Corporations and Business Structure - Liabilities and the Fiduciary Duties

Running head: CORPORATIONS AND BUSINESS STRUCTURE
CORPORATIONS AND BUSINESS STRUCTURE
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CORPORATIONS AND BUSINESS STRUCTURE1
Introduction
In this report the partnership and company business structures have been discussed with
special mention towards the liabilities and the fiduciary duties that can be seen as present in both
the business types. A partnership is a business started by two or more individuals with a common
goal of earning profit and sharing ownership and the responsibilities for the profits and loss
generated and the management of business. On other hand company is a business which is a
legal entity for carrying on commercial or industrial enterprise and is made up of an association
of people both natural and legal. In the report an illustration has further been provided for
providing advice to the client about the duties of the directors in a company by way of a case.
Part A
Under the business law the term ‘liability’ means any financial debt or obligation of the
business that arises in the course of the operations of the business. Liabilities include mortgages,
loans, accrued expenses and deferred revenues. The liabilities towards the third parties are
present in both partnership and company business structures. The liabilities present in both
business structures have been discussed as follows:
Company
Any company that has been formed and registered under the provisions of the
Corporation Act is defined as a company under section 9 Corporations Act1. A company is a
separate ‘legal entity’ from its owners, unlike a sole-trader or a partnership business, and has the
1 Corporations Act 2001, s.9

CORPORATIONS AND BUSINESS STRUCTURE2
same rights as any normal individual can have. The company’s capacity includes incurring debts,
to sue or be sued. As the company is a separate legal entity there are no personal liabilities on the
director of a company on the company’s behalf. Nonetheless the company can held a director
responsible jointly and collectively for any act or omission thereof which can be prejudicial for
the interests of the company and is a violation to the duties discharged by the director. The
fiduciary duties of the directors are mentioned in the Corporations Act, sections 180-1832.
The duty of a director, can typically be seen as to act for the company’s benefit as a
whole. There is the liability to act for the collective interest of all members that is owed by the
director. The director, however, needs to consider other interests as well under certain situations.
According to the Australian Securities and Investment Commission (ASIC)3 any director can be
held responsible for the breach of any obligation even when the company has long been ceased
to be existing. Section 588G4 states that a director would be held liable for the debts incurred by
the company under certain situations if the company is unable to pay off the debts. The duty of a
director under this section is to prevent the company from performing insolvent trading if the
director has the reasons to believe that the company either is already insolvent or is suspected to
be insolvent in the future. ‘Lifting the Veil’ refers to the circumstances where the shareholders
can be held liable for the debts that the company has incurred in spite of the rules of separate
legal liability of the company being present. The director of any company can be held liable to
the liabilities towards the third parties by the company. The exception of such liability is present
only in a pecuniary penalty order or a compensation or if the liability does not arise out of the
acts conducted in the good faith.
2 Ibid, s.180-183
3 Australian Securities and Investment Commission
4 Corporations Act 2001, s.588G