LAW200 Commercial Law: Advising John Smith on Business Structures

This report provides legal advice to John Smith, who is considering starting a small business in the fashion industry. It assesses the suitability of different business structures, focusing primarily on sole proprietorship and partnership. The report details the advantages and disadvantages of each structure, including aspects related to cost, control, liability, capital access, and taxation. It recommends a partnership structure for John, highlighting its benefits in terms of shared resources, diverse skills, and manageable risk, especially given the uncertain nature of a new business venture. The report also emphasizes the importance of a well-drafted partnership agreement to mitigate potential disputes and liabilities. Desklib offers a range of solved assignments and study tools for students.

Running Head: BUSINESS AND CORPORATION LAW 0
Commercial law

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Contents
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Advisory Letter
To, Date: 01 June 2019
Mr. John Smith
Sub:- Advice of Business Structure
Ref:- Query dated 28 May 2019
Respected Sir,
We had a discussion with you where you have asked a suitable business structure for your
business. We have made an inquiry regarding your business venture and identified some of the
most appropriate structure. These structures are detailed in the report attached as Annexure A.
Advantages and disadvantages of these structures with their basic features are also mentioned in
the attached report. Hope you will find the same in order.
Thanking You!

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Annexure A
The client wants to start a small business in the fashion industry. In this scenario, the two
most suitable business structures that seem to be available are the sole trader and partnership. In
general company business structure are also there for commercial entities but the same carries
huge formation and operation cost. Further, other liabilities such as submission of various
returns, the publication of financial statements are also there in case of companies. As the client
already mentioned that the potential business is going to be a small business, there is no benefit
to using this structure, as it will increase the burden on the assets and profits of the company. As
earlier stated, sole trader and partnership are the most appropriate structure hence features, and
pros-cons of the same are required to be a review here.
Staring from the sole trader, this is to state that the same is the easiest structure to adopt.
In this kind of business structure, a person manages all the business activities and takes a
decision. No debts, liabilities, and losses can be shared with others. While starting a business in
Australia, the sole trader provides the most inexpensive structure (Mills, 2017). A sole trader
may employee people for his/her business. In order to discuss the key aspect of a sole trader, this
is to state that it is very simple to set up and operate. This business structure provides many
advantages. One of the leading advantages is low cost. A person may start the business by
registering its business name. Further, the same is also required to make an application for
Australian business number. One may do this by using the business registration website of the
Australian government (Service.nsw.gov.au, 2019). Another benefit of this structure is sole
control that the owner of the business has on its affairs. In another kind of business such as
partnership and company, a group of people manages the business and decides the business

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matters. Here a sole trader has full control of the business. Further, the whole profits belong to
the sole trader. No matter how much profits a business earns, a sole trader does not require to
divide such profits between other people. As a business under sole trading structure does not
require making the financial statements public, hence, trade secrets remain confidential and
competitors are not able to misuse them. As the client approached an accountant, the matters
related to accounts, finance, and tax are also required to have a look upon. One of the key
characteristics of a sole trader is that the owner of the business can use his own individual tax file
number while lodging the income tax return of the business. The logic behind the same is that the
business has no separate identity from its owner. A sole trader is required to be registered for
Goods and Service Tax if the annual turnover of the same is $75000 or more
(Smallbusiness.wa.gov.au, 2019). As a sole trader, a person owns all the assets hence the same is
responsible for all the liabilities associated with the assets. In such situation insurance, become a
mandatory thing to do (Business.vic.gov.au, 2019).
It would not be correct to understand that a sole trader business only has benefits as in
actual the same also carries some disadvantages. The main disadvantage of this business
structure is an unlimited liability. Business does not have a separate identity and for all the
liability and debt of business, the owner remains personally liable (Christensen & Duncan,
2009). Risk is greater than the other business structures and personal assets of the owner come
into the risky zone. Further, the business depends on a single person and comes to end in case of
the death of such person. Apart from these disadvantages, another issue is related to capital. A
sole trader faces the issue of limited access to capital and no one shares the business loss. At last,
the sole trader is responsible to pay business on all the income of profits and cannot split the

