm. This form of business can be
termed as mid-way of Sole Proprietorship and corporations. Law is an important factor to discuss
here. On every Partnership Firm of the nation, a specific Partnership Firm Act does applicable1
Every state has it is a separate act, legislation and set of rules to regulates partnership firms over
there. However, all such acts consist of almost same rules. Partnership Firm has many
characteristics and it is advisable to know all of them before starting the business under this
structure. This is to inform that in a Partnership two or more than two people come together to
carry out a business for a profitable purpose2. Profit is a necessary term across the partnership. If
two or more people doing some act together but that is not for a commercial purpose then their
relationship cannot be, understand as Partnership.
1 Business.gov.au., Partnership (2017) <https://www.business.gov.au/info/plan-and-start/start-your-business/
business-structure/business-structures-and-types/partnership>.
2 Businessdictionary, Partnership (2018) <http://www.businessdictionary.com/definition/partnership.html>.

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After understanding the crucial, meaning of partnership, the requirement of law in this area is
also a significant element to discuss. Every Partnership Firm requires to get a separate Tax File
Number3. Further, this form of business also requires the lodgment of a partnership tax return
with Australian Taxation Officer every year. In addition to this, some more law requirements are
there in the Partnership Firm. In conjunction with, a partnership agreement will also be there
between the partners of the firm, which will define the roles and responsibility of every partner
and the nature of the relationship with other partners and firms4. A partnership can be unlimited
or a limited one. Under the limited partnership, liabilities of the partners remain limited up to the
level of capital they have introduced to the firm5. In an overall view, Partnership is a type of
business on that a law is applicable and partners thereof act on behalf of the firm.
Corporations are the more organized structure in comparison to Firm. A well-defined legislation
is applicable on every corporation incorporated in Australia and that is known is Corporations
Act, 20016 (Cth). This act provides all the provisions related to companies and it is working in
the nation. In a Corporation, two bodies are there, one is ownership, and another one is
Management. This is a wider term. In addition to Corporations Act, 2001, listing rules will also
be applicable on the company if the same will list itself on Australian stock exchange. It was
held in the case of Salomon v A Salomon & Co Ltd7 that a Company is always a separate legal
personality until unless a director is not acting beyond the provided powers. The act has it is of
great significance as, on the basis of the provisions of the same, the courts provide decisions in
3 Austrlian taxation office, Partnership (2018) <
https://www.ato.gov.au/business/starting-your-own-business/before-you-get-started/choosing-your-business-
structure/partnership/>.
4 Constance E. Bagley, Managers and the Legal Environment: Strategies for Business (Cengage Learning, 2018)
608.
5 Legalvision, What is an Incorporated Limited Partnership (6 November 2016) < https://legalvision.com.au/what-
are-incorporated-limited-partnerships/>.
6 Corporations Act, 2001 (Cth).
7 [1896] UKHL 1, [1897] AC 22.

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the cases. Unlimited life is another concept of this business structure8. A company has it is
perpetual succession and the same cannot end without the process of winding up and
Liquidation. Many of the cases have reported related to corporations and they have set some
general principals and Legal Precedents. The aforesaid discussion was a try to provide a general
overview to the client about Partnership firm and a Corporation.
Part 2 (A) Weighing up the advantages and disadvantages of the two alternatives
This part is expected to provide updates on advantages and disadvantages of both the discussed
aspects i.e. partnership and a corporation. As client needs an advice about the fact that which
business structure will be suitable to them, therefore in order to provide a reasonable advice, the
following report is submitted herewith, that consist of following
1. Advantages and Disadvantages of a partnership
2. Advantages and Disadvantages of Corporation
3. Recommendation/ Advice
Advantages of Partnership:-
1. Costs are very few for the establishment of a Partnership firm except in case of limited
liability partnership9. Unlike a company, no legal expenditures are need to pay while
forming a partnership firm.
2. Changes are liberal; partners can come and go. At the time of addition or reduction of a
partner, partnership agreement needs to be amend. No other specific formalities are
required to do.
8 J. Chris Leach and Ronald W. Melicher, Entrepreneurial Finance (Cengage Learning, 6th ed, 2016).s
9 George Vozikis et al, Entrepreneurship: Venture Initiation, Management and Development (Routledge, 2014) 281.

