LAWS20059 - Corporations and Business Structures Law Assignment Report

This assignment report analyzes various business structures, including sole traders, partnerships, and proprietary companies, highlighting their advantages, limitations, and setup costs. It delves into the legal aspects of partnerships, emphasizing partner liabilities and agency relationships, referencing the Partnership Act 1958 and the case of Mercantile Credit Ltd v Garrod. The report then contrasts this with the structure of corporations, emphasizing the concept of separate legal entity and limited liability, citing Salomon v Salomon and Lee v Lee’s Air Farming Ltd. It explores the duties of partners, including rendering accounts and avoiding personal profits, as outlined in the Partnership Act 1958, and common law fiduciary duties. The report also outlines the duties of company directors as prescribed by the Corporations Act 2001, including care, diligence, and acting in the best interest of the corporation. The report also touches upon the disclosure of interests and duties during insolvency periods. Finally, it touches upon the common law duty of directors to exercise discretion.

Running Head: BUSINESS AND CORPORATION LAW 0
Corporations and Business Structure
4/7/2019
Business and Corporate Law
Student’s Name

Corporation and Business Structure
1
Contents
Part A...............................................................................................................................................2
Part B...............................................................................................................................................3
Part C...............................................................................................................................................5
Part D...............................................................................................................................................7

Corporation and Business Structure
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Part A
Mainly three types of business structures are available to people namely sole traders, partnership
firm, and proprietary companies. These structures have their own advantages and limitations,
different setup and administrative cost. Starting from sole traders, this is a low-cost structure and
very few reporting requirements involved in the same. One may become a sole trader by
registering the business name. Further one may apply for Australian Business number1. All the
administrative burden of such business lies with on single person who is the owner of the
business. There is no hard-core annual compliance in cases of sole traders and therefore
administration is easy. Another form is a partnership. This is also an easy structure. A
partnership business must make an application to get ABN. In addition to this, the same is also
requires to get a separate Tax file number for its business. As profits of the firm get divided
among partners and become their income, therefore the firm is not required to pay separate
income tax. Further, if the annual turnover of the firm is $75,000 or more then a partnership firm
will be required to be registered for GST2. Annual compliance is also a burden on the partnership
firm. A firm is required to prepare and submit a Tax return to Australian Taxation Officer every
year. The administrative burden of the firm is on all the active partners of the firm3.
At last, the third type of business structure is the Proprietorship Company. This structure has
much cost of set up. Promoters need to get registered their company with ASIC. In Australia, the
setup cost for a proprietorship company is $4884. Further, companies are required to have a
1 Abr.gov.au, Sole trader (Web Page) <https://abr.gov.au/For-Business,-Super-funds---Charities/Applying-for-an-
ABN/ABN-entitlement/Sole-trader/>
2 Philip McCouat, Australian Master GST Guide, 2011, 12th ed (CCH Australia Limited, 2010) 46.
3 Ato.gov.au, Partnership (Web Page) < https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-
get-started/Choosing-your-business-structure/Partnership/>
4 Business.gov.au, What are the set-up steps and costs? (Web Page) < 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>

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separate bank account, which is subject to bank charges and interest. The administrative burden
lies with the directors of the company. A company has to pay director fee as well which cost
more to this business. In this manner, this would not be wrong to state that the company is the
most costly business structure whereas a sole trader is the cheapest one.
Part B
Firstly, to say, a partnership firm has no separate identity from its partners5. This is the reason
that partners have unlimited liability for the debts of the firm. A partner of the firm has an
agency relationship with partners as well as with the firm. It means he/she act on behalf of the
firm and other partners. In this manner, a partner has the authority to develop any contract with
the third party on behalf of the firm. This authority may be expressed as well as implied
authority. The rights and liability of the partners are regulated by partnership agreement, which
may be developed in oral as well as in written mode. A partnership agreement is an internal
document and a third party does not have access to the same. An outsider who deals with the
firm thinks that partners have enough authority to enter into an agreement and law secure the
right of third parties in this manner. According to the section 9 of Partnership Act 19586 when
partners do act beyond their given authority, the right of the third party remains secure and the
same can held the firm as well as other partners liable for the same. The reason behind the same
is that the third party cannot check the level of authority of a partner when the transaction is
related to the ordinary course of business.
Nevertheless, it is also necessary to state that a third party would have no right against a firm or
other partners when the same has knowledge about less or no authority of the partners.
5 Lucy Jones, Introduction to Business Law (Oxford University Press, 2017) 521.
6 Partnership Act 1958 (Vic)

