Business Structures: Sole Trader, Partnership, and Proprietary Company

This document provides an overview of three business structures - sole trader, partnership, and proprietary company. It explains the liabilities, costs, and legal requirements associated with each structure. The document also includes relevant case studies and legislation references.

Running head: CORPORATIONS AND BUSINESS LAW
Corporations and Business Law
Name of the Student
Name of the University
Author Note

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Part A
A sole trader refers to a business structure where the business owner and the personality of
the business are regarded to be one and the same. The varied liabilities that are incurred by
this particular business are construed as personal liabilities of the owner of the business
largely because of the fact that the business or the enterprise is considered to be one single
entity. The different types of laws that usually govern such businesses are those that may be
found in the Australian Fair Work Act dated 20091. The expenditures and the business costs
that are associated with such an enterprise are far more economical compared to the
expenditures and business costs associated with other types of businesses. A number of
regulations and legislations need to be in place for the adequate running of a sole trader
business such as registration, license and permit, all of which have to be complied with,
however, adhering to which is quite a hassle free experience. Similarly, working capital
needed for running such a business is also quite nominal in value.
A partnership refers to a type of enterprise where two people are needed for forming and
running the business with success. Incorporation is never considered to be the main requisite
when it comes to a partnership. Partners are expected to hold financial resources jointly under
the business name in order to create a single entity. In fact the most important feature of such
a business structure is the fact that profit distribution is accrued by the business partners in
keeping with the agreement drawn up between these business partners for this purpose. The
establishment costs associated with the setting up of a partnership business are low as are the
expenses involved in its setup. The partners are also jointly liable for any and every liability
that is incurred by such a business.
1 The Fair work Act 2009 (Cth)

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A proprietary company happens to be a type of business where the business is
constituted as a legal entity that is separate from the managers and the owners of the same
business. The managers of the enterprise and even its owners for that matter are not liable for
any of the liabilities that happen to be incurred by the business. It is the shareholders in a
proprietary business who incur liabilities based on how much it is that they have contributed
to share capital. Such business structures require plenty of capital in order to operate, much of
which can be raised through the successful sale of shares. Disclosure requirements and legal
compliances tend to be quite complex when it comes to the proprietary business2. The
distribution of profit takes place through the announcement of dividends.
Part B
Business partnerships are created by two people at a minimum with the intention of
running business operations for the purpose of generating and earning profit. The partners in
such a business become jointly liable for debts and liabilities that may be incurred by their
firm. Financial resources of both partners are combined for setting up the business. It is the
Partnership Act dated 19613 that governs most of the laws pertaining to the running of a
partnership business. Liabilities that are incurred by the business are the same for both
partners as the business is viewed and treated as a single entity, even though it has been set
up by more than one person. Third parties that are involved in transactions pertaining to
partnership businesses can always hold the firm or the partners jointly liable, always
imposing their own interest upon them4. It is also possible for third parties to initiate
proceedings against such partners if any wrongful breach has been committed on the part of
the latter. This is something that is quite evident when one looks at the case of ofJohn Grimes
2Eisenberg, Melvin Aron. "Legal models of management structure in the modern corporation: Officers,
directors, and accountants."(2017) Corporate Governance. Gower. 103-167
3The Partnership Act 1961 (Cth
4Barry, Norman. Business ethics. Springer, 2016.

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Partnership Ltd v Gubbins5. In this case the main requisite for partnership identification is
profit distribution as earned by the partners of the business in accordance with agreement.
Expenditures incurred by the partnership are minimal as are the establishment costs that need
to be met for setting up the business. The expense liability that has to be incurredfor setting
the business up is to be shared by all the partners of the business in equal measure. Apart
from being liable, jointly, for the different liabilities that could be incurred by the firm in
course of its operations, losses associated with a partnership business are also mitigated by
distributing such losses among the partners of the business in accordance with what may be
termed as a profit sharing ratio. When it comes to matters such as insolvency, all liabilities
concerning the business partners or incurred by them are going to be unlimited in value. It
should be noted as well that partners share a relationship which is similar to that of an agency
with the firm.
On the other hand, a company is perceived as an entity that is legally separate from its
directors and its shareholders. The managers and owners of the company are likely to be in
any way affected by the liabilities that are incurred by the company. Liabilities can be
incurred by the shareholders of the business based on the amount of money or the capital that
they have invested in the business. In order for a company to run a lot of capital is needed,
which is for the most part raised through the marketing of shares. Legal compliances as well
as disclosure agreements tend to be a bit complex in nature for such a business type. Profit
distribution takes place by announcing dividends. The directors of the company are solely
responsible for the management of the company but are not liable for the liabilities that are
incurred by this company, provided they are acting entirely within the purview of the
authority that has been entrusted to them. Such a concept is one that has evolved from the
5John Grimes Partnership Ltd v Gubbins[2013] EWCA Civ 37

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well known case of Salomon v A Salomon and Co Ltd6. If directors are found to be acting
beyond their scope of authority, then they will be subjected to personal liabilities. Directors
on the other hand who act only within their scope of authority can carry out transactions that
are binding in nature on both the company as well as its shareholders. Such a business falls
within the purview of the Corporations Act dated 20017. The directors of the company who
are responsible for the running of the company are to act in compliance with the different
provisions of this Act and other related legislations. Breach of duties on the part of the
directors will result in penalties being imposed on the directors in accordance with the
provisions of this Act. Such a predicament is one that is evident from the case of ASIC v
Lindberg8where directors were penalized by the court of law by being slapped with fine
amounting to as much as a hundred thousand dollars in addition to being debarred from
managing the company for a period as extensive as two years.
Part C
Partnership is a business structure where two people are needed for setting up and
running the business jointly, and for which incorporation is never regarded as the main
requisite. The financial resources that are needed for the running of the business are to be
held jointly by the business partners for the purpose of creating one entity. The most
important feature of this particular business is the fact that profits get distributed among the
partners of the business in accordance with agreement. Expenditures are simple and
establishment costs are low when it comes to the partnership business. The liabilities of the
business are to be jointly incurred by the business partners and are treated as their personal
liabilities. This is primarily due to the fact that the firm is treated is one single entity and the
6Salomon v A Salomon and Co Ltd[1897] AC 22
7The Corporations Act 2001 (Cth)
8ASIC v Lindberg [2012] VSC 332

