Different Business Structures: Sole Trader, Partnership, and Proprietary Companies

This document provides an overview of different business structures - sole trader, partnership, and proprietary companies. It explains their liabilities, costs, and regulatory requirements. It also discusses the distribution of profits and the agency relationship within each structure. The document highlights relevant legal cases and the role of directors in managing the operations of a company. It aims to help individuals make an informed decision about the most suitable business structure for their needs.

Part A
Soletrader emphasizes on a business structure, which identifies the owner to any business as the
same head as that of the business. The liabilities that come with the business would become the
personal liability of the business owner owing to one single entity. The Fair Acting Law of 2009
holds all major laws that guide these sorts of businesses1. The costs for establishment as well as
the expenses in delivering administration in case of such businesses are much less when
compared to the other variations of business categories. This business category needs regulatory
abidance in terms of permit, registration as well as license that it needs to comply with.
However, the regulatory framework that needs to be followed against this business structure is
much simplified compared to that of the other businesses. There is also the necessity of only a
threshold business capital for this business.
Partnership is that form of business that requires a minimum of 2 people to develop the
business and run it. There is no primary requirement of incorporation in this business category. It
is expected in this kind of business that the partners would have joint holdings of the financial
resources under the common name of that business as to create a unique entity. One of the
primary features of this pattern of business is that the profit distribution is according to the
conformations of the agreements made within the business partners2. The costing behind the
development of this pattern of businesses is actually simplified and the cost for establishing such
businesses is also low in comparison. All partners in this category of business would be jointly
responsible for sharing any sort of liability that is incurred by their business.
1The Fair work Act 2009 (Cth)
2Eisenberg, Melvin Aron. "Legal models of management structure in the modern corporation: Officers, directors,
and accountants."(2017) Corporate Governance. Gower. 103-167.

Another business pattern is that of the Proprietary companies which are treated to different legal
entities from the owners as well as the managers of that business. There is no liability of the
owners as well as the managers to share liabilities incurred by the business. The company’s
shareholders might incur liability owing to their donation towards the shared capital towards the
business. However such businesses are differentiated in a way that they need huge business
capital and setting up and that is gained mostly by sales of the shares of business. The
compliance needs as well as the needs for disclosure in this category of business is complex.
Dividend announcement are the source of sharing dividends.
Part B
Partnership is a business form where there is the engagement of minimum two business
personnel who have the aim of profit generation by running their business3. Here in the business
partners share the liabilities of any of the liabilities that are incurred by the business in the form
of debts that are incurred by the company. In partnership, business capital is accumulated by
accumulating the financial resources of both of the partners. The regulatory framework for
partnership business is the Partnership Act of 1961. The liabilities that have been incurred by the
company is under the name of the business is that to be shared as joint as well as personal
liabilities of individual partners. The reason behind this is that the company under partnership is
to be regarded as an unique entity and there is no separate identity of the individual partners.
This incurs liability upon any of the partners of the firm for any of the liabilities that have
been incurred by the organization since the business partners as well as the owner partners are to
be regarded as a single entity. An external party who has been engaged into any of the business
3The Partnership Act 1961 (Cth)

