Business Law: Examination of Australian Corporation Structures

This report provides a comprehensive overview of different business corporation structures, crucial for individuals starting a business in a complex and globalized environment. It begins by introducing the significance of choosing the right business structure and then delves into the specifics of sole proprietorships, partnership firms, and companies. For each structure, the report outlines the advantages, such as ease of formation and tax benefits for sole proprietorships, pooled resources and fiduciary duties in partnerships, and separate legal identity and limited liability in companies. It also highlights the disadvantages, including unlimited liability for sole proprietors, potential for partner disputes in partnerships, and increased administrative complexities for companies. The report references relevant legislation, such as the Corporations Act 2001, and case law, like Salomon v A Salomon & Co Ltd, to support its analysis. Furthermore, it suggests that while corporate structures are complex, they are often preferred due to their distinct benefits and discusses legal safeguards like the piercing of the corporate veil and the duties of directors. The report concludes by emphasizing the importance of carefully evaluating the aspects of each business structure to make an informed decision, ultimately recommending the corporate structure for its longevity and professional management capabilities.

INTRODUCTION TO BUSINESS LAW
Business Corporation Structures

Contents
Introduction................................................................................................................................2
Types of business structures.......................................................................................................2
Sole Proprietorship..............................................................................................................2
Partnership Firms................................................................................................................3
Company...............................................................................................................................3
Suggestion..................................................................................................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

Introduction
The decision of the choice of a business venture is one of the most crucial business decisions
for the owners before starting a business in the complex and globalised business environment.
Every business structure is different from each other and governed by different regulatory
authorities. The evaluation of the choice of business structure is dependent on the compliance
requirements, set up, administration cost, and the longevity of the business. The following
work is aimed at highlighting the various aspects of different business structures in
accordance with the associated advantages, disadvantages and the statutory requirements.
Types of business structures
Sole Proprietorship
The sole proprietorship is the most simplest form of business structures and a single
individual operates and owns the same. In addition to the exclusive ownership over the
decision making in management and the profits of the business, comes the responsibility of
the bearing the risk. It must be further noted that the cost of compliance is least in the said
business structure. The business name must be registered initially unless the same falls in the
ambit of the list of exempted business.
The advantages of the sole proprietorship are mentioned as follows. The business structure is
easy to form and requires less paperwork and procedural compliance. In addition, sole
proprietorships tend to be affordable models with no requirements of filings as prescribed for
the companies and cheaper registration cost. The cost of registration of the business name is
$36 for the period of one year, however a collective three years registration cam be obtained
at a cost of $85 (Department of Industry, Innovation and Science, 2019). An Australian
Business Number (ABN) is also required to be obtained which is free of cost. The yet another
benefit is in the form of the tax benefits and the compliance. The business is not required to
file its income tax return separately and the owners claim businesses gains and losses as a
part of their individual tax returns itself. In addition, the individual tax rates apply instead of
separate tax rates as in case of other business structure. The direct control over the business
operations rather than the distribution of the power is also a chief benefit. As the power is not
diluted, the policy formulation and implementation process is faster and hassle free.
The disadvantages can be listed to be whole and sole liability of the sole owners. In the event
the business assets are not sufficient to meet the debt obligations, the individual assets can be

seized and utilised for the satisfaction of the claims of the creditors (Legal Match, 2019). The
duration of the business structure is limited and is dependent on the life of the owner of the
enterprise. In addition, raising capital is difficult as the initial funding is entirely dependent
on the capacity of the sole owners.
Partnership Firms
The next set of most popular business structure is that of the partnership firms which denotes
an association of two or more individuals for the purpose of conduct of trade, profession, or
business. It must be noted that the maximum number of people that can be associated is
limited to twenty by the statute (Australian Government, 2018). The said business structures
are governed by different legislations depending upon the state or territory in which the
business is based. Some of the partnership legislations are the “NSW - Partnership Act 1892,”
“QLD - Partnership Act 1891,” “VIC - Partnership Act 1958,” and others.
The advantages of the partnership firm are listed as follows. The owners are not only able to
pool their assets and capital, but also able to share the risks and rewards of the business. As
held in the case of Birtchnell v Equity Trustee, Executors & Agency Co Ltd., the partners owe
fiduciary duty towards each other and work under the agency relationship for the partnership
firm. Thus, there is an effective governance and oversight by the law in context of the
management of the affairs of the partnership. Some other advantages are the opportunity for
income splitting and the resultant tax savings, greater borrowing capacity, and privacy of the
business affairs limited to the partners.
The said business structure also has its share of disadvantages as explained follows. Firstly, in
the eyes of the courts of law, the identity of the firm is not considered as separate from the
partners. Thus, the partners are individually as well as severally liable for the outside claims
on the entity and the acts done by other partners as well during the employment (Tasmanian
Government, 2019). The disadvantages can be further stated to be risk of frictions among the
partners leading to the dissolution of the partnership firm. Further, the setup and
administration costs are relatively higher and the higher tax rates are applicable on the
income of the firm.
Company
The most popular form of business structure is that of the corporates as governed by the
Corporations Act, 2001 in Australia. A company denotes an artificial person created by law,

