LAWS20059: Corporation Law and Business Structure Report, Term 1, 2020

This report, prepared for LAWS20059, examines the fundamental decision of choosing a business structure. It compares partnerships and companies, focusing on establishment, administration, liabilities, and fiduciary duties. The analysis includes the registration processes, administrative burdens, and legal requirements for both structures. The report details the unlimited liability of partners versus the limited liability of company shareholders, referencing relevant case law like Salomon v A Salomon & Co Ltd. It also explores the significance of fiduciary duties in partnerships and the duties of directors in companies, citing relevant sections of the Partnership Act 1891 (Qld) and the Corporations Act 2001 (Cth). Based on the comparison, the report recommends that Ted, Greta, and Mariana form a company for their proposed Russian caviar and vodka business.

Corporation Law and Business Structure

LAWS20059 – TERM 1, 2020 1
PART A
Introduction
One of the first and the foremost decision to be taken before starting a business is the choice
the structure of the business. There are varied business structures which have their own set of
pros and cons. When the number of the individuals to be associated for the conduct of the
business is more than one, the two primary choices of the business structures is that of the
partnership firm and company. The objective of the following report is to guide the clients
Ted, Greta and Mariana regarding the choice of the business structure for their proposed
Russian caviar and vodka business in Melbourne. The first part would include the comparison
of the different features of both the business structure. The second part would include a
recommendation based on the discussions in the earlier parts.
Analysis of the features of the business structures
A partnership is defined as an agreement bounded association of the persons for the purpose
of conducting profession or business, wherein the prime objective is to share the profits. It is
to be noted that the maximum number of the partners in a partnership firm are limited to 20 at
a time. A partnership can be in nature of general partnership or a limited partnership1. In
contrast to this, a company is defined as a legal entity under the Corporations Act 2001 (Cth),
which is capable of performing all the functions of a body corporate, has a perpetual
succession, can hold, sell and acquire the property in its own name and can sue or be sued2.
The most formed types of the companies are Proprietary Limited Company, Limited
Company and No Liability Company. The comparison and contrast of different features is
presented as follows.
Establishment and administration
The first step in registering a partnership firm is to decide and register a business name for
the partnership. For the registration of business name, the partners are required to obtain an
Australian Business Number (ABN). Such number must be used in all the business dealings.
It is essential to note that the relationship between the partners and the matters of the
partnership business are based on the principles of equity contained in the state wise
Partnership Acts. After the first step, the partners must form an agreement among themselves
1 "Partnership", Business.Vic.Gov.Au (Webpage, 2020) <https://www.business.vic.gov.au/setting-up-a-
business/business-structure/partnership>.
2 "Research Guides: Companies In Australia: Business Structures", Guides.Slv.Vic.Gov.Au (Webpage, 2019)
<https://guides.slv.vic.gov.au/companies/structures>.

LAWS20059 – TERM 1, 2020 2
setting out the rights and duties of each of the partner, remuneration details, profit sharing
ratio, capital contribution ratio, nature and type of the business and other significant details
such as the manner of resigning or dissolution of the partnership. The respective acts of the
state govern the partnership contracts. Thus, the cost of registration is less and limited to
ABN and agreement. For the administration burdens, there is not much except maintain the
appropriate books of accounts and record, in terms of the legal requirements.
In contrast to this, the formation and the management of the company is rather a costly and a
complex affair. The process starts with numerous planning and decision making as to choose
the type of company to be established, deciding on who will be directors and members of the
company, and establishment of a governance structure. The consent of the directors and
members need to be obtained. The proposed members would have to choose a company name
by reviewing the name on the Australian Securities and Investment Commission (ASIC). The
members must have to get the constitution and the internal rules prepare and printed for
which a legal practitioner would be required to be hired. After this, the companies must be
registered with ASIC, by filing the form 201C (in case of proprietary companies). The cost
for such registration amounts to $ 4953. Such an ACN number obtained must be quoted in all
the official documents and records of the company and thus the same must be printed
accordingly. In terms of the administrative and the legal burdens, there is numerous costs and
the activities involved. The companies are required to conduct certain number of meetings of
directors as well as members, must maintain the accounts as per the applicable legal
framework, must file the annual returns and financial statements, apart from others. Thus, it is
complex and tedious affair and needs hiring of the professionals.
Analysis of the liabilities
The following section is descriptive of the liabilities in both the business structures of the
entity itself and the members towards the third parties.
As stated in the previous parts, the state acts regulate the partnership business. For instance,
in Queensland, the governing act is the Partnership Act, 1891. The prime feature of a
partnership firm is that the liability of the partners is unlimited towards the firm. This means,
in the event of the assets and the other resources falling short for the payment of the
obligations, the personal assets can be called for the contribution. Regarding the dealings and
3 "201 Application For Registration As An Australian Company | ASIC - Australian Securities And Investments
Commission", Asic.Gov.Au (Webpage, 2020) <https://asic.gov.au/regulatory-resources/forms/forms-folder/201-
application-for-registration-as-an-australian-company/>.

