Nature, Characteristics, Advantages and Disadvantages of Partnerships, Trusts, and Companies

This document provides an overview of the nature, characteristics, advantages and disadvantages of partnerships, trusts, and companies. It also discusses the rights, duties and liabilities associated with each business structure. The information will help individuals in determining the most suitable business structure for their organization.

Corporations Law

To: Oliver and Emma
From: Beanstalk
Date: 20/12/2018
Subject: Advising on which business structure would be best for staring the organization
Emma and Oliver have to understand the nature, features, advantages and disadvantages,
rights, duties and liabilities of different business structures. It will help them to determine and
evaluate which business structure would be most suitable.
Nature, characteristics, and advantages and disadvantages of the partnerships
When two or more than two persons are getting involved in any kind of business and sharing
their profit and losses is called partnership. There should be an agreement between the
partners in order to establish a legal relationship. It could be either written or oral form. Both
agreements are equally valid but it is suggested that the partners should go for written
agreement as it helps in avoiding disputes in future. The main objective of the partnership
business is to earn a profit and the profit must be shared between the partners in pre-decided
ratio1. Each partner has equal right to get involved in proceedings of the business. The
business can be maintained by either any one partner or more or by all of them. All partners
are agent and principle as well. As an agent, he/she has the right to bind all other partners and
as a principle, he/she tied by the acts of the other.
There must be a mutual contribution in partnership as a partnership cannot be considered
without the equal investment of money, industrial property or to a common fund. Sharing
profits and losses are the soul of a partnership. Profits are must be shared between the
partners in pre-decided ratio. All assets which have been contributed into the partnership are
being owned by the partnership by the righteousness of its different and clear juridical
personality2. If any one partner is contributing an asset to the business, it will be owned
equally by all the partners in a special sense. Each partner has a right to bind other partners
with a legal contract. There is a limited life in partnership. Death of the partner,
1 Business Victoria, Partnership (2018) Business.vic.gov.au <http://www.business.vic.gov.au/setting-up-a-
business/business-structure/partnership>.
2 Business Guide, Partnership Advantages And Disadvantages - How To Start A Business Guide (2018) How To
Start a Business Guide <http://how-to-start-a-business-guide.com/partnership-advantages.html>.
1

bankruptcy, inability and withdrawal partner or expiration of the agreement may dissolve the
partnership.
The partnership is advantageous in terms of funds as it allows involvement of multiple
owners which helps in raising funds for the business. Two or more partners can be able to
contribute more funds. It also helps in improving efficiency as all the partners can maintain
the goal of the business. The partnership provides a combination of skills of two or more
partners3. It can be considered a wider pool of skills and knowledge. It is also cost- effective
as all partners may be specialized in different aspects of the business. It makes the business
structure flexible and it can be changed at any point in time.
As decisions are being shared there is a high probability of disagreement which may affect
the business. It is for long-term, situations and expectation may change at any point in time
and can take to substantial and disturbing split-ups4. It also has a limited life and it may end
up with the death of the partner or withdrawal of the agreement. It is found that the
partnership can prevent from becoming a large business as it has limitations. It requires more
flexibility, partners need to consult and negotiate before making any decision. The
partnership is also less effective in raising the large amount to capital.
Nature, characteristics, and advantages and disadvantages of the trusts
Trust is a legal relationship where the property is being held by one entity on behalf of the
other. The entity that carries the property known as a trustee and it has some specific duties
according to that role. The entity that's property is being held by the trustee is known as the
beneficiary5. The entity which allows the trustee to hold the property on trust for the
beneficiary is known as settlor. The trustee might have the legal ownership of the property
which is being held by them but he/she is not allowed to apply the property for his/her own
interest. The trustee is responsible to use that property for the interest of the beneficiary.
Trust can be two different types one is express trust and the other one is trust implied by law.
The trust assets are not part of the trustee's own estate as it constitutes a separate fund. The
legal assets of the trust held by the trustee, other people are also allowed hold the assets on
behalf of the trustee. Trustees have been provided with the duty and power, according to that
3 B. R Ananthan, H. R Appannaiah and P. N Reddy, Business Management (Himalaya Pub. House, 9th ed, 2010).
4 Toughnickel, Characteristics Of A Business Partnership (2018) ToughNickel
<https://toughnickel.com/business/CHARACTERISTICS-OF-PARTNERSHIPS-BUSINESS>.
5 Stone Group, What Is A Trust? Different Types Of Trusts | Stone Group Lawyers (2017) Stone Group Lawyers
<https://www.stonegroup.com.au/what_is_a_trust/>.
2