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identity of the business partners is not one that is separate from the identity of the firm. Such
liabilities are developed for the partners of the firm for all types of business transactions that
are carried out by the firm, with the firms being treated as single entities. Third parties that
tend to become involved in any sort of transaction with the firm are capable of holding the
firm liable jointly and can also at the same time enforcing their interest upon the partners and
the firm. If there are wrongful breaches that are committed on the part of the partners, then
the third parties can always initiate proceedings against them. The most important requisite
when it comes to partnership identification is the manner in which the profits are distributed
based on the revenue that is earned by the partners of the firm and in accordance with the
agreement that is drawn up among them for this purpose. The expenses that are involved in
the setting up of a partnership business happen to be very low and the same applies for the
establishment costs that are involved in the running of a partnership business. Apart from
being jointly liable for all of the liabilities that may be incurred in the process of running
business operations, the losses that are normally incurred by a partnership business tend also
to be mitigated with the amount of loss that is incurred being shared among the partners of
the business based on the profit sharing ratio that has been decided upon by the partners of
the business.With regard to insolvency, it is important to remember that the liabilities
pertaining to the partners of the business shall be of an unlimited nature and that the
relationship that is shared between the partners may be construed as an agency relationship.
This is something that has been illustrated very well in the case of ASIC v Healey &Ors
[2011] FCA 717.9
It is not mandatory for shareholders to engage in running the affairs of the company
even though they own the company. It is the directors of the company who are expected to
manage the company’s affairs. If the company directors act within their scope of authority,
9ASIC v Healey &Ors [2011] FCA 717

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then they will not be subjected to the liabilities that may be incurred in the running of the
company. They will be personally liable for such liabilities only if they act outside of the
scope of authority that they have been entrusted with10. Directors who act within the scope of
authority can engage in or carry out transactions that are binding on the company as well as
its shareholders. It is the Corporations Act of 200111 which governs such a business. It is
expected that the directors of the company act in compliance with the provisions of this Act
and related laws. The provisions of the Act require directors to act in the best interest of the
company always, something that is easily evident in the case of ASIC v Vizard12. It is
expected that directors will be reasonable and diligent in their approach to company matters.
Proper accounts of the company’s financial affairs have to be disclosed to the shareholders of
the company by the directors for the sake of transparency. Directors are strictly prohibited
from performing acts that are likely to be detrimental for the interest of the company.
Information that is made available to the director of the company with regard to company
matters needs to be kept confidential by the director and must be disclosed by the director as
well in as discreet a manner as possible.
10, Stephen. The constitutional corporation: Rethinking corporate governance. (Routledge, 2016).
11 The Corporations Act 2001 (Cth) s180
12ASIC v Vizard (2005)145 FCR 57

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Transcript
 I was asked to suggest a client regarding the business structure that he is supposed to
undertake.
 He did not have any idea regarding the several business structuresthat he can choose
from.
 I have explained the business structures that he can effectively establish and which
will be more convenient for him.
 He wanted to start a business alone, so the first business structure that is
recommendable is the sole business.
 This is the business structure where the business owner and the personality of the
business are regarded to be one and the same.
 The varied liabilities that are incurred by this particular business are construed as
personal liabilities of the owner of the business largely because of the fact that the
business or the enterprise is considered to be one single entity.
 The expenditures and the business costs that are associated with such an enterprise are
far more economical compared to the expenditures and business costs associated with
other types of businesses.
 A number of regulations and legislations need to be in place for the adequate running
of a sole trader business such as registration, license and permit, all of which are to be
complied with, but adhering to which is quite a hassle free experience.
 Working capital needed for running such a business is also quite nominal in value.
 Another business structure that can be mentioned in this context is the partnership.
 A partnership refers to a type of enterprise where two people are needed for forming
and running the business with success.

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 However, in this case, this form of business, the primary requisite will be at least two
people to form the business.
 But in this case, the client wanted to start the business alone.
 This would strike out the possibility of adopting partnership.
 Another structure that he may seek resort to is the proprietary corporations.
 A proprietary company happens to be a type of business where the business is
constituted as a legal entity that is separate from the managers and the owners of the
same business.
 In this form of business, the managers of the enterprise and even its owners for that
matter are not liable for any of the liabilities that happen to be incurred by the
business.
 The managers of the enterprise and even its owners for that matter are not liable for
any of the liabilities that happen to be incurred by the business.
 It is the shareholders in a proprietary business who incur liabilities based on how
much it is that they have contributed to share capital.
 However, in this form of business a plenty of capital is required in order to operate.
 This can be construed to be burdensome to a person.
 Butmuch of this capital can be raised through the successful sale of shares.
 This would shift the liability of the raising of capital to others.
 In this form of business, if the company directors act within their scope of authority,
then they will not be subjected to the liabilities that may be incurred in the running of
the company.
 In this kind of business structure, the directors would not be held liable for the
liability of the company.

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 The owners and the managers of this form of business enjoys more immunity than any
other form of businesses.
 All these factors will render the establishment of a corporation by the particular client
to be more recommendable than the other forms of businesses.
 Hence, I have recommended him to establish a company.