Business Structure Report: Partnership, Company and Liability Analysis

This report evaluates business structures, specifically focusing on partnerships and companies, to recommend the most suitable structure for clients. It examines costs, regulatory and administrative burdens, potential liabilities, and fiduciary duties associated with each structure. The report analyzes key legal cases, such as Stekel v Ellice, Smith v Anderson, Salomon v Salomon & Co Ltd, and Lee v Lee's Air Farming Ltd, to illustrate the legal principles. The analysis considers the unlimited liability of partners versus the limited liability of shareholders and the fiduciary duties of partners and directors. Based on the analysis, the report recommends a limited partnership for the clients, considering their desire to limit personal liability and maintain operational control. The report emphasizes the benefits of a partnership, including lower costs and reduced regulatory burdens, while highlighting the importance of a partnership agreement to define roles, responsibilities, and liabilities. The conclusion stresses the need for careful evaluation of business structures to ensure the selection of the most appropriate option.

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Business Structure

Introduction
When it comes to starting a business, it is important that the parties involved in the
process must evaluate the type of “business structure” which they want to select that
meets their requirements. There are various structures available, each of which has
different benefits and disadvantages which are necessary to be addressed by
individuals to make the right decision. In this report, the purpose of to evaluate two
structure to promote recommendations to the clients based on their analysis; these
include “partnership” and “company”. Along with evaluation of their management
costs, regulator and administrative burden, this report will evaluate liability of parties
and significance of fiduciary duty that will assist in making a recommendation.
I: Issue
The key issue presented in this case is selection of the “business structure” which
appropriate for the clients based on the evaluation of costs, regulatory and
administrative burden, fiduciary duties and potential liabilities towards third parties.
R: Rule
Costs, administrative and regulatory burden
People who are willing to establish their business in Australia has to select an
appropriate structure. “Partnership” is often used when there are two or more
individuals that decide to join together in order to start their business. Along with it,
people also select “Company” as the structure to manage their business. There are
both pros and cons which are necessary to be considered by people to make sure
that they select a suitable structure. When it comes to a partnership, it offers various
benefits to people. As per its definition, when two or more individual start a business
in which they have the intention to generate profit and run the operations in common,
it is considered as a partnership. In Stekel v Ellice1, it was identified that the court
analyses the relationship between parties to determine whether they are in a
partnership or not; a salaried employee was also considered as a partner by the
court despite the fact that his name was not included in the partnership agreement. It
1 (1973) 1 WLR 191
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is also important that parties that form a partnership must run its operations together
as given in Smith v Anderson2.
Broadly, it is categorised in general and limited. In the case of general partnership,
all partners are liable for the debts which are incurred by their business, jointly or
severally. In case of “limited liability partnership (LLP)”, an option is available that
enables partners to limit their personal liability up to certain extent. A key advantage
is that the initial costs which are required to establish and run the business are
considerably low3. It is not mandatory for parties to register their business; however,
it is recommended. When it comes to compliance with regulatory burdens, they are
considerably low, making it easier for partners to comply with them. They did not
have to file their annual returns, conduct mandatory meetings and the number of
policies which apply on the business is also lower.
However, this is not the case with a “Company” since its structure is different from a
partnership. It is mandatory to register a company after which it gains a “separate
entity” that separates it from its owners. It is considered as an “artificial person” that
can form contractual relationship with third parties under its name as given in
Salomon v Salomon & Co Ltd4. Its owners are also referred as shareholders, and
their liability in the business remains limited to their shares in the company. The
costs of running its operation are considerably higher since parties have to comply
with various policies and prepare documents which are submitted to regulators.
Registration is also mandatory for parties5. The administration is managed by the
“board of directors” that take decisions on behalf of the organisation. Regulations
that govern the actions of corporations are relatively stricter as they have to prepare
annual reports, conduct mandatory meetings and comply with various policies while
managing day-to-day business operations. The “Corporations Act 2001 (CA)6” is the
key legislation in Australia that provides policies which govern the operations of
companies. They are divided into two types: public and proprietary companies.
2 (1880) 15 Ch D 247
3 Geoffrey Morse, Partnership law (Oxford University Press, 2010).
4 (1897) AC 22
5 Paul Davies, Introduction of company law (Oxford University Press, 2020).
6 Corporations Act 2001 (Cth)
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Liabilities
Since partnership firms did not have a legal entity, the liability of partners remains
unlimited. They are responsible for taking its decisions, and they also face
consequences of those decisions. Third parties that are not able to recover their loss
from the partnership are able to sue the partners to recover their debt. In the case of
limited partnerships, partners have the option to limit their personal liability up to a
certain extent7. They can specify this in their partnership agreement in which they
can also mention their profit sharing ratio. Partners are not only liable towards third
parties, jointly and severally, they can also be held liable for one another. They are