it is responsible for managing employees and disposing of the assets as per the terms and
conditions of the trust and also some special duties have been imposed to him by law6. The
settlor reserves some rights and powers and it allows the trustee to become a beneficiary. It is
compulsorily consistent with the existent of a trust. The most important characteristic of trust
is that it allows making separate legal ownership and beneficial interest.
The growth that takes place in the assets of the trust is fixed in the Trust itself, not in the
personal statement. All the assets of the trust are generally distributed as per the terms and
conditions of the trust. A revocable trust provides an assurance that the property will continue
to be available for the use owners' benefit7. It also provides protection in terms of problems
like mentally or physically not capable of maintaining own affairs. The owner of a revocable
trust can use all the assets while he/she alive and after his/her death it allows the successor
trustee to distribute the assets into the valid beneficiaries. Disabled dependents and children
can be provided with the financial protection with the special needs by a Trust.
The property needs to be registered under the name of trust in order to include the property in
a revocable trust. It might become troublesome as it might cost extra like filing fees. It allows
forcing any beneficiary who is over 18 to leave their credited shares of income in the
business8. It cannot grant the owner with the full control on the assets as other trustees are
also involved in the matter. Trust needs to be registered and it allows its authorities to have
access to it. There is a probability of involving wrong trustees and it may create problems if
the trustees are vying heir. Death of trustee may bring catastrophic outcomes as there is no
one who can take responsibility on behalf of the trust.
Nature, characteristics, and advantages and disadvantages of the companies
A company can be considered as a group of people with the purpose of running a business to
earn a profit. It has two different natures, as a corporation of its members and at the same
time separate from its members as a person. Once the mandatory formalities of incorporation
are completed, a completely new body comes into a role which is different and well defined
6 Donald A Ball, International Business (McGraw-Hill/Irwin, 8th ed, 2013).
7 Frank Mokosak, Advantages And Disadvantages Of Trusts (2014) Desmoinesregister.com
<https://www.desmoinesregister.com/story/money/2014/03/31/advantages-disadvantages-trusts/7141729/
>.
8 Practical Law, Trust (2018) Uk.practicallaw.thomsonreuters.com
<https://uk.practicallaw.thomsonreuters.com/4-107-7416?
transitionType=Default&contextData=(sc.Default)&firstPage=true&comp=pluk&bhcp=1>.
3

by its shareholders and directors9. The money which is being credited by the creditors of the
company can only be recuperated from the properties of the company and from the company
itself. As it is not possible to sue an individual member, similarly, the company cannot be
liable in any way for the debts of any individual member. A company carries its own name,
proceed as per its own name, it also has a seal of its own and even its assets are distinct and
different from its own members.
As per the incorporation law, a company is a separate legal entity from its members. A
company can own property, employ people, borrow money, have a bank account and also
enter into contracts. A member of the company is only liable to pay for uncalled money
which is due on shares occupied by him. If the firm does not have enough assets to pay the
liabilities of the firm, the partners can be forced by the creditors to create good the deficit
from their own assets10. A company cannot be ceased unless it is wounded up or the reason
for which it was created has been completed. Any of the members of the company cannot
claim for becoming an owner of the company or its property as it is a distinct legal entity.
The huge advantage for a company is that the members of the company have financial
security which helps in having easy sleep at night to its members. Companies also get
relaxation on tax as they only pay tax on their benefits. Investors feel safe in putting their
money into a company instead of investing in a partnership or sole trade because the shares
which they purchase are more protected and their liabilities are also limited to their
shareholdings11. Banks give more priority to the companies compare to the partnership or sole
trader which is another advantage. As banks can get more profit from companies, they
introduce easy loan planes to them.
There is a corporation tax associated with companies; it is a tax on the profit of the business.
A limited company comes with a lot of administrative responsibilities such as tax return,
details of the expenses and business account details. It is easy for companies to obtain finance
but still, directors are asked for personal guarantees in order to get a loan from the banks,
which shows that the directors are still liable for the company's debt12. There is a privacy
9 Law, NATURE OF A COMPANY (2018) Law.uok.edu.in <http://law.uok.edu.in/Files/5ce6c765-c013-446c-b6ac-
b9de496f8751/Custom/company_intro.pdf>.
10 Company Formation, Characteristics Of A Company, Essential Characteristics Of A Company (2018) Company-
formation.co.in <http://www.company-formation.co.in/characteristics-of-a-company.php>.
11 Mazuma, Advantages And Disadvantages Of A Limited Company | Mazuma (2018) Mazumamoney.co.uk
<https://www.mazumamoney.co.uk/news/advantages-and-disadvantages-of-a-limited-company/>.
12 Ricky W Griffin et al, Business (Pearson Canada, 5th ed, 2014).
4

