Partnership vs Company: Advantages, Disadvantages and Relevance of ASIC v Adler Case

This article discusses the advantages and disadvantages of partnership and company business structures, and the relevance of ASIC v Adler case in context of directors' duties under Corporations Act 2001.

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Corporation Law

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Part 1
Introduction:
This part of the paper defines the two business structures that are partnership and company. As
both the structures are consider as important business structures but their usefulness depends on
the requirements of the owner who conduct the business.
Business Structures:
Partnership:
Partnership is defined as the structure in which two or more persons agree to operate the business
in the form of co-owners and agreed to share their profits and losses. All the co-owners of the
business are defines as partners and act on behalf of firm and other partners in the firm.
Partnership firm is not considered as the separate entity from its partners. It must be noted that;
partnership structure in Australia is governs under the partnership Act 1958.
Those who conduct the operations of business under this structure is known as partners, and
following are some key components of the partners:
 Partners hold personal liability for the losses and debts of their business.
 Partners of the firm own fiduciary duty towards each other.
 Each partner is considers as the agent of partnership and other partners of the firm.
 Partners can bind the firm or other partners with their acts.
There are two types of partnership, under which co-owners can conduct their business:
General partnership: In this type of partnership all, the partners of the firm are equally
responsible for managing their business, and they also bear the risk of unlimited liability in
context of debts and obligations occurred in the partnership business1.
Limited partnership: Limited partnership is the partnership in which obligations of the partners
in context of debt or losses suffer by firm is limited. This type of partnership structure includes
one or more general partners and one or more limited partners. Liability of the partners in limited
partnership is limited to the proportion of their investment. There is no restriction on the
maximum numbers of the limited partners2.
Following are some important key aspects of the partnership structure:
 It is comparatively easy and less expensive structure to set the business.
 Partnership firm required the separate tax file number (TFN).
 In case partners carrying on an enterprise, then they can apply for the Australian Business
Number (ABN), but this number is not mandatory.
1 Clayton UTZ, Business structures, < https://www.claytonutz.com/ArticleDocuments/178/Clayton-Utz-Business-
Structures.pdf.aspx?Embed=Y>.
2 ATO, Partnership, < https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/
Choosing-your-business-structure/partnership/>.

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 Business management is share by the partners3.
 Partnership does not pay any tax on the income earned by the firm, but each partner of
the business pay their own tax on the share of income received by them.
 Partners are under obligation to file the partnership tax return with the Australian
Taxation Office (ATO) each year.
 Partners of the partnership business are not the employees of the partnership.
 Partners required registering themselves for GST in case annual turnover of the business
is $75000 or more4.
Company:
Another important business structure is the company, and the person can consider this structure
at the time of starting or growing stage of the business.
Company is considered as the separate legal entity, not like the sole trader and partnership
business. Separate legal entity means Company holds the same rights as the natural person,
which means company can incur debt, sue the other person, and be sued5.
Owners of the company (shareholders) have option to limit their personal liability, and usually
they are not liable for the debts occurred by the company. Business structure of the company is
complex in nature, and it includes the high administrative costs.
Company must be register with the Australian Securities and Investments Commission (ASIC).
Management of the company lies in the hands of the directors and officers, and they are under
obligation to comply with the Corporation Act 2001.
Following are some important key aspects of the partnership structure:
 Company is the separate legal entity.
 Shareholders of the company enjoy limited liability.
 Structure of company is complex and expensive in nature as compared to other structures.
 The Corporations Act 2001 regulates this structure.
 Directors and shareholders of the company control and manage the operations of the
business6.
Conclusion:
This paper highlights the importance of two business structures that can be carry by the person as
per their needs and preferences. It further states the difference between the partnership and
company, and the obligations of the owners of both the business.
Part 2
3 DIIIS, Partnership, (2017) < https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-
structure/Business-structures-and-types/Partnership>.
4 TIA, Legal Business Structures, < http://dpipwe.tas.gov.au/Documents/Legal-Business-Structures.pdf>.
5 ASIC, Your Business Structure, < https://asic.gov.au/for-business/your-business/your-business-structure/>.
6 DIIS, Company, (2017), < https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-
structure/Business-structures-and-types/Company>.