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same into friends or family members. Following is the tax rate chart for sole traders the financial
year 2018-19
(Business.gov.au, 2019)
The other business structure that is available for John is a partnership. It is a business
structure where at least two people join their hands to do business. These people are known as
partners of the firm. Unlike a sole trader, partner of the firm together runs the business. In order
to discuss the process of establishment of this business structure, this is to state that similar to the
sole trader, a partnership business is also required to apply for Australian business number and
must use the same in all business dealings. Partners are required to prepare a partnership deed to
decide the rights and obligations of partners. This business structure has its own pros and cons.
Starting from the pros, this is to state that business does not face the issue of limited capital as
different partners introduce their assets and resources to the business. Another benefit is the

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availability of different talent and skills (Corwin & Ciampi, 2018). One partner may be good at
one thing and another one may be good at another. In this manner, the business gets benefited
from different kind of skills. Further, in the case of losses, a single person is not required to bear
them. In case of any financial difficulty, a firm may ask support from banks and financial
institutions as well. Partners may come and go but business does not come to an end because of
this.
If to talk about disadvantages of this firm, this is to state that in case of partnership firm
also, liabilities of partners remain unlimited and they can be held personally liable for the debt of
their business (Business.tas.gov.au, 2017). Secondly, chances of disputes are always there as
different partners have their different opinion often and decisions of important matters get a
delay because of this. In addition to this one of the important drawback of this business, the
structure is a liability for other’s action. In case of partnership bossiness structure, every partner
work on behalf of the firm and firm and other partners are liable for such conduct. In this
manner, a person does not take responsibility for his/her action but is also liable for the conduct
of others.
Moving the discussion towards, accounts and tax aspects of this structure, this is to
inform that similar to a sole trader, partners of partnership firm also require to pay tax on the
income they earned as profit out of the business of the firm. The firm is required to lodge a tax
return every year with the Australian Taxation Officer. A separate file number is mandatory in
case of partnership firms (OECD, 2017).
After the above-mentioned information, it is far clear that every business structure is
different, having its own identification, features, benefits, and disadvantages. The different

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structure can be suitable for different business. Here the client wants to start a small venture.
Considering every factor, the partnership business structure seems to be suitable for John. It is a
new venture and can fail in the future. It means the success of the same is not ensured. If the
partnership structure would be used, other partners will be there to help him out. Further capital
would not be an issue. As it is a new venture, financial arrangements will be difficult from banks
under the sole trader structure. Although the risk of personal issues would be there in case of
partnership firm, the same can be addressed and resolved by clearly mentioning the rights and
obligations of partners in writing. Here a client can be worried about the liabilities for the
conduct of others hence in order to resolve this issue; again, a partnership agreement will be
there. If other partners would be there then John will be able to get their advice and in this
manner, the business will experience benefit from the skills of other partners. Personal assets of
John will not be in as much risk as the same would be under the sole trader structure. Hence, it is
advisable for John to go with Partnership Structure.

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References
Business.gov.au. (2019). What are the tax rates for income? Retrieved From:
https://www.business.gov.au/change-and-growth/restructuring/sole-trader-to-a-company/
tax-differences-between-a-sole-trader-and-a-company/what-are-the-tax-rates-for-income
Business.tas.gov.au. (2017). Partnership – advantages and disadvantages. Retrieved From:
https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/
partnership-advantages-and-disadvantages
Business.vic.gov.au. (2019) Sole trader. Retrieved From:
https://www.business.vic.gov.au/setting-up-a-business/business-structure/sole-trader
Christensen, S., A. & Duncan, W., D. (2009). Sale of Businesses in Australia. Australia::
Federation Press.
Corwin, L., D. & Ciampi, A., J.(2018). Law Firm Partnership Agreements. New York: Law
Journal Press.
Mills, A., D.(2017). Company Accounting - Prepare Financial Reports for Corporate Entities.
Australia: Cengage AU.
OECD. (2017). Global Forum on Transparency and Exchange of Information for Tax Purposes:
Australia 2017 (Second Round) Peer Review Report on the Exchange of Information on
Request: Peer Review Report on the Exchange of Information on Request. Paris: OECD
Publishing.

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Service.nsw.gov.au. (2019). Set up as a sole trader. Retrieved From:
https://www.service.nsw.gov.au/transaction/set-sole-trader
Smallbusiness.wa.gov.au. (2019). Sole trader. Retrieved From:
https://www.smallbusiness.wa.gov.au/business-advice/business-structure/sole-trader