LAW200 Commercial Law: Business Structure Recommendation for John

This report provides advice to John Smith, an aspiring entrepreneur in the fashion industry, regarding the most suitable business structure for his new venture. It analyzes three primary options: sole proprietorship, partnership, and company. The report details the advantages and disadvantages of each structure, considering factors such as liability, finance raising, ownership, management, and decision-making processes. Ultimately, the report recommends that John Smith establish his business as a company due to its limited liability, ease of finance raising, and potential for expert management, making it the most advantageous structure for his specific needs. Desklib provides solved assignments and study resources for students.

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Contents
Reference List.............................................................................................................................................6

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LETTER
To,
John Smith
XYZ
Subject: Advise John on the most appropriate business structure to operate his new venture.
To whom the letter may concern,
In Australia, there is no single manner in which any business organisation can be carried out.
Every interested person has three options to choose from, that is, sole trader ship or a partnership
or a company.
Now, when any single person wants to conduct business on his own then, it is advisable that he
must operate the business by way of a sole trader. A sole trader is the sole owner of the business
and he is in charge of all the benefits and liabilities of the company. Generally, business of very
small scale can be operated by way of a sole trader. In sole traders, it is the owner who has to
invest all the finances and must bear all the consequences of the same. (Hunter, 2010)
Now, considering the status of John Smith, John Smith is considering to formulate his own
business in the fashion industry, mainly in men’s clothing. Now, though John wants to start a
small business, but, if he has to invest in the business then it is he who has to buy all the finances
and must bear all the losses individually. Also, as soon as John dies or will leave the business,
the business ceases to exists.
Thus, it is advisable that John Smith should not carry on his business by way of a sole trader.
Apart from sole trader ship, there are two other kinds of business amongst which a business
structure can be chosen by John Smith and which includes a partnership and a company.
A partnership is the second most important kind of business structure that can be established by
any interested parties. A partnership is the business structure wherein two or more than two
persons may start any business to carry on the business with common intention and of
continuous nature with a sole intention of earns profits and share losses. The persons who carry
on the business of a partnership are called partners.

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There are several points of consideration that must be kept in mind when initiating a partnership
form of business, that is, firstly, that the partnership does not have perpetual succession. A
partnership might get dissolved because of death of any partner or because of incoming/outgoing
of any partners; secondly, the liability of the partnership is unlimited; thirdly, the acts that are
carried out by any partner are taken in the name of the partnership and will hold the partnership;
fourthly, the partners have to raise finance on their own; fifthly, the acts of one partner will hold
all the other partners liable for the same. Even at times when the partner is acting outside the
authority but still the form is liable if the acts are carried out under ostensible authority.
(Sheridan, 2006)
Apart from the partnership form of structure, there is yet another kind of business structure
which can be availed by John Smith is in the form of a company.
A company is a business entity which can be established in Australia, only when the same is
incorporated as per the rules and regulations of the Corporation Act 2001 and the guidelines laid
down by Australian Investment and Securities Commission.
When any company is made then it has a distinct personality in the eyes of law and is treated as
an artificial person. There are several points of consideration that must be kept in mind when
initiating a company form of business, that is, firstly the company has perpetual succession, that
is, a company does not die even if there is no surviving personnel’s in the company; secondly,
the liability of the owners of the company are limited to the value of their unpaid shares and thus
there s limitation of the liability; thirdly, finance can be raised by issuing shares of debentures
and thus the finance can be raised easily; fourthly, experts can be appointed by the company
without making them part of the organization. (Henderson, 2008)
Now, these are some of the points of consideration that must be kept in mind while deciding the
form of business the person would like to establish, that is, a partnership or a company.
However, considering the position of john Smith, It is advised to him that he must establish his
business by way of a company and not by way of a partnership. This is because of the following
reasons:
i. It is advisable that he must operate his business by way of a company because if the
company is made by him then his business will have limited liability. The liability of
John is only to the extent of the shareholding that he shares in the company and if the

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company sustains higher liabilities, then, the owner (John smith) is not answerable for
the same.
Whereas, if partnership form of business is selected by john Smith, then, the liability
of John Smith will be unlimited and he will be liable for all the losses that are
sustained by the partnership firm as the business does not have the concept of limited
liability.
ii. It is further submitted that if John Smith will carry on his business by way of a
company, then, it is very easy for him to raise finance. This can be done as the
company being a separate legal entity in the eyes of laws can raise e finance by
issuing shares and debentures in its own name. Thus, John Smith does not have to
bring in any kind of finance on his own.
Whereas if a partnership business is operated by him, then, it s very difficult to raise
finance as it is john Smith alone who has to bring in investment the business. There s
personnel investment that can be raised and thus bring financial obligation on John
Smith.
iii. Further, John Smith can only establish a partnership with the help of some other
person as a partnership requires two or more persons. Thus, he must be sharing his
ownership with some other persons.
Whereas, f a company is established by him then he can establish the same without
the interference of any other person as a company has its own identity and can be
established by a single persons. A company upon registration is categorised as a
separate legal entity in law and thus can be formulated by a single person.
Thus, John Smith can easily formulate a company all alone.
iv. Further, if John Smith requires any other person to carry out his business effectively,
then, he has to share his partnership with such person. But, if a company is
formulated, then, any person can become part of the company by joining it as an
employee of the company and thus does not become part of the ownsheshrip of the
company.
v. Also, if a partnership is created, then, all the acts that are carried on by John Smith
and his fellow partners has to carry out the same in the name of the partnership and
will ultimately hold all the other partners accountable for the same. The rule of

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agency will follow and the act of one partner will bind all the other partners of the
firm.
But, if a company is formulated, then, a company is an artificial legal person in the
eyes of law. Thus, if any expert is to be appointed then the same can be done by
employing the same and the employee does not become part of the ownership of the
company.
vi. Also, in partnership since all the partners are taking part in the management
decisions, then, there are chances of conflicts amid them. However, if john smith
choose to formulate the business by way of a company, then, the managers and the
employees are not all part of the decision making process and it is only the directors
of the company who take active part in the management of the company.
On the basis of all the reasons above, it is advised to John Smith that the best business
structure that can be selected by him s to operate his business by way of a company.
Once a company is established then he will be distinct from the company and all the
acts that are taken by the company will be taken in his own name. Also, the John
Smith can easily raise finance, limit his liability and employee experts for the
effective management of the company.
Hence, the best choose considering the expectations of John smith, the company is
the best business structure to choose from all the other kinds of structures.

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Reference List
Books/Articles/Journals
Henderson, A. (2008). Directors' Personal Liability for Corporate Fault: A Comparative
Analysis. Kluwer Law International B.V.
Hunter, S. (2010). The Sole Trader Quick Start Handbook. Dash House.
Sheridan, G. (2006). The Partnership: The Inside Story of the US-Australian Alliance Under
Bush and Howard. UNSW Press.