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3. Amendments are easy in legal structure. The same does not attract so much legal
expenses10.
4. Business details remain private as financial statements are need not to be published on a
public platform.
5. In case of Limited Liability partnership, liability of partners remains limited up to their
ratio.
6. Dissolution of partnership is very easy11. Partners can decide about winding up of their
business and can easily go ahead with the same without many of the legal formalities.
Disadvantages of Partnership
1. Liability of partners is unlimited. Personal property of partners can be used to pay off the
debts of the firm, in case of insolvency.
2. Partners of a firm are jointly and severally liable for the firm. If the partnership is, a
traditional partnership rather than limited liability partnership then partners will be held
personally liable for all the debts and dues of their partnership business12.
3. In case of non- registration of the firm, there are high chances of disputes. Partners can
disagree with the opinion of other partners and in case of non-registration, trust cannot be
held prove.
4. Businesses have an impact of addition and reduction of partners.
5. In case of loss, there are disputes in the firm as no one wants to share the loss as profits.
10 business.tas.gov.au, Partnership – advantages and disadvantages (27 February 2017) <
https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/partnership-advantages-and-
disadvantages>.
11 A.S. Siddiqui, Comprehensive Accountancy XII (Laxmi Publications, 2010) 300.
12 Irene Lynch Fannon and Karole Cuddihy, Corporations and Partnerships in Ireland (Kluwer Law International,,
2010) 311-313.

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Corporations are also a well-defined business structure that governs by a number of rules, acts,
and authorities. Similar to any other business form, this business form also has it are positive and
negative aspects, which are mentioned hereunder:-
Advantages of Corporations:-
1. Limited Liability is one of the greatest advantages of this business form. Liabilities of
directors are limited up to their role and they can be not be held liable for any act they do
on behalf of the company until unless they do something beyond the charter of the
company.
2. In the case of a public company, funds can be raised from the public and therefore the
issue of lack of capital does not exist there13.
3. A Corporation has an unlimited life. The right into share passes from generation to
generation of investors14.
4. Shares in a company are a transferable asset and members can easily sell them for money
whenever they want.
Disadvantages of Corporations:-
1. Formation of a company requires more money and time in comparison to the partnership.
2. In the case of corporations, many legal formalities are there that are quite difficult to
manage.
3. Separation of ownership and management creates a conflict of interest between
shareholders and directors of the company.
13 Justia, What are Some of the Advantages or Disadvantages of Forming a Corporation? (2018) <
https://www.justia.com/business-formation/docs/corporation-advantages-disadvantages/>.
14 AccountingTools, Corporate advantages and disadvantages (23 august, 2017)
<https://www.accountingtools.com/articles/corporation-advantages-and-disadvantages.html>.

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4. Accounts of the corporation need to submit and publish to ASIC that is an open platform
and anyone can access the financial statements of a company15. This thing does not leave
the secrecy of a company and sometimes affect the performance of the company.
Part 2 (B) Recommendations
In the given case, clients are members of the same family. It is assumed that they have a
trustworthy relation in between and no cases of disputes will be there as they have mutual trust.
In such a situation, it is to advise to use the partnership model for the business. As major
disadvantages of this form are that there can be disputes among partners, which is not expected
in case of the targeted client, therefore it is recommended to start their business in form of
partnership. Corporate will attract many of the liability and cost. Further, duties of directors are
defined in case of the corporation, breaches of the same attract a heavy penalty, and hence
recommendations are provided in favor of partnership.
Part 3:- Significance of the case, ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72,
This is to inform the client that Sections 180 to 184 of Corporations Act, 2001 are very important
sections. These sections provide the duties that a director and officer need to perform during their
tenure. Many of the cases have reported in the past in which it was noted and observed that
directors of the company have breached the duties stipulated under the act. In conjunction with
the duties, penalty provisions are also prescribed under the act for such breach. Case ASIC v
Adler16, is one of the significant cases of this area. The case along with the duties and
responsibilities of directors mentioned under the act is prescribed in the following discussion.
15 Australia, Australian Consumer Credit Legislation (CCH Australia Limited, 2010) 74.
16 (2002) 20 ACLC 576; 41 ACSR 72.