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Mercantile Credit Ltd v Garrod7 is an important case to study in this area. The court in the
decision of the case set aside the argument made by another partner and held that the third party
had no knowledge of limited authority of a partner and therefore the firm, as well as another
partner, was liable towards the third party8. The transaction was related to the general nature of
the business. It means the liability of partners is unlimited towards the third party and they are
personally liable for the performance of a contract entered by them or another partner of the firm
as well. If a partner act within the authority and/or partner act outside of authority but transaction
relates to the general nature of business of the firm.
Moving the discussion towards the liability of directors acting on behalf of the company, this is
to mention that a company has a separate legal status from its directors as well as officers. It
means in the eyes of law a company is a legal person which may enter into a transaction in its
own name with the third party. In addition to this, the same can develop the contracts and can sue
third parties by its own name. Third parties also can sue a company. Because of the separate
identity feature of the company, its members, as well as directors, also enjoy another benefit that
is known as limited liability. According to limited liability rule, neither directors nor the
members of the company may held liable for the conducts of a company. It was held in the case
of Salomon v Salomon that the company is a separate legal person and there is an artificial
corporate veil between directors and company. The rule further supported in the case of Lee v
Lee’s Air Farming Ltd9. It means the officers and directors are not personally liable for the
contract developed by the company with outsiders. If a company breaches any contract made by
an outsider, then the whole responsibility will be of the company. Nevertheless, there are some
exceptions where directors of the company can held personally liable. These are the situations
7 Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
8 Stephen Judge, Business Law (Macmillan Education UK, 2009).
9 Lee v Lee’s Air Farming Ltd [1960] UKPC 33

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where directors act fraudulently and in the opinion of courts, it becomes necessary to held them
personally liable. Such a situation is known as the lifting of the corporate veil. It means in
normal circumstances directors are not liable but courts may held them personally liable
wherever the same find it necessary.
Part C
Partners of the firm owe many duties to each other under common law as well as under statutory
law. Starting from the statue, this is to state that every state of Australia has it is separate
legislation to govern the partnership structure of business but for this part, Partnership Act 1958
will remain in focus. Division 3 of this act consists of provisions related to the relationship
between partners. Section 32 of the act says that partners of the firms have a duty to render the
accounts to other partners. In day-to-day business dealings, partners often do many transactions
on behalf of the firm such as purchasing and selling of goods, payment of salaries, receipt of
payment from third parties and many others and in such a situation it becomes the duty of
partners to render all accounts in a true manner to other partners10. Another duty of partners is
mentioned in section 33 of the act. According to this section, partners should not make personal
profits out of any transaction concerning the business of partnership without the knowledge of
other partners11. If a partner does so then he/she becomes accountable to the firm for such
personal profits. In addition to these two sections, the third duty of a partner under statue is
mentioned in Section 34. As per the provisions of this act, a partner should not carry the similar
10 Legislation.vic.gov.au, Partnership Act 1958 (Web Page) <
http://www.legislation.vic.gov.au/Domino/Web_Notes/LDMS/LTObject_Store/ltobjst8.nsf/
DDE300B846EED9C7CA257616000A3571/999AD52779A9DAFCCA257C8C0001320F/$FILE/58-
6330aa083%20authorised.pdf>
11 Classic.austlii.edu.au, Partnership Act 1958 - SECT 33 (Web Page) <
http://classic.austlii.edu.au/au/legis/vic/consol_act/p84a1958135/s33.html>.

