Advantages and Disadvantages of Incorporating a Company

This article discusses the advantages and disadvantages of incorporating a company for a small business in the fashion industry. It also covers the duties of directors in corporations in Australia. The advantages of incorporating a company include limited liability, owning property in its own name, impression created on outsiders, tax benefits, and perpetual succession. The disadvantages include higher initial costs, complex reporting requirements, and personal liability of directors. The article also covers the four major duties of directors prescribed by the Corporations Act, including care and diligence, good faith, proper use of position, and proper use of information. It also discusses the duty to prevent insolvent trading and the disclosure of material personal interests.

Part A
To: Jack Smith
Date: ________
Dear Jack,
This letter is written regarding your visit to our office. You are considering establishing a small
business in fashion industry, particularly dealing in men's clothing. As a result, you were looking
for advice regarding the formation of the most suitable business structure for operating this new
venture. By starting a new business in Australia, a number of options are available regarding the
business structure. As a result of business can be operated as a sole trader, partnership, company
or a joint venture. All these business structures have their own advantages and disadvantages.
Under these circumstances, it becomes important to be aware of all the relevant factors so that
the most appropriate business strategy can be selected for starting the new venture. Here it
appears that the business center of a company with the most appropriate for starting your new
venture (Clarke and Clarke, 2016). It needs to be noted that, as is the case with all the business
structures, the business sector of a corporation also has its own advantages and disadvantages.
However, after going through all the relevant factors, it appears that in the present case, the
business structure of corporation will be the most appropriate for starting the new venture
(Khoury and Yamouni, 2010). Hence, the advantages and disadvantages related with business

structure of corporation had been discussed below so that you can make an informed decision.
Even if there are some disadvantages also in the business structure of a corporation, but the
advantages that are going to be available after the incorporation of a company outweigh the
disadvantages.
The advantages of incorporating a company:
Limited liability: the most significant advantage that is available after the incorporation of
companies that of limited liability. Therefore as compared to a sole trader or partnership, where
the owner of the business is lawfully accountable for different facets of business including its
debts and liabilities, in case of a company which is treated as a separate legal entity, the liability
of the owners of the company is limited. Therefore, while the owners of sole trader business or
partnership business can be considered as liable for selling a defective product or an injury
caused to the consumers in the course of business, the owners of the business can be held
personally liable (Dunncliff, 1990). Under these circumstances, the personal assets of the owners
of the business can also be at risk. This is not the case with the company. In view of the principle
of distinct identity of a company (Solomon v Solomon, 1897), the personal assets of the owners
of the business are not at risk.
As a result of the limited liability of an incorporated company, the company can be forced to pay
the creditors only out of the assets over by the company itself along with any money unpaid on
the shares of the company. Moreover, the company is considered as a distinct legal entity or a
legal person (Terry, Giugni and Brace, 1994). Therefore, the company is distinct from its owners
(shareholders) and the persons controlling the company (Directors). In this way, generally

speaking, and by assuming that the directors of the corporation have acted honestly and fulfill
their duties, particularly the directors have not allowed the company to trade while it is insolvent,
and when the owners/directors of the corporation did not provide a individual guarantee
regarding the debts of the corporation,. In such a case, the private assets of the
shareholders/directors of the company are beyond the reach of the creditors of the company and
industry they are protected from them.
Owning Property in its Own Name. Due to many reasons sometimes it is suitable for the persons
that the property should be owned at the deal should be made in the name of the corporation in
place of their own name. At the same time, the company now in Australia now allows for the
formation of a one-person company. This means the company having a single person as the sole
owner (shareholder) and the director of the company. However, it always needs to be
remembered that a company is an entity that is disconnected from its owners and directors.
Therefore, the company should not be considered as an alter ego of its owners.
Impression created on outsiders: generally the outsiders are impressed by the name of an
incorporated company instead of merely a registered business name. The reason could be that the
other people are aware of the fact that the cost of establishing a company is known as compared
to the registration of a business name. In this way, the impression of more seriousness is created
in case of the registration of company in Australia.
Tax: the individuals who are doing business under registered business name are required to pay
tax at standard rate. On the other hand, the corporations in Australia have to pay tax at a fixed
rate of 30%.

