Legal Advice for Choosing the Right Business Structure: Partnership vs Company

This legal advice provides a comparative analysis of partnership and company business structures, and recommends the right structure for family members. It explains the legal formalities required for the formation of a partnership and a company, and the benefits and drawbacks of each structure. The case analysis of ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72 highlights the implications of corporate governance failures and the duties of a director under the scheme of corporate governance.

Running head A ADV C: LEG L I E
Legal Advice
Name of the Student
Name of the University
Author Note

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Part 1
Report to supervising partner
Partnership
Partnership business is a form of business which is undertaken by two or more people
with the ultimate aim of earning profits. The nature of the business structure is fiduciary and the
partners are obligated to act in good faith1. The agreement entered between the parties is in a
written form and it is executed formally within the framework of the partnership deed. The
partnership deed is the written formal agreement which sets out the profit ratio that has to be
shared between the parties. In the absence of a written agreement denoting the rights of the
parties, the same can be inferred from the conduct of the parties and the intention of the parties to
be bound by the verbal agreement. If from the conduct of the parties, it can be found that the
parties are intending to carry out the transactions of the company, then it be considered a
partnership form of business. As per the provisions of the common law, the distribution of the
profits shall be distributed equally amongst the parties and also the loss shall be borne equally
with the parties. Partnership in Australia is governed by common law and the domestic laws of
the state apply to partnerships within the territory of Australia. The partners are individually
liable to the partnership firm and there is no separate legal entity unlike corporate laws. The
liability that arises of the partnership are individually borne by the partners. Therefore, the
partners share the profits and the losses mutually. Therefore, in cases when there are no written
formal agreements in the form of partnership deeds, there is mutual sharing of profits which
therefore concludes the partnership. The partnership also entails upon commercial property and
therefore in cases where there is co-ownership with the ultimate aim of earning profits, the
1 Corwin, Leslie D., and Arthur J. Ciampi. Law Firm Partnership Agreements. Law Journal Press, 2017.

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partnership can be inferred from the sharing of returns from the said property or undertaking.
Therefore, it can be said that co-ownership is an implied proof of partnership. The benefits of
using the partnership model is that the partners owe a duty to carry on the transactions in good
faith and therefore, the partners are in a position to trust the intentions of the partners and can
rely upon them in cases of sharing on profits and losses. The downside of using this model is that
there is a risk of bearing the losses by the partners and therefore they are in a position of
disadvantage.
Companies
Company is a complex business structure which is a separate legal entity which has the
power to sue and also be sued. The company can also incur debt and the shareholders in the
company can limit in their liabilities and the members in the company shall be held to be
responsible for the debts that are incurred by the company. The business structure of the
company is the most followed structure by most enterprises. The members who enter into this
business model make an initial investment and thereafter the structure ensures that the liabilities
are absolved. The shareholder owns the shares of the company and they are considered as the
owners of the company and when the company makes profits, the shareholders reap the benefits
of the company’s stocks2. The rights of the shareholders are valued as the percentage of their
ownership in the company and these are the shares. A company has a legal existence and they
have the right to sue and they enjoy a separation of power where the ownership is separate from
the ownership3. The shares determine the rights of the shareholders that they own in the
company. The Corporations Act, 2001 govern the rights of the shareholders and the company is
2 Curley, Melissa, Björn Dressel, and Stephen McCarthy. "Competing Visions of the Rule of Law in Southeast Asia:
Power, Rhetoric and Governance." Asian Studies Review 42.2 (2018): 192-209.
3 McQueen, Rob. A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920.
Routledge, 2016.