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business as of partnership firm and if a partner does so then he/she will be liable to surrender all
the profits earn out of such personal business to a partnership firm12. In addition to these statutory
duties, common law states that partners in mutual have fiduciary duties. Birtchnell v Equity
Trustee, Executors & Agency Co Ltd13 is an important case to quote here where the court decided
that partners should not make secret profits or should not do anything contrary to the interest of
the firm. Similar to an agent, a partner of the firm should act within the given authority by
principles, otherwise the same may held personally liable for the same.
Moving the discussion towards duties of director of the company, this is to state that
Corporations Act 200114 is the lead legislation of Australia, which states the duties of directors.
Section 180 to 183 of this act prescribes the general duties of the director. Section 180 of the act
says that it is the duty of every director and officer of the company to perform their duties with
care and diligence15. Section 181 is another section in this area, which says that every officer and
director of the company should perform their duties in the best interest of the corporation and
that too for a proper purpose. The position of the director is a significant one. Directors are the
person responsible for the management of the company and therefore they have information on
all the crucial decisions and financial position of the company. In such a situation, there are
chances that they can misuse their position in the corporation. Section 182 prohibits such
incidents According to this section no director or officer can use his/her position in the
corporation in an improper manner for the personal benefits or benefits of others or in a manner
that may cause harm to the corporation. At last, section 183 is the last sections, which prescribe
12Classic.austlii.edu.au, Partnership Act 1958 - SECT 34 (Web
Page) <http://classic.austlii.edu.au/au/legis/vic/consol_act/p84a1958135/s34.html>.
13 Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 384
14 Corporations Act 2001 (Cth)
15 Australia, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related
regulations (CCH Australia Limited, 2011) 221.

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the general duties of directors. As per this section, neither a director nor the officer of the
corporation should use the information of the corporation for their personal benefits or in a
manner that may cause harm to the corporation16. In addition to these general duties, directors
also owe some other special duties to the company. Section 191 of the act says that in those
transactions where the personal interest of the director is involved, it becomes the duty of the
same to disclose this personal interest to other directors17. Section 588G states that it becomes the
duty of the same to not enter into any transactions during the insolvency period18. Similar to
partners of a partnership firm, director of the corporation also has duties under common law as
well. Duty to exercise discretion is one of the significant duties of directors that is prescribed
under common law. As per this duty, directors are liable to make an independent and informed
judgment while performing their duties. In addition to this, directors have duties to perform their
functions for the proper purpose. Most of the duties of the director under Corporations Act 2001
and common law are the same. Similar to Corporations Act 2001, common law also says that it
becomes the duty of the director to disclose his/her personal interest while dealing on behalf of
the company.
Part D
Hello, Mr. John, Senior legal advisor of Best Advisors LLP, this report is focused on one the
interview that I have recently conducted with our clients Mr. Lee and his wife. The client wants
to start their business and wanted to know about the advantages and risk related to various
16 Premiers.qld.gov.au, 7.3 Corporations Act 2001 (Cth) (the Corporations Act) (Web Page) <
https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-
duties/corp-act-2001-c.aspx>.
17Gianmatteo Nunziante, Joint Ventures (Sweet & Maxwell, 2012) 26.
18 Malcolm Burrows, Director’s duty to prevent insolvent trading (Web Page) <
https://www.dundaslawyers.com.au/directors-duty-to-prevent-insolvent-trading/>.

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business structures. Starting from the very basic, I first informed them about three-business
structures, which are available to them, namely sole proprietorship, partnership, and company. I
have first informed the client that if they would use a sole proprietorship structure then the risk
associated with the same will be unlimited. Mr. Lee will be personally liable for all the debts of
their business and in this manner, their personal assets will be at risk. Further, some advantages
are also there which this business structure will serve to them. For instance, control on the affairs
of the business. I told them that in my opinion, this is one of the most significant advantages that
sole proprietorship structure provides to business owners.
I have asked them about the funds/capital available with them. Mr. Lee stated that he does not
have much money but his wife does. Thereafter I have started briefing about another business
structure, which is a partnership firm. I have told them that they may also choose the partnership
form of business. As Capital can be an issue in a sole proprietorship, Mr. Lee can enter into
partnership business with his wife. If Mrs. Lee would provide capital to his husband for his sole
business then in the future she can have trust or another issue. In order to remove the risk of
conflict or issues, she can become a partner with his husband and can have equal control over the
use of her funds. Mr. Lee asked about the control and liability-level of the partnership structure. I
have briefed them the same and stated that similar to sole ownership structure, partners of
partnership firm has unlimited liability regarding debts of the firm. Further, all the partners of the
firm take part in the management of the firm unless otherwise stated. The partnership agreement
is a document, which states the rights and liabilities of the partners. This agreement may also be
developed in oral form but it is advisable to develop the same in a written mode in order to
prevent all the potential risk and arguments19. In addition to this, I also informed that partners do
19 Jean Murray, Why Your Partnership Needs a Written Agreement (Web
Page) <https://www.thebalancesmb.com/why-your-partnership-needs-a-written-agreement-398401>.