Perpetual succession: another advantage available in case of the incorporation of companies that
of perpetual succession. The law provides that unless a company is bound up, the corporation
carries on even if the members have left the company.
However, the presence of a large number of advantages does not mean that there are no
disadvantages associated with a Corporation. Therefore the disadvantages associated with the
company can be described as follows:
The establishment of a company can be more expensive as compared to the establishment of a
sole trader or partnership. Similarly, it is costly to maintain and wind up a company as compared
to the business structures. Therefore the initial cost of registration of a company is more than the
cost of setting up a sole trader or partnership. However it needs to be noted that the benefits
available in case of company outweigh the higher initial cost of incorporated.
The reporting requirements are also complex. The corporations law has imposed a number of
reporting requirements on the companies. It is the duty of the directors to ensure that all the
reporting requirements are fulfilled by the company.
In case, the directors of the company failed to fulfill the legal obligations imposed on them by
the law, they can be held personally liable regarding the debts of the company. At the same time,
certain duties have been imposed on the directors by the common law and the statutory law.
These duties have been imposed on the directors by the Corporations Act.
The profit made by the company that is going to be distributed among the shareholders is
taxable.

After considering advantages/disadvantages that the present in case of the incorporation of a
company, it can be recommended that the most appropriate structure for starting the new
business will be the incorporation of a company.
Yours faithfully
(_________)

Part B
Duties of directors
A number of duties are prescribed for the directors of corporations in Australia. Simultaneously,
the duties of the directors have also been incorporated in the statutory law. Therefore the
Corporations Act, 2001 prescribed certain duties for the directors of companies. The company is
governed by the directors other half of the shareholders of the company. According to section
198A(1) of the Act, the business of the corporation is to be managed by all under the direction
given by the directors (Ford and Austin, 1995). All the directors have certain basic legal duties.
The duties and responsibilities that have been prescribed for the directors by the Corporations
Act are applicable to several different organizational structures like proprietary companies,
public companies etc. The four major duties that have been prescribed by the Corporations Act
for the directors can be described as follows:-
Care and diligence: it is the duty of the directors to act with the similar degree of care and
diligence that can be anticipated in case of any other reasonable person. The city has been
mentioned in section 180. A similarity is also been imposed on the directors by the common law.
At the same time, a safe harbor is provided by the business judgment rule to the directors
regarding a claim made under the common law under section 180 (Austin and Ramsay, 2013).
The business judgment rule is also included in this section.
Good faith: another responsibility of the directors is to act in good faith and keeping in view the
best interests of the corporation. Therefore, the directors should always ask for a proper purpose
as mentioned in section 181 (Ford, 1978). This duty includes the responsibility of the directors

avoid any conflicts of interest. On the other hand, if any such conflict arises, the directors have
the responsibility to reveal and manage such conflicts as soon as possible. This duty is the duty
of trust and fidelity (Farrar and Hannigan, 1998). Therefore it is known as a fiduciary duty that
has been imposed by the common law and also by the duty prescribed by the Act.
Proper use of position: it is the duty of the directors that they should not act improperly. For this
purpose, the position of the director should not be used improperly for the purpose of achieving
your personal advantage or for causing a detriment to their corporation (Paterson and Ednie,
1976). This duty is present in section 182.
Proper use of information: This duty requires that the directors should not use the information
improperly that has been received by them in the course of fulfilling their duties as the director
of the company (Menzies, 1959). Therefore such information should not be used by the directors
for the purpose of achieving your personal advantage of for causing any loss to the corporation.
The duty has been stated in s183 of the Act.
It is mentioned in section 183 that a director of the company should not make an improper use of
the information that has been acquired by the director on account of his or her position in the
company. This position is also applicable on, the officers or employees of the company including
the junior employees. Therefore it will be a breach of this duty if they have achieved an
advantage for themselves or for any other person. It needs to be remembered that the provision
applies where the improper use of information or position has been made, even if the director
may have acted honestly (Cowen, 1967). On the other hand, if it has been discovered that the

