LAWS20059 - Partnership vs. Company: A Comprehensive Analysis

This report provides a comprehensive analysis of partnership and company structures, highlighting their key elements, advantages, and disadvantages. It discusses the legal requirements for forming each type of business, including relevant case laws such as Joyce v Morrissey and Salomon v Salomon & Co Ltd. The report also evaluates the duties of directors under the Corporations Act 2001 (Cth), using the ASIC v Adler case as a practical example of breaches in director responsibilities. Ultimately, the report recommends the most suitable business structure for a client based on their specific needs and circumstances, emphasizing the importance of considering factors such as liability, capital raising, and regulatory compliance. Desklib offers a range of resources, including past papers and solved assignments, to support students in their studies.

Corporation and
Business Structure
2018

PART 1
INTRODUCTION
Different business structures have different characteristics based on which parties can select
them while starting their business. Selection of the suitable business structure is the key
objective of parties while starting their business. The objective of this report is to evaluate
the key factors of partnership and company structure. Different attributes of each structure
will be discussed in the report to understand the different aspects of each structure based
on evaluating cases and legislation.
PARTNERSHIP
When two or more parties agreed to start a business together, then they form a
partnership. This structure enables two or more parties, up to 20, to form a business
together and run its operations1. Partners have unlimited liability, and they can be held
personally liable for business debts. While forming this structure, certain elements are
required to be present without which a valid partnership business cannot be formed.
EL EMENT OF PA R T NERS H IP
 Relationship between parties
It is necessary that the partner must have a relationship with each other to form a
partnership business. In the case of
Joyce v Morrissey2, the court provided that a
relationship between two or more people which fulfils the criteria of a partnership can bind
them into a business structure based on which they can be held liable for actions of each
other.
 Carry out a business
The business of a partnership is carried out by partners themselves, and they are solely
responsible for its operations. An agreement for the performance of isolated event which
1 Australian Taxation Office,
Partnership (2016) Australian Taxation Office <
https://www.ato.gov.au/business/starting-your-own-business/before-you-get-started/choosing-your-
business-structure/partnership/>
2 (1998) TLR 707

would not repeat in the future cannot be constituted as a partnership as given by the court
in
Smith v Anderson3 case.
 In common
The business of the partnership must be run in common by each partner. The non-
participation in the business cannot form a partnership between two or more parties as
given in the case of
Saywell v Pope4.
 View of profit
The purpose of the partnership must be to generate a profit for the partners which they
divide between each other based on their profit sharing ratio. However, in
Britton v The
Commissioners of Customs & Exercise5 case, the court provided that only sharing of profits
did not constitute a partnership between parties and presence of other elements is
necessary as well6.
COMPANY
The provisions regarding constitutions and attributes of a corporation are given under the
Corporations Act 2001 (Cth)7. A corporation has a separate legal entity in the eyes of the law
based on which it is different from its members as given by the court in the case of
Salomon
v Salomon & Co Ltd8. The registration of a company is necessary without which it cannot
become a separate personality9. It is an artificial person based on which it has several rights
and liabilities as well. In the case of
Lee v Lee’s Air Farming Ltd10, the court provided that
third parties cannot hold the owners of a company liable for its debts since their liability is
limited to their shares in the company.
The decisions in a company are not taken by its owners, like a partnership. Instead, directors
are responsible for run the operations of the corporation, and they take all the business
3 (1880) 15 Ch D 247
4 (1979) STC 824
5 (1986) VATIR 204
6 Netlawman,
Choosing a legal structure for your business: Partnership (2018) Netlawman
<https://www.netlawman.com.au/ia/partnerships-ins-and-outs-australia>
7 Corporations Act 2001 (Cth)
8 (1897) AC 22
9 Michael Whincop, Mary Keyes and Richard A Posner,
Policy and Pragmatism in the conflict of laws
(Routledge, 2018).
10 (1960) UKPC 33

decisions on the company. In Australia, the Corporations Act provides provision regarding
governance of a company, and it also imposes various duties on directors which they are
necessary to be fulfilled while taking business decisions11. The process of forming a
corporation is complex since parties have to comply with a large number of legal
requirements. Furthermore, the cost of incorporation is high as well since the parties have
to pay registration and various other fees.
CONCLUSION
Based on the above analysis, each business structure has different characteristics.
Partnership is suitable for parties who wanted to keep their business small and in control
without facing strict legal regulations. The corporation provides more growth opportunities
to parties based on which they can easily expand their business.
11 ASIC,
Your business structure (2018) ASIC < https://asic.gov.au/for-business/your-business/your-business-
structure/>