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have an agency relationship with the firm as well as with other partners and therefore they have
fiduciary duties towards other partners and firm under common law. Client belongs to Victoria
state and wants to establish their business in this state only. I have informed them that
Partnership Act 1958 will be applicable to their business, which states the liability, and rights of
partners and partnership agreement cannot be in contravention of this legislation. Mrs. Lee asked
about the income of partner and tax liability of the business. Answering question asked by her I
have stated that profits earned by the firm is divided among partners according to their profit
sharing ratio or equally if no ratio is decided between/among partners. Further, as I have told
earlier that a firm does not have separate legal entity from its partners, hence firm is not required
to pay any tax on its income. Partners pay income tax on their incomes that are profits of the
firm. I have made it clear to Mr. Lee as well as his wife that I am only providing general
information of business structures and my words should not be taken as professional and final
advice. Mr. Lee afterward shared that he wants to know the liability that directors of an
incorporated company have as he heard about the limited liability of business structure. Agreeing
with him, I stated that yes directors of the company has limited liability, as a corporation is a
separate legal person in the eyes of law. A company is a separate legal personality and the same
can enter into transactions and contract with third parties in its own name20. Nevertheless, it does
not mean that directors may misuse their limited liability or separate personality of a company as
the court may held them personally liable in those cases where they breach their duties. Common
law requires the director to act in a trustworthy manner considering the best interest of the
organization. Further, Mr. Lee has to comply with the provisions of the Corporations Act 2001.
This act states the duties of director of Australian companies. Mr. Lee asked the manner in which
20 Bhanu Srivastava, The Concept of Separate Legal Entity in light of Corporations (Web Page) <
https://www.lawctopus.com/academike/concept-separate-legal-entity-light-corporations/>.

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a company is managed and I explained to him that directors are the person responsible to manage
the company but there are some transactions, which require the approval of shareholders. In such
situations, the company has to call general meetings and the same can only proceed with the
agendas if approved by shareholders. At last, I asked Mr. and Mrs. Lee that what are the most
important concern of them and they stated that they want to limit their liability. I stated that
company structure would be preferable for them, as they would have limited liability if they
would act as per the given duties. I again made it clear that this is only general advice and the
ultimate decision will be of the client only.

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Bibliography
Books/Journals
Australia, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC
Act 2001, related regulations (CCH Australia Limited, 2011)
Nunziante, G. Joint Ventures (Sweet & Maxwell, 2012)
Jones, L. Introduction to Business Law (Oxford University Press, 2017)
McCouat, P. Australian Master GST Guide, 2011, 12th ed (CCH Australia Limited, 2010)
Legislations
Corporations Act 2001 (Cth)
Partnership Act 1958 (Vic)
Case Laws
Birtchnell v Equity Trustee, Executors & Agency Co Ltd (1929) 42 CLR 384
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103
Stephen Judge, Business Law (Macmillan Education UK, 2009).
Other Sources
Abr.gov.au, Sole trader. (Web Page) <https://abr.gov.au/For-Business,-Super-funds---
Charities/Applying-for-an-ABN/ABN-entitlement/Sole-trader/>.
Ato.gov.au, Partnership (Web Page) < https://www.ato.gov.au/Business/Starting-your-own-
business/Before-you-get-started/Choosing-your-business-structure/Partnership/>