transactions with this company will have the liberty of jointly holding the partners liable for the
liability of the business organization. In case if any of the partners of the company makes an
illegal breach of any contract, then the third party can develop a proceeding against both of the
partners. This is exactly what happened in the case of The partnership firm of C Czarnikow Ltd v
Koufos [1967] UKHL 4 [1967] (The Heron II)4. A partnership is mainly identified through the
process of distribution of profits which have been gained by the partnership firm through profit
distribution by the terms of the agreement. The cost for creating this kind of a business set up is
simplified and comparatively it incurs low cost of set up also. One of the main reasons behind
this is the similar distribution of the expenses as well as profits among all the partners of the
company. All partners concerned with such a firm are going to share joint liabilities by virtue of
any of the liabilities that have been acquired under the name of the business. The loss incurred
under such a business structure isalso reduced since those are scattered among the partners as per
the ratio that is determined for sharing of the profit. In case, if any issue of insolvency occurs, the
liability that is supposed ti be shared by the partners is supposed to be unlimited. It also requires
mention that the partners have an intrinsic agency relationship in context to their organization.
Reversibly, the company is regarded as a unique identity as any shareholder or director of
the company is holding. There is no liability of the owners as well as managers of the
organization. The company’s shareholders might incur liability in alignment to the proportion of
the share capital ratio. Such business set up needs a large bulk of capital that can be developed
by selling the shares of the business in open market. However, the regulatory compliances as
well as the requirements for disclosure in this business are much complicated so far as this
business is concerned. The liability for any sort of transaction under the brand name of the
4C Czarnikow Ltd v Koufos [1967] UKHL 4 [1967] (The Heron II).

business is imposable up on them to the extent to which they contribute towards raising business
capital for the firm. There is no complimentary need for the shareholders to hold a position in the
management body of the business. However, they are still the owners of the firm. This duty of
managing the affairs of the business has to accept the responsibility of managing the state of
affairs of the business. However, the power to appoint the directors to the company lies
necessarily with the shareholders. The directors will only be managing the business affairs and
managing the operations of the firm and they necessarily do not need to be the owners of the
company. This conception was highlighted with clarity in the case of the Salomon vs A.
Salomon and Company Limited5. However, in case if the actions of any individual director are
beyond the scope of their discretionary power, they will be sharing the liability under a personal
capacitance. In contrast, when the directors are acting within their territory of their discretionary
power, the effects of their transactions will be strictly imposable on the company and the
concerned shareholders. This nature of business is advocated by Corporations Act of 2001(Cth)6.
The directors who are liable for managing the operations of the company are under the liability
of doing the same under the requirements of the Act and under other laws if the same is
applicable up on them. Any duty breach from the end of the directors might impose significant
penalty on the directors under the provisions of the same act. In this context, the case of Vrisakis
v Australian Securities and Investments Commission (1993) 9 WAR 395can be highlighted7. In
this case, the directors were withheld with penalization of $10000 and they were banned from the
directorship of the organization for a span of 2 years.
Part C
5Salomon v A Salomon and Co Ltd[1897] AC 22
6The Corporations Act 2001 (Cth)
7Vrisakis v Australian Securities and Investments Commission (1993) 9 WAR 395

Partnership is a structured business where minimum of 2 people are mandatorily needed for the
running of a business. There is no primary requisition for running this form of a business. The
financial assets that are individually rendered by the partners are stocked under the brand’s name
and this calls for development of a common entity. The basic pattern of running this business is
to share the profit according to the agreed terms in the initial phase of the business. The cost of
developing the framework of this kind of business is simplified as well as the cost for
establishment is relatively low. The partners of this business are jointly addressed for sharing any
form of liability that has been incurred by the brand in its business transactions. The business
liabilities of the brand are jointed as well as personal liabilities of the business organization. The
major reason behind this is that the company developed under partnership is needed to be
considered as a single entity and the partners of the firm are not separated by the terms of their
identity. They are unified under the identity of their company name. Naturally, in this case, the
liability for any transaction done in the name of the company would involve the name of the
partners. Any of the third parties who have been indulged in to transaction with such a company
under joint partnership, can impose liability up on the partners as well as the firm and enforce
their interest up on the directors as well as the owners. Hence, the third party can call for a legal
proceeding against the partner agencies for misleading breaches conducted by business partners.
The primary goal of a partnership business is sharing of the profits based on the agreement that
have been framed between them. Every partner who is jointly in to the business is liable for
liabilities that have been brought about by the organization. The mitigation of the losses incurred
by the business is to be distributed in accordance to the profit sharing ratios of the business
partners8. When there is any case of insolvency, the partners have to share unlimited liability. It
8Bottomley, Stephen. The constitutional corporation: Rethinking corporate governance. (Routledge, 2016).