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incorporated as per the provisions of the said legislation. In cases of companies, the financing
becomes easier to accomplish as the financing can also be raised from the public. Though
litigation can be initiated against a company, the company members shall not be personally held
liable and the company will not have to bear the liability personally4. Also, another way of
financing in cases of companies is to look for small investments who are willing to make that in
shareholding.
Part 2
Comparative analysis of the two business structures
In view of analyzing a partnership structure in cases of family members, it can be opined
that since partnership structure is based on trust and good faith, it is highly suited for family
members entering into partnership. The aim of partnership firm is to maximize profits and
therefore members of the same family are in the position of trust where they can enter into an
agreement to ensure that the firm makes profits. A written formal agreement to that effect is not a
mandate and it can be achieved with the conduct and behavior of the parties. Therefore, the
partnership firm can continue its operation with or without the registration. The process of
registration of partnership is very easy. The business structure of a company is very complex and
a partnership firm is less complex in comparison as the formalities required for the formation of
a partnership is relatively easier. The partners in a partnership firm have equal share in profits
and losses and the legal formalities are lesser. The method followed for the distribution of profits
amongst the partners in a partnership firm is without any complications and ambiguities.
Partnership is created with the mutual of the members and since the members in the present case
are family members, it becomes easier to ensure the decision making process of the firm. The
4 Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.

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owners in the partnership firm shall be held to be personally liable for the decisions of the firm.
The difference between partnership and company is in the legal entity and a partnership firm is
not considered a legal entity which has a fictional character and can sue and be sued. The
partners in the partnership firm are bound by the judgments that are passed against the firm and
the partners are the real owners and there is no concept of separation of powers.
In cases of companies, they enjoy the power of separation of legal entity and they are
considered to be juristic persons in the eye of law. Companies have the power to sue and be sued.
The process of incorporation of a company is a very long and complex process which requires
various complexities and formalities. The ones who have incorporated the company make an
initial investment and the promoters are in charge of raising the capital needed to run the
company. The whole process of incorporation of the company requires money and though it is
the most used form of business structure, there are many disadvantages associated with the
process of incorporation. The shareholders are considered to be the owners of the rights of the
company and they also invest a large sum of capital with the help of buying share capital 5. The
shareholders enjoy their liability in terms of the capital they have invested and therefore their
liability is restricted to the investments they have made. Unlike partnership firms, companies can
sue and also be sued in their name and therefore in cases of litigations, the members of the
company become parties and they get tied. The administration of the company is handled by a
hired skilled professional who will have the potential to turn the business profits and also ensure
efficiency in the management of the company6. The ultimate aim of a company is to increase the
profitability and to make sure that the venture is advantageous for you. Therefore, to maximize
5 McLaughlin, Susan. Unlocking company law. Routledge, 2018.
6 Thornton, Margaret, et al. New Directions for Law in Australia: Essays in Contemporary Law Reform. ANU Press,
2017.

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the profit, it is essential to seek all the opportunities that will increase the shares of the company
and turn profitable for the members.
Recommendation
After weighing the two alternatives between partnership and company, the right business
structure in the present scenario would be the company structure. In the present factual scenario,
the family members are intending to enter into a business where they are seeking the right choice
between a partnership and a company. Though a partnership firm is easier to incorporate and it is
based on trust and good faith, the company has the ability to ensure more protection for the
members of the company and also is a safer choice keeping in mind the liabilities that the
partners might have to incur. Being a separate legal entity and having a fictional legal structure,
the members are protected through the corporate veil and the partners will also enjoy the
protection in cases of any litigation. With the help of the principle of corporate veil, the
shareholders will be personally protected and they will not be held personally liable for the debts
that the company shall incur.
Part 3
Case Analysis
ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72
The case dealt with the HIH fraud which was one of the biggest frauds in the history of
corporate governance. There was a complete corporate collapse of the corporations namely
Answett, OneTel and Adler which commenced as a result of the corporate collapse of HIH. This
case brought to light the implications of corporate governance failures in cases when the