LAWS20059 – TERM 1, 2020 3
the liabilities of the third parties, partners on their own cannot decide the same; rather the
same are based on the provisions contained in the act.
As per the provisions of section 12 of act, the partners hold a joint liability for the debts and
obligations to the third parties in relation to the business of the form and the concerned
transactions must have been entered into while being partner in the business. The significance
of such a joint liability is that the even without the knowledge of the transactions engaged
into by the other partners, there is an obligation. This is referred to as the agent relationship
of the partners towards each other and towards each other and the firm. In simple words it
means that the contracts can be enforced by the third parties on the presumption of the equal
and joint liability even when all of the partners are not aware of the transactions. The further
relevance of the joint liability is that in the events of the death of partners, the estate would
still owe towards the omissions or the wrongful acts of the other partners.
In comparison of the liability of the, the identity of the company is considered as separate
from its members. The separate and distinct identity principle was first established in the
leading English case of Salomon v A Salomon & Co Ltd4. According to the pronouncement in
the case, the creditors of the company could not sue the shareholders for their outstanding
debt even when the maximum numbers of shares were held by a single shareholder itself.
This principle thus limits the amount of liability of the shareholders to the unpaid amount on
the shares subscribed. The implication of this nature of liability is that even in the event of the
winding up of a company by the virtue of the negative net worth, the shareholders are not
required to contribute out of their personal assets. Thus, while the liability of the members
towards the company is to the extent of the share capital agreed to be subscribed, there is no
liability towards the other shareholders. Additionally, in the light of the above principle, the
outside parties can sue the company and vice versa, and the members of the company can sue
it and vice versa.
However, the above principle must not be construed as a means to defraud the creditors, for
the courts may lift the corporate veil under the common law as well as the statute to identify
the real persons behind the company. The piercing of the corporate veil is often done in the
event of the illegitimacy of the company objectives, and the fraudulent activities towards the
varied stakeholders in company. The corporate veil has been lifted by the courts in the
various cases, few renowned names are Green v Bestobell Industries Ltd5, Gilford Motor Co
4 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
5 Green v Bestobell Industries Ltd [1982] WAR 1