issue with companies as the details and accounts are needs to be published publically which
can be accessed by anyone.
Rights, duties, and liabilities associated with partnerships
The partners in the partnership firm have the right to manage the business operations of the
organization. They have the right to express their opinion and consult on any matters
associated with the firm. They can have the access copy and inspect the books of records and
accounts of the firm. The sharing of the profit is to be based on the terms and conditions
stated in the agreement13. They have the right to receive any interest on advances and loans
contributed by them into the firm. A partner has the right to manage the business operations
unless he or she is expelled as per the terms and conditions of the partnership agreement.
They can participate in the decision-making process and their views need to be heard. The
partnership properties can also be used by the partners. The partners have the right to prevent
the entrance of new partners or expelling the existing partners.
The duties of the partners are to carry out the business by applying their skills and knowledge
in order to gain maximum benefits. All partners should be faithful and honest while carrying
out their duties. They should provide all the information associated with the firm without
keeping it confidential. Remuneration is not being entitled to the partners for operating the
firm14. However, the working partners can receive remuneration on the basis of the
partnership agreement. If any loss is incurred due to the negligence or fraud committed by
any of the partners then such partner has to compensate for the loss to the firm. The partners
can use the property for the business purpose and not for personal benefit. If any partner
earns personal profit from any transaction then such profit need to be accounted or pay to the
firm15. The loss needs to be shared equally by the partners of the firm. All the partners would
be liable for the actions of the third partners. A partner cannot transfer or assign interest of his
partner to the outsider without informing to other partners.
All the partners are jointly responsible for actions taken by the firm. The loss of the firm will
be equally shared on the basis of the terms and conditions. A new partner after becoming a
13 Chinmoy Kumar, What Are The Rights, Duties And Liabilities Of Partners? (2018) Preservearticles.com
<http://www.preservearticles.com/201101153418/rights-duties-and-liabilities-of-partners.html>.
14 Study Points, Explain The Duties, Rights And Liabilities Of Each Partner (2018) Studypoints.blogspot.com
<https://studypoints.blogspot.com/2011/05/explain-duties-rights-and-liabilities_7157.html>.
15 Varun Sharma, Partnership: Definition, Rights And Duties Of Partner (2018) Your Article Library
<http://www.yourarticlelibrary.com/accounting/partnership-account/partnership-definition-rights-and-duties-
of-partner/54055>.
5

partner would be liable for all his or her actions16. The insolvent partner’s property is not
liable for the obligations of the organization. If the organization suffers losses due to the
death of a partner then the deceased would not be liable for the damages. A retired partner
would not be responsible for the actions or operations of the firm. All the partners would be
equally liable if a partner commits any fraud.
Rights, duties, and liabilities associated with trusts
The right of the trustee is not personal in nature rather it is associated with the management
of the trust. If the beneficiaries of the trust are under a certain age or infants then the trustee
has the right to advance income or capital to the beneficiaries. The trustee has the right to
carrying out the operations of the trust. The trustees have the power to transfer or sell the
property of the trust17. The trustee has the right to claim for the losses not incurred due to his
or her fault. The expenses incurred during the management of the trust can also be paid by the
trustee. Trustee on behalf of the trust can commence litigation. It can be used for recovering
properties owing to trust or debts.
A trustee has to exercise skills and care in managing the trust. Trustees need to carry out the
investment decisions in an appropriate manner in order to avoid any kind of problem. A
balance needs to be maintained between the beneficiaries in capital and income by the trustee
because it can affect their investment decision18. A trustee has to take steps for preserving and
protecting the assets of the trust. Any conflict needs to be disclosed by the trustee. Accurate
account and records need to be kept by the trustees. The trustee should not work for its
personal gain and act in an appropriate manner.
The trustee is being appointed by the court to take his or her position. Without informing the
court or the beneficiaries, the trustee cannot leave his or her position. A trustee is liable
personally for the breach of her or his fiduciary duties19. The fiduciaries duties consist of the
duty of prudence, subsidiary duties and duty of loyalty. The trustee will not able to delegate
16 Soumya Singh, The Rights, Duties And Liabilities Of Partners In A Partnership Firm (2018)
Preservearticles.com <http://www.preservearticles.com/2012022323669/the-rights-duties-and-liabilities-of-
partners-in-a-partnership-firm.html>.
17 Justia, Trustee Duties And Liabilities :: Estate And Probate Law Center :: Justia (2018) Justia.com
<https://www.justia.com/estate-planning/trusts/trustee-duties-and-liabilities/>.
18 Rockwell Olivier, Rights & Responsibilities Of Trustees | Lexology (2014) Lexology.com
<https://www.lexology.com/library/detail.aspx?g=dd59853d-9cac-498e-8780-ee702c932d4c>.
19 Andrew Miller, Duties And Liabilities Of Trustees - August 2015 - Corporate/Commercial Law - Cayman
Islands (2016) Mondaq.com
<http://www.mondaq.com/caymanislands/x/496738/Trusts/Cayman+Duties+and+Liabilities+of+Trustees>.
6