is evident that there is an agency relations hip within the partners as well as the firm that they
owns. These aspects can be highlighted by the case of Cox vs Hickman.
The shareholders will not need to take part in managing of the operations of the company,
in spite of the fact that they hold the ownership of the organization. This duty is the liability of
the directors of the firm. However, the shareholders have the power to select the rightful director
to the organization. However, in case if the directors have acted outside the periphery of their
rightful authority, they would incur liabilities under their personal capacitance. In sharp contrast,,
if the directors have been acting in alignment to the powers that they hold, rightfully, then the
liabilities of all their transactions would be binding on the company as well as their shareholders.
This business structure has been advocated by the Corporation Act of 20019. The directors are
liable for managing the needs of performing the duties of the company who have to do the same
in compliance with the above mentioned act.
This act holds that the directors are needed to execute the responsibilities in the best
interest for the benefits of the company. In the case of ASIC v Adler (2002) 41 ACSR 72, the
same applies10. The company directors need to disclose proper accounts after running the firm for
a considerable time period to all the shareholders so that transparency is ensured. The directors
cannot derive personal gain from any of the transactions which have been progressed under the
brand name of the organization. Any data that have been available with directors’ by the dint of
power of his position as a director need to remain confined.
9The Corporations Act 2001 (Cth) s180.
10ASIC v Adler (2002) 41 ACSR 72

Transcript
 I have been interviewing a client, who has approached me for an advice with respect to
the business structure that would be more convenient for him to set up and operate.
 The client was quite unaware of the business structures that exists.
 The client had been thinking of proceeding with a business along with his friends.
 He has been wondering the options or the structure of the business that he should follow.
 I explained him regarding the different structures of business that exists.
 I explained him that sole trader emphasizes on a business structure, which identifies the
owner to any business as the same head as that of the business.
 I discussed the liabilities that come with the business would become the personal liability
of the business owner owing to one single entity.
 Moreover, it would be more convenient for him to pursue this form of business structure
as the costs for establishment as well as the expenses in delivering administration in case
of such businesses are much less when compared to the other variations of business
categories.
 Although, this business category needs regulatory abidance in terms of permit,
registration as well as license that it needs to comply with, but the regulatory framework
that needs to be followed against this business structure is much simplified compared to
that of the other businesses and the working capital is much less.
 However, he wanted to start the venture along with his friends who were willing to
contribute towards the capital of the business.
 This recommend two option namely setting up a corporation or creating a partnership
business.

 In case of partnership, the partners would have joint holdings of the financial resources
under the common name of that business as to create a unique entity.
 One of the primary features of this pattern of business is that the profit distribution is
according to the conformations of the agreements made within the business partners.
 The costing behind the development of this pattern of businesses is actually simplified
and the cost for establishing such businesses is also low in comparison.
 The legal compliances and the registration hassles are also low in comparison.
 But all partners in this category of business would be jointly responsible for sharing any
sort of liability that is incurred by their business.
 However, another form of business that would be available to them for the purpose of
setting up will be the proprietary company.
 Another business pattern is that of the Proprietary companies, which are treated to
different legal entities from the owners as well as the managers of that business.
 There is no liability of the owners as well as the managers to share liabilities incurred by
the business.
 The company’s shareholders might incur liability owing to their donation towards the
shared capital towards the business.
 However such businesses are differentiated in a way that they need huge business capital
and setting up and that is gained mostly by sales of the shares of business.
 The compliance needs as well as the needs for disclosure in this category of business is
complex.
 Dividend announcement are the source of sharing dividends.

 But in case of corporations the liability of the managers and the shareholders are limited
and they enjoy immunity from the liabilities of the business.
 Moreover, the huge capital that will be required to set up this form of business can be
raised from issuing of share.
 Hence, I have recommended them to set up a corporation.