information was used by the directive dishonestly and with a view to achieve a personal
advantage, then such action can be treated as a criminal offense.
Duty to prevent the insolvent trading: Apart from these duties, another important duty is also
been imposed on the directors. This duty requires the directors to prevent the company from
trading in the company has become insolvent. The other along with the general duties of the
directors, a positive duty has also been imposed on the directors according to which they should
prevent the corporation from trading if the company has become insolvent. In this context, a
corporation can be described as insolvent if it is not in a position to repay its debts when they
become due. Therefore it is the responsibility of the directors that while incurring a new debt by
the company, the directors should consider if there are reasonable grounds to suspect that the
company may be insolvent or it may become insolvent after incurring the debt. In context of this
duty, merely an understanding of the financial position of the company at the time of signing the
yearly financial statements of the company by the directors is not sufficient. In view of this duty,
it is very important that the directors always remain aware of the financial position of the
company.
The duty to prevent insolvent trading has been named in section 588G. This duty, along with the
defenses and the consequences of breach has been mentioned in Part 5.7 B, Division 3.A of the
Act. The duty mentioned in sections 588G(1) and 588G(2) will be pleased by a person if:
The person is a director of the corporation at the time of incurring a debt;
The company is insolvent at such time or it is going to become insolvent after incurring the debt;

Relevant grounds were present to suspect that either the company has become insolvent or, it is
going to be so; and either
Such person is aware of the presence of these grounds
Any reasonable person in such position in the company would have been aware of these grounds.
The person had failed to stop the company from incurring such a debt.
However, the defenses available to the director with the director had failed to prevent the
company from incurring a debt if:
At the relevant time, reasonable grounds were present for the person to expect and the person
expected that the company was solvent and would remain solvent. Even after incurring the debt
s588H(2)
The director had reasonable grounds to believe that a competent and reliable subordinate had
been keeping an eye on the solvency of the company and keeping the director informed.
At the relevant time, the director was not taking part in the management of the corporation due to
illness or some other valid reason.
The director had taken all the reasonable steps for preventing the company from incurring such a
debt.

Section 191 to 195 of the Act provides the duties of the directors related with the disclosure of
material personal interests. Therefore, apart from the sole director, proprietary companies, the
director having a material personal interest in any major dealing with the affairs of the company
should give a notice to the directors of the company regarding the presence of such interest in
accordance with section 191(1). However and extensive list of the interests that need not be
disclosed by the director has been provided with section 191(2).
Such notice shall provide the details of the nature and the extent of the interest. It should also be
told how the interest is related with the affairs of the corporation. The notice should be given by
the director to other directors as soon as reasonable after the director has come to know regarding
the presence of such conflicting interest. It has been provided by section 194 that the directors of
proprietary companies who have disclosed the material personal interest related to the affairs of
the company can vote on the matters related with such interest and the transactions related with
the interest we proceed if the disclosure has been made by the director before the company has
entered into the transaction. NSA, by making proper disclosure, the director can retain the
benefits and at the same time. The transaction cannot be avoided by the company only due to the
presence of such an interest.

References
Austin R P and Ramsay, I M., 2013, Ford’s Principles of Corporations Law, LexisNexis
Butterworths, 15th ed. 432
Clarke, P and Clarke, J., 2016, Contract Law, Commentaries, Cases and Perspectives, 3rd
Edition, Oxford University Press
Cowen, Z., 1967, ‘Company Directors: Their Powers, Duties and Responsibilities’ 2 University
of Tasmania Law Review 361
Dunncliff, A., 1990, Setting Up In Small business - The Role of the Solicitor, December, Law
Society Bulletin
Farrar John H and Hannigan, B., 1998, Farrar’s Company Law Butterworths, 4th ed. 382
Ford H A J and Austin, R P 1995, Ford and Austin’s Principles of Corporations Law
Butterworths, 7th ed. 262
Ford, H A J., 1978, Principles of Company Law Butterworths, 2nd ed. 345
Khoury, D. and Yamouni, Y., 2010, Understanding Contract Law, 8th Edition, LexisNexis
Butterworths
Menzies, D., 1959, ‘Company Directors’, 33 Australian Law Journal 156
Paterson W E and Ednie, H H., 1976, Butterworths, Australian Company Law, vol 2, 2nd ed
Terry A and Giugni, D. and Brace, H., (1994) ‘Alternative Business Structures’ from Business,
Society & the Law Sydney

Case Law
Salomon v A Salomon and Co Ltd [1897] AC 22