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In the case of ASIC v Adler, a company named HIH Casualty and General Insurance Ltd (HIHC)
has provided an unsecured loan worth $10 million to another company named Pacific Eagle
Equity Pty Ltd (PEE). The control and management of PEE were with a person named Adler.
Adler owned another company “Adler Corporation Limited” (hereinafter referred as ACL) which
was a shareholder of HIH. Adler was also a non-executive director via “Adler Corporation
Limited” in which he was a non-executive director. After the aforesaid Loan, PEE as become a
trustee of Australian Equities Unit Trust (AEUT). By the money of said loan, PEE has purchased
shares of HIH of the value worth $4 million. The intention behind this purchase was to show that
HIH is doing well and to mislead the investors of the company. Afterward, PEE has sold out
these shares at a loss worth $2 million. Later on, PEE has also purchased shares of various
companies from ACL and has come out with a loss of $4 million17. All these investment results
in a total loss of money. Further, Adler has received $2 million from AEUT under the mentioned
trust.
All the aforesaid transactions were the planned one and Adler was the person behind all this
strategy. Cause of unethical acts, all the aforesaid companies have faced heavy losses. The
notable point in the case is that shareholders did not approve all such transactions and no
disclosures have made to the board of the companies. Here, Adler being a director of HIH has
breached his duties that were required to comply with on his part. In the decision of this case, the
court has imposed a monetary penalty on Adler and other liable directors so the company.
Further, the court has decided to ban Adler to act as director of the company for the next 20
years.
17 Wolters Kluwer, ASIC v ADLER (No 5), Supreme Court of New South Wales, 30 May 2002 (2018) <
https://iknow.cch.com.au/document/atagUio378952sl10446153/asic-v-adler-no-5>.

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This is a lead case in the history of the Corporations Act, 2001 and enlightens the directors' duty,
their breaches, and provisions related thereto. The significance of this case is very high. The
decision, in this case, ensured that directors need to perform their duties in every situation. In this
case, the director has breached his duties required to perform under sections 180 to 18318.
Section 180 of the act provides that a director of a corporation owns a duty to act with due care
and diligence. It can be stated that under this section of the act requires a director to perform the
delegated duties with sufficient care. In the given case, Adler did not take care of anything while
entering into all the mentioned transactions. On the other part, section 181 of the act says that a
director must act in good faith of the company and use the given power for a proper purpose. The
studied case reminds everyone that what are the requirements of the act and what can be the
result of failures. The decision of the case is far important in order to understand the requirement
of the act.
Further, Section 182 of the act also played an important role in the decision of the case. This
section stops a director of the company by doing improper use of his/her position19. In
conjunction with this, Section 183 of the act consists of the provisions related to improper use of
the available information. According to this section being the management of the company,
directors usually have all the crucial business information but the same must not use such
information for an improper purpose.
Study of this case is a necessity while understanding the importance of section 180 to 184 of the
Corporations Act, 2001 that are related to duties and responsibility of a director20.
18 Sarah Segalla, Checklist for director’s duties (2018) < http://www.findlaw.com.au/articles/1303/checklist-for-
directors-duties.aspx>.
19 Allens, Cases (2018) < https://www.allens.com.au/pubs/itm/jul02/cases.htm>
20 Briefs of Cases, ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171 New South Wales Supreme Court (2018)
<http://helpcasebriefs.blogspot.com/2014/03/ASIC-v-Adler-2002-.html>.

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Part 4:- Video Transcript
Kindly inset link of the video here.