LAWS20059 – TERM 1, 2020 4
Ltd v Horne6 and Daimler Co v Continental Tyre Rubber Co Ltd7. It was held in the above
cases that the mere reason to form the company was to avoid the liabilities of the
shareholders, and the shareholders must be liable for the payment of the obligations of
transactions even when it were entered in the name of the company.
Significance and the difference of the fiduciary duties
It is important to note that the relationship shared between the partners is that of the fiduciary
relationship in all the matters related to the partnership. This means, the partners must ensure
to be honest, loyal and fair towards the firm as well as the other partners. Accordingly, the
acts prescribe the duties of the partners on in different sections. As per the section 27 of the
Partnership Act 1891 (Qld), additional duties can be mentioned in the agreement apart from
the general duties. For instance, the general duties as laid down in the act calls for honest and
legitimate conduct of the business of the firm and the same was prescribed in the case of
Mercantile Credit Ltd v Garrod8. According to the section 31 of the above act, it is the duty
of every partner to maintain the accounts of the firm in a transparent manner9. Additionally,
incidental significant information by the virtue of which the operations of the partnership can
be considerably affected must also be disclosed fairly not just to the other partners, but their
legal representatives as well. The section 32 of the act casts the duty, to disclose any kind of
benefit or profits achieved by the partners in respect of any business transactions, to which
the other partners are not aware10. Such a duty is also applicable after the dissolution of the
partnership due to the death of the partner. In such a circumstance, such a disclosure must be
made to the surviving partners along with their legal representatives or the legal
representatives of the deceased partners. In addition, the duty is casted on the partners of the
firm to not engage themselves in the business that is competing to that of firm, unless an
agreement has been entered with the rest of the partners, as stated in section 33 of the said
act11. If the partners still engage in the competing business it is the duty to transparently
provide for the profits earned and pay the same to other partners. Hence, as mentioned above
it is the duty of the partners to act as the agents of other partners and the firm.
6 Gilford Motor Co Ltd v Horne [1933] All ER 109
7 Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307
8 Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103.
9 Partnership Act, 1891, sec 31
10 Partnership Act, 1891, sec 32
11 Partnership Act, 1891, sec 33

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In contrast to the above, the directors of the company manage the affairs on behalf of the
stakeholders of the company including the shareholders. The directors are in fiduciary
relationship with the company and must act as the agents of the company. The main general
duties by which the directors must abide are stated out in the section 180, 181, 182, and 183
of the Corporations Act 2001 (Cth). It has been mentioned in the stated duties that the
directors must act in a manner that is in the best interests and in good faith of the company.
Some of the acts in good faith are abidance of the state, federal, and territory laws,
employment laws, occupational health and safety laws, and to not to engage in business
transactions with the conflicting interests12. Other duties as mentioned in the other sections of
the act are to follow the applicable financial reporting requirements, disclose the personal
interests in the contracts to be entered, disclosure of information that that has potential to
affect the share prices of the company and others.
Recommendations and Conclusions
As discussed in the previous parts, there are numerous key benefits of the formation of both
the partnership and the company. Though the corporate structure is complex and involves
more burden of cost and regulatory burdens, yet the benefits in terms of longevity of the
business, professional management and the limited liability. Hence, it has been recommended
to Ted, Greta and Mariana to form a company for their proposed business.
12 Australian Securities and Investment Commission, Directors' key responsibilities (web page) <
https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-
guide-for-small-business-directors/directors-key-responsibilities/>

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Bibliography
Acts
Corporations Act, 2001 (Cth).
Partnership Act, 1891 (Qld).
Cases
Daimler Co v Continental Tyre and Rubber Co [1916] 2 AC 307
Gilford Motor Co Ltd v Horne [1933] All ER 109
Green v Bestobell Industries Ltd [1982] WAR 1
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103.
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Others
"Research Guides: Companies In Australia: Business Structures", Guides.Slv.Vic.Gov.Au
(Webpage, 2019) <https://guides.slv.vic.gov.au/companies/structures>
"Partnership", Business.Vic.Gov.Au (Webpage, 2020)
<https://www.business.vic.gov.au/setting-up-a-business/business-structure/partnership>
"201 Application For Registration As An Australian Company | ASIC - Australian Securities
And Investments Commission", Asic.Gov.Au (Webpage, 2020)
<https://asic.gov.au/regulatory-resources/forms/forms-folder/201-application-for-registration-
as-an-australian-company/>
Australian Securities and Investment Commission, Directors' key responsibilities”,
Asic.Gov.Au (Web page, 2020) < https://asic.gov.au/for-business/your-business/tools-and-
resources-for-business-names-and-companies/asic-guide-for-small-business-directors/
directors-key-responsibilities/>