Company and Commercial Law

Company and Commercial Law

Answer 1
Issue
The issue is related to the business structure in which Julio, Carolyn, Trisha and Sarah
are operating their business, and their status regards to the business.
Rule
While operating a business in Australia, people can select between different structures
each of which has different characteristics. There are four common business structures
from which people could choose to operate their business in Australia which include a
sole trader, partnership, company and trust. A partnership is a relatively common
business structure due to its lack of legal requirements and easy formation. The
business is governed by the Partnership Act (Vic) 1958 which provides regulations
which are necessary to be fulfilled in order to form a partnership. Section 5 provides
the definition of a partnership which is referred as a relationship between two or more
individuals who decided to carry out business with an objective to generate profits
commonly. Section 6 provides a number of elements which are necessary to be
fulfilled in order to form a partnership between two or more individuals.
Mainly there are three key elements which are necessary to fulfil in order to form a
partnership which includes carrying on a business, in common and with a view to
profit. In order to establish carrying on a business, it is necessary that mutuality of
rights and obligations exists between parties. In Goudberg v Herniman Associates Pty
Ltd case, the court provided that preparing to carry on business did not constitute as
carrying on a business based on which a partnership cannot be formed between two
or more parties. Furthermore, the business of the partnership must be operated by all
the partners who are involved, and its actions should be on behalf of all partners. Each
partner has mutual obligations towards the business and members are not required to
be active as long as the business is carried out by or on behalf of the person.
Page 1

In the case of Re Ruddock, business was running by Ruddock under his name, and he
owed a debt to Mrs Bear. In order to discharge such debt, Mrs Bear acquired the
shares in the business, and she received 25 per cent of the profits in the business.
While introducing a new person into the business, Ruddock required asking for the
consent from Mrs Bear. The court held that Mrs Bear has entered into a partnership
because she has mutual rights and obligations. Furthermore, the objectives of the
partners must be to carry out the business with a view of profit. Section 6 (2) provides
that just sharing of profits does not automatically form a partnership between people.
In Plummer v Thomas case, it was held that although the profits were to be shared
50/50 between partners but there was no provision to share the loss. Due to which a
partnership was not formed between the parties.
Application
In the particular scenario, Julio, Carolyn and Trisha decided to jointly operate a
business by writing some rules on the paper. As per the definition is given under
section 5 of the PA, a partnership has been constructed between the partners. The
business was to be carried out by each partner, and they jointly decided to operate
such business (Goudberg v Herniman Associates Pty Ltd). The business was operated in
common by each partner, and they each play different roles in the business, for
example, Julio was giving tax advice, Carolyn was handling accounting, and Trisha was
managing investment advice (Re Ruddock). The objective of the parties was to
generate a profit by providing different sorts of financial advice to their clients. Julio,
Carolyn and Trisha have fulfilled the essential elements of a partnership, thus, a
partnership has been formed between the parties. On the other hand, Sarah was not
interested in the business, and she gives $40,000 as a loan to Julio, Carolyn and Trisha.
She was interested in art, and she was not interested in managing the operations of
the business. Just sharing of profits did not form a partnership between parties based
on which Sarah is not a partner of Julio, Carolyn and Trisha (Plummer v Thomas).
Page 2

Conclusion
To conclude, a partnership structure has formed between Julio, Carolyn and Trisha
since they have fulfilled its essential elements. However, Sarah is not their partner
because she is not carrying out the business in common with others and only sharing
of profits did not construct a partnership between parties.
Page 3