expected to take decisions within their authority and actions that are taken by them
outside their authority – which harms the interest of other partners – could lead to
legal consequences. This is especially the case in contractual relationships in which
they enter – on behalf of the firm as given by the court in Mercantile Credit Co Ltd v
Garrod8; these contracts have the ability to hold each and every partner liable
towards their parties.
However, this is not the case in a corporation in which directors have the power and
responsibility to make business decisions. Although they take decision for the
company; however, a personal liability cannot be imposed on them since the
company has a separate entity. It forms contractual relationships under its name,
and it is directly sued by third parties for violation of contractual terms as given in
Lee v Lee's Air Farming Ltd9. Furthermore, shareholders or owners also have limited
liability in the business – up to their share amount – based on which they cannot be
held personally liable in the business. Third parties have the right to file a lawsuit
against the company – rather than its owners or directors – to recover their losses.
However, it did not mean that directors cannot be held accountable for their actions;
they can be held liable for taking decisions which violate their duties given under
section 180 to 183 of CA.
Fiduciary duty
Partners manage business operations together, and they are able to take decisions
which also bind other partners into legal contracts. Due to this feature, they are
7 J. Scott Slorach and Jason Ellis, Business Law 2019-2020 (Oxford University Press, 2019).
8 (1962) 3 All ER 1103
9 [1960] UKPC 33
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subject to a fiduciary duty which imposes an obligation on them. They are obligated
to make sure that no actions are taken by them within their authority or outside it that
could have potentially adverse impact on the interest of the firm or other partners.
This duty was recognised in George Hall & Son v Platt10 where it was held that
partners can form contracts that legally bound other partners due to which they owe
a duty to ensure that their decisions did not harm the interest of other partners. This
duty requires that the partners must not priority their personal benefits while taking
decision on behalf of the partnership since their decisions could negatively affect
other partners or else third parties can hold them liable. In case any decision is taken
that violate this duty, then a lawsuit can be filed against the partner. Other partners
can recover their losses by holding the partner personally liable.
Similarly, directors also owe a fiduciary duty since they are responsible for making
decisions that affect operations of a corporation. They have immense power to take
decision which could adversely affect the interest of the company or its shareholders
as well based on which duties are imposed on directors under the CA. Guidelines
given under section “180 to 183” identifies various duties that enforce directors to
avoid violating their fiduciary duties11. It is their duty that they must maintain “care
and diligence” which is reasonable to expect from a person who is operating in the
same position as given under section 180. This is expected from them when they
make business decisions while using their position. They also have to act in “good
faith” when making decisions for the organisation to make sure that their decisions
did not harm its interest or the interest of shareholders. They cannot use the position
to give priority to their personal interest a given in the case of Greenhalgh v. Arderne
Cinemas Ltd12. Furthermore, a duty is also imposed on them to properly use their
position and confidential information in the company under section 182 and 183,
respectively. Furthermore, in Hogg v Cramphorn Ltd13, the judgement also supported
that directors’ have a fiduciary duty and they must comply with the same to avoid
legal consequences based on which personal liability can be imposed on them.
10 [1954] TR 331
11 Shelley Marshall and Ian Ramsay, ‘Stakeholders and directors' duties: Law, theory and evidence’,
(2012) 35 UNSWLJ 291.
12 [1951] Ch 286
13 (1967) Ch 254
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A: Application
Based on the analysed of both these business structures, a suitable structure can be
recommended to the clients. They are three in number, and they want to run a
business together. They also want to limit the extent of their personal liability in the
business to ensure that they cannot be held liable for its debts. Therefore, it is
recommended that they should select “limited partnership” as their business
structure. The benefits of a partnership will allow them to avoid compliance with
stricter legal policies, and they will be able to completely control their business
operations. Along with low establishment and running costs, they will not be subject
to stricter guidelines relating to administration of the business. They should create a
partnership agreement in which details regarding their profit sharing ratio, duties,
responsibilities, authorities and liabilities should be included. They will be able to
avoid stricter compliance with regulatory and administrative burden, which would be
the case if they select a company structure. They might face challenges in relation to
generating revenue from external sources; however, choosing a limited partnership
will allow them to limit their liability up to a particular extent. They will owe a fiduciary
duty to make sure that they did not take any actions which harm the interest of
another partner which will protect their interest. Therefore, this is the correct
structure for them which will benefit them.
C: Conclusion
To conclude, it is important that parties must evaluate pros and cons of business
structures which allow them to select a suitable structure for them. Both partnership
and company offer different pros and cons to parties which they can evaluate to
select on structure. Based on the evaluation of costs, administrative and regulatory
burden, potential liability and fiduciary duties, it is recommended that a limited
partnership will be suitable for the clients due to its benefits. It will be cheaper to
operate without enforcement of stricter guidelines, and they will be able to limit their
liability in the business as well.
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