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Introduction:
This section of the paper highlights the advantages and disadvantages of both the business
structures discussed in part 1 that are partnership and company. It compares the two structures,
and at last, best structure is recommends to the clients.
Advantages and disadvantages:
Partnership:
This business structure includes number of advantages and disadvantage:
Advantages Disadvantages
Complexity- Partnerships are considers as
easier and less expensive business structures as
compared to other business structures7.
Limited liability- this is the biggest
disadvantage of the partnership business, as
partners of the firm are personally liable for
any debts and losses of the firm. Each partner
holds the individual liability in context of the
debts incurred by other partners.
Firm name- Partners of the business can carry
the business under the name of the firm.
Taxes- partners are liable to pay the tax at
personal tax rate.
More resources and experience- partnership
allow the combination of more resources and
facilitates more experience people for
conducting the operations of the business.
Transfer of ownership- it is not possible for
partners to transfer their ownership without the
consent of other partners8.
Simple- this business structure is simple to
administer, as income and losses between the
partners of the firm are share as per their
decided ratio that is define in the partnership
agreement. This automatically reduces the
confusion and conflicts.
Management- responsibility to manage the
business does not lie on any one person, which
means, each partner is liable to take part in the
business9.
Change in structure- any changes required in
7 Legal Vision, The Advantages & Disadvantages Of Operating Under A Partnership Business Structure, (2015), <
https://legalvision.com.au/business-structures-the-advantages-disadvantages-of-operating-under-a-partnership-
model/>.
8 Business Queensland, Partnership business structure, < https://www.business.qld.gov.au/starting-business/types-
legal-structures/legal-structures/partnership>.
9 Adam Courtenay, The pros and cons of business partnerships, (2010), < https://www.smh.com.au/business/small-
business/the-pros-and-cons-of-business-partnerships-20101109-17lhh.html>.

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the legal structure of the partnership is
comparatively easy.
Company:
Some of the advantages & advantages of this business are state below:
Advantages Disadvantages
Limited Liability- liability of the shareholders
in context of the debts and losses incurred by
the company is limited. In other words, they
are not personally liable.
Expensive and complex- this business structure
is complex and expensive to set up as
compared to partnership business structure.
Transfer of ownership- in this business
structure it is very easy to transfer the
ownership, as it only requires transfer of
shares.
No privacy- there is no privacy, as figures are
disclosed to public.
Taxation rates- taxation rates are more
favourable as compared to others.10
Personal liability- in case directors fails to
fulfil their duties then they bear personal
liability.11
More capital- owners of company have access
to more options of capital as compared to
others.
Structure- this business structure is regulated
by Corporations Act 2001, and more organized
as compared to other business structures.
Recommended:
After comparing the advantages and disadvantages of both the structures, best structure for the
clients is company. Company is the structure, which fulfils all the requirements of the clients,
and a reason because of which this structure is choosen:
 The most important reason is the limited liability, as in company liability of the
shareholders in context of the debts and losses incur by the company is limited. In other
words, they are not personally liable. This is not the case in partnership, as partners of the
firm are personally liable for any debts and losses of the firm. Each partner holds the
individual liability in context of the debts incurred by other partners.
 Taxes in context of company are more favourable as compared to partnership business
structure, but in case of partnership, partners are personally liable for paying their tax at
personal rate.
 Capital access in case of company is wide as compared to the partnership structure
because company is organized legal structure and it is easy to trust the company.
10 Murfett legal, Not-for-profit organisations - association or company limited by guarantee?, <
https://www.murfett.com.au/MurfettLegal/media/Documents/Article/56-Associations-vs-Company-Limited-by-
Guarantee.pdf>.
11 Jonathan Korchakk, Advantages and disadvantages of a public limited company, (2016), <
https://www.informdirect.co.uk/company-formation/public-limited-company-advantages-disadvantages/>.

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 Company holds the separate legal entity and differs from its members, but partnership
does not hold any separate legal entity.
Conclusion:
After considering the facts of this section of the paper, it is clear that company holds more
advantages as compared to the partnership business in various aspects. However, this business
structure also has some disadvantages also but it can be resolve. Therefore, it is recommends to
the clients to use the company as their business structure.
Part 3

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Introduction:
This part of the report discusses the relevance of case law ASIC v Adler (2002) 20 ACLC 576;
41 ACSR 72 12in context of the directors of the organization that is regulated under the
Corporations Act 2001. Lastly, brief conclusion is state for concluding this section of the paper.
Discussion:
This case of ASIC v Adler is considers as unique and complicated case, because it involves
number of breach of duties in context of Corporations Act 2001. This case is the relevant
example for understanding the duties of directors.
Collapse of HIH in this case was cause because of the bad corporate governance and failure of
directors to understand their duties and fulfil them. As stated above, there were number of duties
which were breach under this case such as duties of directors stated under section 9, duty to act
with due care and diligence under section 180, duty to act in good faith and for a proper purpose
under section 181, duty not to use their position in improper manner and business judgment rule
under section 182, duty not to use the information in improper manner under section 183, and
financial assistance under section 260A.
In this case, court considers all these duties imposed by Corporations Act 2001 on the directors
of the company. Santow J in this case defines the importance of these duties in following
manner:
Section 9- 13This section defines the meaning of directors and officers of the company. In the
case of ASIC v Adler, Court stated that directors of the HIH were also considers as an officer of
wholly own subsidiary which can be fall under section 9 definition of directors, and this applies
to Adler also.
Section 18014- this section imposes duty on directors to exercise their powers and fulfill their
duties with due care and diligence, as any reasonable person will do if holds the position of
director or officer. In this case, this section was contravened by Williams who holds the position
of managing director for HIH and HIHC because he failed to make sure the proper safety
measures before allowed the HIHC to provide loan to PEE. Court further states that Fodera holds
the position of the finance director of HIH also breach this section because he failed to discuss
the proposal of providing loan of $10 million to PEE to the board of HIH. Therefore, both
Fodera and Williams breach section 180 of the Act.
Court also stated that both Fodera and William cannot rely on business judgment rule as their
statutory defense.
Section 18115- This section imposes duty on directors of the company to act in good faith, for
proper purpose, and also in the best interest of the company. In this case, Court held that, Adler
12 ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
13 Corporation Act 2001- Section 9
14 Corporation Act 2001- Section 180.
15 Corporation Act 2001- Section 181.