possessing a separate legal identity and common seal under law and whereby the
management and the ownership are generally separated.
There are numerous advantages of the company form of business structure as listed follows.
The principle of the “separate legal identity” is what makes the corporate different from other
forms of the business structure and is the key advantage of all. By the virtue of the said
principle, in the events of satisfaction of the corporate rights of the creditors, the claims are
limited to the assets of the company and the personal assets of the shareholders cannot be
utilised for the discharge of claims. The liability of the shareholders of the company is limited
to the extent of the amount payable on the shares held by such a shareholder. The popular
case law of “Salomon v A Salomon & Co Ltd.” had led to the establishment of the
foundational principle and the same has been asserted in various following case laws such as
that of “Lee v Lee’s Air Farming Ltd,” “J J Harison (Properties) Ltd v Harrison” and others.
As the company obtains its registration, it can carry out various business transactions by the
virtue of the contractual relationships with the third parties, incurring the debts and the
possession of the property. Thus, the company has both the beneficial and legal ownership
over the assets purchased in its own name. Further, a legal suit can be initiated against any of
the members of the company by the company because of the separate legal identity. Another
key advantage is that a corporate survives the death of the owners unlike the other form of
business structures.
The disadvantages of the company form of business structure is listed as follows. The
procedural formalities for setting up of the business, administration and management of the
company affairs are maximum in the corporate form of business structure. For instance, there
is mandatory legal requirement for the companies to obtain a registration under Australian
Securities and Investment Commission (ASIC) to be known as the Australian Company
Number (ACN). In addition, the requirement to obtain the business name must be fulfilled by
the filling of the “Form 201” (ASIC, 2019). The cost proprietary for the obtaining the
business name for a proprietary limited company has been prescribed to be the $495. The
administration formalities can be stated to be holding of requisite number of meetings,
appointing of the directors, filing of the annual return and financial statements, maintenance
of accounts and books, and the other incidental processes. Additionally there are other
associated legal costs such as solicitor fees and the cost of underwriting. In addition to the
above, the corporates are subjected to the highest tax rate slabs and the taxes are high as

compared to other form of business structure. The ownership and the control over the
business decisions is also diluted among a number of shareholders.
Suggestion
In spite of the inherent complexities in the corporate structure, the same is the more preferred
business structure and the distinct features that are not at all present in other business
structure forms. It must be noted that in order to address the complexities in the management
and to fix the responsibilities of those managing the affairs of the enterprise, the law has
provided a number of safeguards as listed follows. The prime safeguard available to the
various stakeholder groups is that the shareholders cannot hide behind the separate identity of
the company and carry out undesirable business functions; the courts can anytime life the said
“Corporate Veil,” in the event of the conflict of interests. The corporate veil can be pierced
by the courts of law under common law and under the provisions of the corporation’s statute
as well. It has been pronounced in a number of popular cases such as “Gilford Motor Co Ltd
v Horne,” “Daimler Co v Continental Tyre” and others that the courts consider the members
of the company to be limited unless the said are not carried with an intention to defraud and
deceive the creditors and other stakeholder of the enterprises. Further, the duties of the
directors are specifically listed in the various sections of the Corporations Act that are
“section 181 to 183” (Corporations Act, 2001). The said duties are prescribed by the law to
ensure the fair conduct and efficient management of the enterprise by the directors. Further
the exercise of professional care and diligence while discharging the functions of the
directors is necessitated. Some of the other safeguards available in various other sections of
the Corporations Act are the “section 199” stating to maintain the proper records of the
companies and the financial books to ensure transparency and the “section 208” requiring the
disclosure of personal interests of directors to the market. In addition, the “section 588G” of
the act prescribes that the directors of the companies must ensure that the insolvent trading
practices are not entered into by the company, to safeguard the interests of the investors. In
addition, it must be noted that the directors can be stated to make good the losses out of the
personal assets if they fail to perform their directorship functions in a responsible manner as
was held in the popular case of the “ASIC v Sino Australia Oil and Gas Limited.”
Hence, it is evident that though the corporate structure is complicated, yet it is the most
desirable forms of the business structure because of the unmatched benefits obtained. Hence,

it is suggested to opt for the corporate business structure also because the initial set up and
registration costs are one-time investments.
Conclusion
As per the discussions conducted in the previous parts it can be stated that the choice of the
business structure is one of the most crucial business decisions, as yet numerous aspects and
obligations such as capital contribution, profits and risk sharing, taxation implications are
dependent on such choice of business structure. The work explored the various aspects of the
different business structure, which must be evaluated carefully by the owners before choosing
the structure. These aspects were profit sharing, dilution of ownership, risk, and extent of
personal liability involved, tax obligations, initial set up and administration costs and others.
On evaluation it has been found that the corporate structure is best suited in terms of the
longevity and the professional management of the business of the enterprise.

References
ASIC v Sino Australia Oil and Gas Limited [2016] FCA 42.
Australian Government (2018) Partnership [online] Available from:
https://www.business.gov.au/planning/business-structures-and-types/business-structures/
partnership [Accessed on: 31/07/2019].
Australian Securities & Investment Commission, 201 Application for registration as an
Australian company [online] Available from:
https://asic.gov.au/regulatory-resources/forms/forms-folder/201-application-for-registration-
as-an-australian-company [Accessed on: 31/07/2019].
Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 38.
Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307
Department of Industry, Innovation and Science (2019) What are the set-up steps and costs?
[online] Available from: https://www.business.gov.au/change-and-growth/restructuring/sole-
trader-to-a-company/difference-between-a-sole-trader-and-a-company/what-are-the-set-up-
steps-and-costs [Accessed on: 31/07/2019].
Gilford Motor Co Ltd v Horne [1933] All ER 109.
J J Harison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 162, at
[25].
Lee v Lee’s Air Farming Ltd [1961] AC 12.
Legal Match (2019) Advantages and Disadvantages of Sole Proprietorships [online]
Available from: https://www.legalmatch.com/law-library/article/advantages-and-
disadvantages-of-sole-proprietorships.html [Accessed on: 31/07/2019].
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22.
Tasmanian Government (2019) Partnership – advantages and disadvantages [online]
Available from: https://www.business.tas.gov.au/starting-a-business/choosing-a-business-
structure-intro/partnership-advantages-and-disadvantages [Accessed on: 31/07/2019].