Costs of Business Structures

This document discusses the set-up and administration costs of different business structures, including sole traders, partnerships, and companies. It explains the registration costs, compliance procedures, and management responsibilities associated with each structure. It also explores the liability of partners and individuals in contracts with outside parties and the duties owed by partners and directors in these entities.

CORPORATIONS and BUSINESS STRUCTURES
TERM 1

Part A
This segment is descriptive of the various set up and administration costs of the different business
structures namely the sole traders, partnerships and proprietary companies.
The sole proprietorship is the simplest and basically an unincorporated business structure which
is managed and owned by single individual, thereby leading to no distinction between the
business and its owner in terms of burden. The business structure involves the least cost in terms
of registration, administration and compliance in later on years. The registration costs involves
that of obtaining the business name. The cost for same amounts to $36 for one year or $84 for
three years1. In this business structure, the whole burden on management of affairs and financing
lies on the sole owner itself.
The partnership firms refers to an association of the people or the entities running a business,
sharing of the income. The business structure is comparatively easier and less expensive to that of
company. Some of the associated set up compliance costs in the partnership are mandatory
requirement to obtain an application of an Australian Business Number (ABN). The partners
jointly manage the affairs of the firm. The administrative costs are little more than the sole
ownership.
The company set up involves the maximum set up costs, with the procedural compliance like that
of registering a company with the Australian Securities and Investment Commission (ASIC).
Further, the company must obtain a business name, the cost of which is $488 for a proprietary
limited company by filling the form 2012. This is followed by the Australian Company Number
(ACN) registration, other associated legal costs such as cost of underwriting, solicitor fees and
others. In addition, the administration costs are maximum because of the complex compliance
procedures applicable. The shareholders transfer the power in hands of board of directors for the
management of business operations3.
1 Department of Industry, Innovation and Science, Set-up steps and costs for a sole trader and a company (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>
2 Australian Securities & Investment Commission, 201 Application for registration as an Australian company
(Web Page) < https://asic.gov.au/regulatory-resources/forms/forms-folder/201-application-for-registration-as-
an-australian-company/>
3 Queensland Government, Company business structure (2019) < https://www.business.qld.gov.au/starting-
business/types-legal-structures/legal- structures/company>

Part B
The following segment describes the differences in the liability of partners to the liability of
individuals involved in a proprietary company under contracts entered into with outside
parties.
Under the Australian law, a partnership is referred to an association of persons who carry on
business which implies a repetition of acts, with a common view to earn profits. It is significant to
note that the Partnership Acts in each State apply to regulate certain rights and obligations of
partners. It is significant to note that for the matters with respect to the relationships between
the partners, the contract governing the partnership will set out the individual duties and
liabilities. The partners may decide to state out the governance duties, profit sharing terms,
remuneration conditions, and other incidental issues such as financial control, terms of
retirement in the said partnership deed. Nevertheless, in absence of the said agreement the
principle of equity and Partnership Acts govern the relationship between the partners.
However, it is essential to note that the partnership deed cannot amend the liabilities of the
partners as against the outside parties, as set out in the statute4. According to the section 12 of
the Partnership Act, 1891, every partner of a firm is jointly and severally liable for the debts
and obligations of the firm5. Thus, the act places a joint liability on all the partners for the
debts and obligations concerning the firm’s business that are incurred during their
involvement of the partner in the partnership. This means a partner will be liable to the
outsiders even when the debt is incurred without their knowledge by the other partners. The
principle was established in the case law of Mercantile Credit Ltd v Garrod6 as well. Thus,
the acts give the benefit to the outsiders who deal with one partner of the firm to presume that
all the partners will be equally and totally liable, thereby making the partners legally and
individually able to be sued under the said contracts. This is in addition to the partner’s estate
also being held liable for the unsatisfied portion of the debts and obligations.
The liabilities of the individuals involved in the proprietary limited companies are registered
under the Australian Corporation laws and are thus governed by the Corporations Act, 2001,
as applicable on the companies7. It is significant to note that a company is a separate legal
entity in the eyes of the law and is distinct from its members. The principle is widely
4 Partnership Act 1891.
5 Austlii, Partnership Act 1891 - Sect 12 (Web Page)
<http://classic.austlii.edu.au/au/legis/qld/consol_act/pa1891154/s12.html>
6 Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
7 Pamela Hanrahan, Ian Ramsay & Geof Stapledon, Commercial Applications of Company Law (Oxford
University Press, 20th ed, 2019).