or transfer his or her actions to anyone. If the trust property is disposed of wrongfully by the
trustee then the beneficiaries have the right to recover that property.
Rights, duties, and liabilities associated with companies
The directors of the company have the rights to access important documents in order to carry
out their duties in an appropriate manner. They can inspect copies of accounts and books of
the company. The directors can delegate their powers to anyone as per the requirement and
situation. A director has the right defence himself or herself for any legal proceedings raised
against him or her for breaching any of the duty. Insurance can be obtained by directors
against liability in some situations but they cannot get it for some breaches under
Corporations Act 200120. The directors have the right to carry out the business operations as
per the legal rules and regulations. They can enforce the corporate constitution and statutory
provisions. They have the right to take part in the board decisions and compensate for any
damages.
The directors need to discharge their duties and exercise their powers in good faith and for
the best interest of the organization. The directors should act honestly considering the best
interest of the company. The duties need to be discharged and powers need to be exercised
for an appropriate purpose. The constitution of a company can also specify the appropriate
purposes which need to be identified in specific situations. The directors need to discharge
their duties and exercise their powers with the degree of diligence and care. The conduct
needed to satisfy the duty relying on the circumstances of the company 21. The duty of the
directors should avoid the conflict of interest by keeping themselves in an appropriate
position. The interests need to be disclosed consisting of a personal interest in order to ensure
smooth functioning of the company. The directors should use their position appropriately
without breaching the law. If the all the debts are not paid then the company would become
insolvent. The duty of the directors in the insolvent situation is to prevent the organization
from trading. If the organization is not meeting its liabilities in relation to taxation reporting
or employee entitlements then the directors would not be able to depend on the safe harbour.
20 Aicd, Rights Of Directors (2018) Aicd.companydirectors.com.au
<https://aicd.companydirectors.com.au/resources/director-tools/practical-tools-for-directors/duties-of-
directors/rights-of-directors>.
21 Baker Mckenzie, Duties And Liabilities Of Directors Of Australian Companies (2017) Bakermckenzie.com
<https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabilitiesofdirectors_
dec17.pdf?la=en>.
7

The directors of the company are liable for the violation of the Corporation Act 2001 and
other Acts that can lead to punishment with imprisonment or fine or both. The directors have
the obligation for ensuring that the organization is paying the debts. The directors need to
ensure the protection of the employees and customers of the company22. However, company
has different legal existent which is being separate from its managers, owners, agents and
employees. The obligations of the director can continue even if the organization has
deregistered and ceased trading. The personal guarantees provided by the directors would
force them to pay the debts or loans. The directors are liable for breaching their duties and
loss incurred by the company23.
Recommendation
The best business structure would be a partnership for Oliver and Emma. The partnership will
enable Oliver and Emma to contribute capital equally as well as share equal profits. The
partners would be able to start the business with small capital and the structure is more
flexible24. Each partner would be responsible for carrying out the business operations and
liable for the debts of the firm. The partnership structure will also allow them to earn millions
of dollars in only a few years. The partnership firm can be started with limited capital funds
which will assist Emma to contribute its funds.
22 Asic, Directors' Liabilities When Things Go Wrong | ASIC - Australian Securities And Investments
Commission (2018) Asic.gov.au <https://asic.gov.au/for-business/your-business/tools-and-resources-for-
business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-
wrong/>.
23 J. J Human, Business Studies (Nasou via Africa, 3rd ed, 2007).
24 William G Nickels, James M McHugh and Susan M McHugh, Understanding Business (McGraw-Hill Irwin, 10th
ed, 2013).
8