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corporations in Australia did not abide by the legislative provisions of the Corporations Act7.
This case, therefore, laid the groundwork for future corporations to abide by the legislative
principles and also showed the implications in cases of failure of the companies to uphold the
corporate principles. In Australia, the Australian Securities Exchange is the governing body that
regulates the corporate governance of major companies in Australia. It lays down the governing
principles which need to be followed to ensure that there is an up keeping of corporate
governance8. The Australian Securities Exchange has recommended various principles that need
to be incorporated within the structure. Coming to the facts of the present case; it was regarding
corporate fraud where the CEO was held liable for fraud as he played a major role in the
sanctioning of acts that ultimately led to the corporate fraud. The CEO, Rodney Adler was
convicted by the court and was held to be liable for committing corporate fraud and was also
penalized where he was barred from handling the matters of the company for a period of 20
years. The court penalized him and also committed him to imprisonment for 20 years with an
added payment of fines to the aggrieved party. This case is important as it laid down the duties
that are expected of a director under the scheme of corporate governance. As per the provisions
of the Corporations Act, 2001, it is mandatory that the director acts in good faith and in the best
interest of the company. The director is in a bona fide relation with the members of the company
and therefore he is duty bound to act in the best interest of the company and its members 9. The
director cannot indulge in fraudulent behavior knowing very well that the company will incur
losses. The director’s duties are enumerate under the provisions of section 180 of the
Corporations Act and he is duty bound to act with proper care and exercise due diligence and
7 ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
8 Huebner, Marshall S., and Darren S. Klein. "The Fiduciary Duties of Directors of Troubled Companies." American
Bankruptcy Institute Journal 34.2 (2015): 18.
9 Huebner, Marshall S., and Darren S. Klein. "The Fiduciary Duties of Directors of Troubled Companies." American
Bankruptcy Institute Journal 34.2 (2015): 18.

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care10. The director, therefore has to keep the interest of the company ahead of himself and also
act with proper honesty and efficiency11. The case also dealt with the provisions of section 181 of
the Corporations Act with the implications of the act on the obligations of the director12. The
duty is to act with proper diligence and care and with proper codified obligations. The court gave
emphasis on the principles as was laid down in the case of Howard Smith Ltd v Ampol
Petroleum Ltd [1974] AC 821, where it was held that the director is duty bound top act in good
faith and exercise proper care and due diligence13. The case upheld the provisions of section 180
and 181 of the Corporations Act where the director has to act with the best intention and in a
bona fide interest14.
The director should not make any misuse of his power and shall not cause any harm to
the company or its members. Again, as per the provisions of section 183 of the Corporations Act,
it was held that the company shall not give out any wrong information and also there shall be no
misuse of information which has been received15. The information received should be in the best
interest of the company and shall not be used to mean any harm or unjustified profit to someone
else. The case also dealt with the provisions of section 260A of the Act where it is prohibited on
the part of the company to use any individual for personal gains to buy shares for the company’s
benefits16. The defense that applies in cases of fraud is that the director has to prove that his
actions were undertaken in good faith. In this case, the director could not avail that defense
10 Huebner, Marshall S., and Darren S. Klein. "The Fiduciary Duties of Directors of Troubled
Companies." American Bankruptcy Institute Journal 34.2 (2015): 18.
11 ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
12 The Corporations Act, 2001, s 180.
13 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
14 Donner, Irah H. "Fiduciary Duties of Directors When Managing Intellectual Property." Nw. J. Tech. & Intell.
Prop. 14 (2016): 203.
15 The Corporations Act, S. 183.
16 The Corporations Act, S. 206(A).

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because he did not act in good faith and based on the precedence of the discussed case, it
establishes a precedence of director’s duties17.
17 ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72

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Video transcript
0:00-1:15- for the present factual scenario, there needs to be an assessment of the right business
structure suited for the fact in question. The options are partnership firm and a company and the
structure has to be decided keeping in mind that the parties interested are family members. The
fact is related to real estate and therefore even though partnership is an easier business structure
but the most preferable and recommended structure would be company as the risks are lesser.
1:16-1:30- the partnership business enjoys unlimited liability and therefore the individuals who
are investing in the firm are liable to the undertaking and have to meet the obligations through
freezing their assets. Partnership is created with the mutual of the members and since the
members in the present case are family members, it becomes easier to ensure the decision
making process of the firm.
11:31:2:00- Companies have the power to sue and be sued. The process of incorporation of a
company is a very long and complex process which requires various complexities and
formalities. The ones who have incorporated the company make an initial investment and the
promoters are in charge of raising the capital needed to run the company.
2:01-2:30- in cases when the individuals aim to company, it will be an advantageous position for
them as it shall be a spate legal entity and also it will enjoy a fictional juristic personality where
the company can sue and also be sued. The liabilities incurred by the company shall not be
applicable to the owners as the company is separate from the rights of the company. The
company shall be liable to sue and also there shall be no personal liabilities. The administration
of the company is handled by a hired skilled professional who will have the potential to turn the
business profits and also ensure efficiency in the management of the company.