accepted in the popular case law of Salomon v A Salomon & Co Ltd 8and Lee v Lee’s Air
Farming Ltd9. The principle gives rise to one of the chief advantages of the company form of
business structure, that is the shareholders of the company or the actual owners’ liability may
be limited to the unpaid amount of the share capital, on the shares prescribed them, as
specified in section 9 of the Act. It must be noted that there is no requirement on the part of
the owners to pay the contractual obligations of the outsiders, or wrongful acts, debts and
negligence, on account of the corporation. This implies a shareholder cannot be sued by the
third parties to in the form of seizure of their personal assets to pay company debts. Thus,
the shareholders of a company enjoy limited liability in a company unlike in the partnership
and the sole proprietorship forms of businesses.
However, it must not be construed that the shareholders can never be held liable. The
principle of the lifting of the corporate veil refers to a situation where the shareholder is held
liable for its corporation's debts despite the rule of the separate personality and the limited
liability10. The said piercing of the corporate veil is applicable in the situations where the
anything illegal or fraudulent is being carried out in the name of the business functions of the
company.
Hence, it can be stated that while the partners of firm can be individually sued for the
obligations, the owners of the company is limited to the extent of share capital held.
Part C
The following segment is descriptive of the duties owed by partners to each other and the
duties owed by directors in companies.
The duties of the partners towards the other partners and the firm, as stated under the sections
of the Partnership Act, 1891 are elaborated as follows. The section 31 of the act states that the
partners of the firm have a duty to render the true picture of the accounts and the full
information of the all the material things that affect the operations of the partnership11. The
duty of the said disclosure is not only applicable towards the other partners of the firm, but
also towards the partner’s legal representatives. Further, the section 32 of the act states that it
is the duty of the every partner of the firm to account for the benefit derived by the partner
from any transactions without the knowledge of the remaining partners, concerning a
8 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
9 Lee v Lee’s Air Farming Ltd [1960] UKPC 33
10 Austlii, Piercing the veil on corporate groups in Australia: The case for reform (2009) <
http://www5.austlii.edu.au/au/journals/MelbULawRw/2009/13.html>
11 Partnership Act, 1891, sec 31

partnership property or matters of business connection12. This is because the partners are in a
fiduciary relationship with each other as stated in the case law of Birtchnell v Equity Trustee,
Executors & Agency Co Ltd13. It must be essentially noted that the duty of the partners is not
only limited while the operation of the partnership, but are also applicable when the
partnership has been dissolved by the death of a partner. Thus, before the accounts have been
completely settled in relation to the partnership, the duty shall prevail. Further the section 33
of the act ensures the duty on the part of the directors to ensure that he or she does not carry
similar business as that of the firm, and thus compete with the firm without the consent of the
other partners. In addition to the above, if the partner enters into such a competition, it is his
duty to account and redeem the profits arisen out of such competitive business14.
It is significant to note that the duties owed by the directors are categorised in general duties and
other duties as set out in the various sections of the Corporations Act. The four primary or the
general duties of the directors are stated out in the sections 180. Further, the fiduciary duties
are mentioned in the section 181 to 183 of the act15. These duties are to ensure the fair and
legitimate management of the company on behalf of the shareholders or the beneficiaries.
These sections involves duties on the part of the directors to ensure to act in good faith and to
exercise the professional conduct while taking due diligence and care in the managerial
functions. Further, the directors of the companies must not involve in a situation of conflict of
interest where there is an improper use of the power and information, which is obtained
during the course of discharge of the management duties of the company. In case the
directors take the shield of company’s corporate veil, they can be held personally liable as
well as stated in the case of Gilford Motor Co Ltd v Horne16. Some of the other duties of the
directors of the corporations, to safeguard the interest of other stakeholders are listed in
various other sections of the act. For instance, the directors under the section 199 are required
to maintain the proper financial books and records of the companies to ensure transparency,
and the disclosure of personal interests of directors is required under the section 208, to the
market17. In addition, the section 588G safeguards the investor interest by requiring the
directors to ensure that the company does not enter into the insolvent trading practices and to
12 Partnership Act, 1891, sec 32
13 Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 384
14 Partnership Act, 1891, sec 33
15 Australian Institute of Company Directors, General meetings of members (Web Page) <
https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-4-6-
director-tools-me-agms_a4_web.ashx>
16 Gilford Motor Co Ltd v Horne [1933] All ER 109
17 Corporations Act, 2001, s208

disclose the information that affects the share prices to protect the interests of investors18. It
must be further noted that in order to ensure that the integrity in the management functions is
maintained by the directors, the directors are make further responsible personally, if they fail
to act in a responsible manner for the shareholders and the other stakeholders of the company.
The principle has been established in various hearings as well such as in the case of the ASIC
v Sino Australia Oil and Gas Limited19.
Thus, as per the discussions in the previous parts, it can be stated that various duties and
responsibilities have been laid down for the partners and the directors of the company in the
respective acts to ensure that the interests of the various associated stakeholders and the outsiders
for these entities are safeguarded.
18 Corporations Act, 2001, sec 674
19 ASIC v Sino Australia Oil and Gas Limited [2016] FCA 42