References
Aicd, Rights Of Directors (2018) Aicd.companydirectors.com.au
<https://aicd.companydirectors.com.au/resources/director-tools/practical-tools-for-
directors/duties-of-directors/rights-of-directors>
Ananthan, B. R, H. R Appannaiah and P. N Reddy, Business Management (Himalaya Pub.
House, 9th ed, 2010)
Asic, Directors' Liabilities When Things Go Wrong | ASIC - Australian Securities And
Investments Commission (2018) Asic.gov.au <https://asic.gov.au/for-business/your-
business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-
business-directors/directors-liabilities-when-things-go-wrong/>
Ball, Donald A, International Business (McGraw-Hill/Irwin, 8th ed, 2013)
Business Guide, Partnership Advantages And Disadvantages - How To Start A Business
Guide(2018) How To Start a Business Guide <http://how-to-start-a-business-
guide.com/partnership-advantages.html>
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<http://www.business.vic.gov.au/setting-up-a-business/business-structure/partnership>
Company Formation, Characteristics Of A Company, Essential Characteristics Of A
Company(2018) Company-formation.co.in
<http://www.company-formation.co.in/characteristics-of-a-company.php>
Griffin, Ricky W et al, Business (Pearson Canada, 5th ed, 2014)
Human, J. J, Business Studies (Nasou via Africa, 3rd ed, 2007)
Justia, Trustee Duties And Liabilities :: Estate And Probate Law Center :: Justia (2018)
Justia.com <https://www.justia.com/estate-planning/trusts/trustee-duties-and-
liabilities/>
Kumar, Chinmoy, What Are The Rights, Duties And Liabilities Of Partners? (2018)
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and-liabilities-of-partners.html>
9

Law, NATURE OF A COMPANY (2018) Law.uok.edu.in
<http://law.uok.edu.in/Files/5ce6c765-c013-446c-b6ac-b9de496f8751/Custom/
company_intro.pdf>
Mazuma, Advantages And Disadvantages Of A Limited Company | Mazuma (2018)
Mazumamoney.co.uk <https://www.mazumamoney.co.uk/news/advantages-and-
disadvantages-of-a-limited-company/>
Mckenzie, Baker, Duties And Liabilities Of Directors Of Australian Companies (2017)
Bakermckenzie.com
<https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesli
abilitiesofdirectors_dec17.pdf?la=en>
Miller, Andrew, Duties And Liabilities Of Trustees - August 2015 - Corporate/Commercial
Law - Cayman Islands (2016) Mondaq.com
<http://www.mondaq.com/caymanislands/x/496738/Trusts/Cayman+Duties+and+Liabil
ities+of+Trustees>
Mokosak, Frank, Advantages And Disadvantages Of Trusts (2014) Desmoinesregister.com
<https://www.desmoinesregister.com/story/money/2014/03/31/advantages-
disadvantages-trusts/7141729/>
Nickels, William G, James M McHugh and Susan M McHugh, Understanding
Business(McGraw-Hill Irwin, 10th ed, 2013)
Olivier, Rockwell, Rights & Responsibilities Of Trustees | Lexology (2014) Lexology.com
<https://www.lexology.com/library/detail.aspx?g=dd59853d-9cac-498e-8780-
ee702c932d4c>
Practical Law, Trust (2018) Uk.practicallaw.thomsonreuters.com
<https://uk.practicallaw.thomsonreuters.com/4-107-7416?
transitionType=Default&contextData=(sc.Default)&firstPage=true&comp=pluk&bhcp=
1>
Sharma, Varun, Partnership: Definition, Rights And Duties Of Partner (2018) Your Article
Library <http://www.yourarticlelibrary.com/accounting/partnership-account/
partnership-definition-rights-and-duties-of-partner/54055>
10

Singh, Soumya, The Rights, Duties And Liabilities Of Partners In A Partnership Firm (2018)
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BUSINESS>
11