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2:31-2:50- A written formal agreement to that effect is not a mandate and it can be achieved with
the conduct and behavior of the parties. Therefore, the partnership firm can continue its operation
with or without the registration. The process of registration of partnership is very easy. The
business structure of a company is very complex and a partnership firm is less complex in
comparison as the formalities required for the formation of a partnership is relatively easier. On
the other hand, in case of a company, the process of incorporation of a company is a very long
and complex process which requires various complexities and formalities. The ones who have
incorporated the company make an initial investment and the promoters are in charge of raising
the capital needed to run the company.
2:51-3:10- The method followed for the distribution of profits amongst the partners in a
partnership firm is without any complications and ambiguities. Partnership is created with the
mutual of the members and since the members in the present case are family members, it
becomes easier to ensure the decision making process of the firm. The administration of the
company is handled by a hired skilled professional who will have the potential to turn the
business profits and also ensure efficiency in the management of the company.
3:11-3:30- The method followed for the distribution of profits amongst the partners in a
partnership firm is without any complications and ambiguities. Partnership is created with the
mutual of the members and since the members in the present case are family members, it
becomes easier to ensure the decision making process of the firm. The ultimate aim of a
company is to increase the profitability and to make sure that the venture is advantageous for
you. Therefore, to maximize the profit, it is essential to seek all the opportunities that will
increase the shares of the company and turn profitable for the members.

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3:31-4:10- it is very important to conduct proper research of the market in which the parties are
intending to invest and the market for real estate is very fluctuating and therefore in cases of
partnership, of a large sum of money is invested, it might pose a threat to the partnerships.
Keeping in mind the nature of the market for real estate, it is essential to advice that company
would be the ideal choice as there shall be minimum risk involved in such scenario.
4:11-4:40- another important consideration for coming to the conclusion that company shall be a
better choice between the two is the concept of corporate veil. Being a separate legal entity and
having a fictional legal structure, the members are protected through the corporate veil and the
partners will also enjoy the protection in cases of any litigation. With the help of the principle of
corporate veil, the shareholders will be personally protected and they will not be held personally
liable for the debts that the company shall incur.
4:41- 5:10- Market expansion will be better advantage in the case of company as it is the
growing model in demand and it also helps in raising capital from the public in cases when the
company cannot raise enough capital. A partnership business model will not be able to raise
capital from the public and therefore it will not be the preferred and ideal choice for expansion.
A company has the chance of making huge bulk investments and therefore bringing profit to the
company. The company has the authority to enter into contract and legally enforceable contract
on its own name which is not applicable in case of a partnership business undertaking.

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Bibliography
ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
Companies." American Bankruptcy Institute Journal 34.2 (2015): 18.
Corwin, Leslie D., and Arthur J. Ciampi. Law Firm Partnership Agreements. Law Journal Press,
2017.
Curley, Melissa, Björn Dressel, and Stephen McCarthy. "Competing Visions of the Rule of Law
in Southeast Asia: Power, Rhetoric and Governance." Asian Studies Review 42.2 (2018): 192-
209.
Donner, Irah H. "Fiduciary Duties of Directors When Managing Intellectual Property." Nw. J.
Tech. & Intell. Prop. 14 (2016): 203.
Hannigan, Brenda. Company law. Oxford University Press, USA, 2015.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Huebner, Marshall S., and Darren S. Klein. "The Fiduciary Duties of Directors of Troubled
Companies." American Bankruptcy Institute Journal 34.2 (2015): 18.
Huebner, Marshall S., and Darren S. Klein. "The Fiduciary Duties of Directors of Trouble
McLaughlin, Susan. Unlocking company law. Routledge, 2018.
McQueen, Rob. A Social History of Company Law: Great Britain and the Australian Colonies
1854–1920. Routledge, 2016.
The Corporations Act, 2001, s 180.
The Corporations Act, S. 183.

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The Corporations Act, S. 206(A).
Thornton, Margaret, et al. New Directions for Law in Australia: Essays in Contemporary Law
Reform. ANU Press, 2017.