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contravened section 181 of the Act because he fails to act in good faith, for proper purpose, and
in also failed to act in best interest of the company. 16As Adler use all the transactions occurred in
the HIH, HIHC and PEE were used in improper manner and for the personal interest of the
Adler.
Section 182- This section imposes duty on director to use their position for proper purpose,
which means they cannot use their position for their personal benefit. In this case, both Adler and
William use their position for improper purpose. As Adler use his position of director in HIH and
PEE for getting advantage for Adler Corporation. On the other hand, William uses his position in
HIH to get advantage for Adler Corporation.
Section 183- This section imposes duty on director to not use the information they get in the
capacity of director for improper purpose, which means they cannot use the information for their
personal benefit. In this case, Adler uses the information for wrong purpose and for getting the
benefit for his own17.
Conclusion:
After considering the facts of this section, it is clear that ASIC v Adler is the case which is serves
perfect example of duties imposed by the Corporations Act 2001 on directors of the company.
BIBLIOGRAPHY
Website
16 AICD, The AdlerWilliams cases on appeal Law Reporter, (2004), <
http://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2000-
to-2009-back-editions/2004/february/the-adlerwilliams-cases-on-appeal-law-reporter>.
17 John Orr, Constraining Fat Cats in Corporate Cathedrals: Neo-Liberalism, Corporate Law and Unreasonable
Remuneration of Directors, (2002) < http://www5.austlii.edu.au/au/journals/SCULawRw/2002/8.pdf>.

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Clayton UTZ, Business structures, <
https://www.claytonutz.com/ArticleDocuments/178/Clayton-Utz-Business-Structures.pdf.aspx?
Embed=Y>.
ATO, Partnership, < https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-
get-started/Choosing-your-business-structure/partnership/>.
DIIIS, Partnership, (2017) < https://www.business.gov.au/Info/Plan-and-Start/Start-your-
business/Business-structure/Business-structures-and-types/Partnership>.
TIA, Legal Business Structures, < http://dpipwe.tas.gov.au/Documents/Legal-Business-
Structures.pdf>.
ASIC, Your Business Structure, < https://asic.gov.au/for-business/your-business/your-business-
structure/>.
DIIS, Company, (2017), < https://www.business.gov.au/Info/Plan-and-Start/Start-your-
business/Business-structure/Business-structures-and-types/Company>.
Legal Vision, The Advantages & Disadvantages Of Operating Under A Partnership Business
Structure, (2015), < https://legalvision.com.au/business-structures-the-advantages-disadvantages-
of-operating-under-a-partnership-model/>.
Business Queensland, Partnership business structure, < https://www.business.qld.gov.au/starting-
business/types-legal-structures/legal-structures/partnership>.
Adam Courtenay, The pros and cons of business partnerships, (2010), <
https://www.smh.com.au/business/small-business/the-pros-and-cons-of-business-partnerships-
20101109-17lhh.html>.
Murfett legal, Not-for-profit organisations - association or company limited by guarantee?, <
https://www.murfett.com.au/MurfettLegal/media/Documents/Article/56-Associations-vs-
Company-Limited-by-Guarantee.pdf>.
Jonathan Korchakk, Advantages and disadvantages of a public limited company, (2016), <
https://www.informdirect.co.uk/company-formation/public-limited-company-advantages-
disadvantages/>.
AICD, The AdlerWilliams cases on appeal Law Reporter, (2004), <
http://www.companydirectors.com.au/director-resource-centre/publications/company-director-
magazine/2000-to-2009-back-editions/2004/february/the-adlerwilliams-cases-on-appeal-law-
reporter>.
John Orr, Constraining Fat Cats in Corporate Cathedrals: Neo-Liberalism, Corporate Law and
Unreasonable Remuneration of Directors, (2002) <
http://www5.austlii.edu.au/au/journals/SCULawRw/2002/8.pdf>.

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Case
ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
Statutes
Corporations Act 2001