PART 2
INTRODUCTION
While making these decisions, parties are required to evaluate key factors of different
business structures and compare them to select most appropriate structure for them. In
order to determine the most suitable business structure, parties are required to evaluate
the advantages and disadvantages of each structure to determine which is suitable for
them. The purpose of this report is to evaluate both pros and cons of establishing
partnership and company structure to give recommendations to the client.
PARTNERSHIP
Advantages
 Formation of a partnership is easier than incorporating a company since partners
have to comply with fewer legal requirements12.
 The cost of establishing is low as well than compared to a company.
 Accounts of a partnership are private property which cannot be accessed by the
public.
 The legislation relating to partnership did not impose strict regulation on partners
regarding continuous reporting and disclosure requirements.
 Partners divide profits and losses based on their profit sharing ratio which removes
confusion.
Disadvantages
 Partners have unlimited liability based on which they can be held liable for the debts
of the business or the wrong actions of other partners conducted by them during the
course of partnership business13.
 The sources of raise capital for the business are limited, and partners have
comparatively fewer growth opportunities.
12 Vanja Simic,
The advantages & disadvantages of operating under a partnership business structure (2015)
Legal Vision <https://legalvision.com.au/business-structures-the-advantages-disadvantages-of-operating-
under-a-partnership-model/>
13 The Quinn Group,
Partnership Structure (2018) The Quinn Group
<http://www.allbusinessstructures.com.au/partnership-advantages-and-disadvantages/#Disadvantages>

 Partnership income is included in the personal income of the partners which is not
taxed separately, thus, it did not have favourable tax rates.
 Conflict in the partners can result in the dissolution of the entire partnership
business.
COMPANY
Advantages
 Members and directors have limited liability based on which they cannot be held
personally liable for the liabilities of the company.
 Operations are managed by directors who are experts in the field and focus towards
expanding the business of the company14.
 Shareholders can easily transfer their share to other parties through the stock
exchange.
 Corporations have more sources for raising capital for their operations which
provides them more growth opportunities.
 Tax rates are favourable for a company than compared to a partnership in Australia.
Disadvantages
 The process of incorporation is relatively complex since parties have to comply with
a large number of legal requirements15.
 The incorporation process is expensive as well since parties have to pay registration
and various other fees.
 Accounts of corporations are public which can be accessed by anyone. It eliminates
privacy of the company’s overall performance and decisions.
 Compliance with requirement such as continuous disclosure and reporting
regulations increases the issues for the directors.
RECOMMENDATION FOR THE CLIENT
14 The Quinn Group,
Company Structure (2018) The Quinn Group
<http://www.allbusinessstructures.com.au/company-advantages-and-disadvantages/>
15 Incorporator,
Registering company? Some pros and cons of registering a company in Australia (2018)
Incorporator <https://www.incorporator.com.au/pros-cons-company.asp>

Based on the analysis of both pros and cons of a corporation, a partnership structure is
more suitable for the client. The cost of forming a partnership is easy, and the client can
form a partnership by entering into an agreement. The process of incorporation is easier as
well since they have to comply with fewer legal regulations than compared to a company.
Since all the clients belong to the same family, it would be easier for them to form the
partnership and share the profits and losses of the business. After incorporation
compliances of a partnership are fewer as well than compared to a company since the
clients did not have to comply with continuous disclosure and reporting regulations. The
main advantage of a company is that it would enable the clients to raise capital for their
business from multiple sources. However, they would have less control over their
operations, and they would have to comply with a large number of regulations while
maintaining business operations. Thus, for starting a real estate business, the clients should
form a partnership business since it is the most suitable option for them.
CONCLUSION
To conclude, each structure has different attributes which are necessary to be evaluated in
order to select the most appropriate business structure for a party. It is recommended for
the clients that they should form a partnership to operate their business which would be
more suitable for them.

PART 3
INTRODUCTION
The Corporations Act 2001 imposes a number of duties over directors to ensure that they
did not breach their duties and misused their position for personal gain. These duties ensure
that the directors are focusing on growing and expanding the business of the enterprise
which benefits all of its stakeholders. The purpose of this report is to evaluate various duties
which are necessary to comply by directors while discharging their duties by analysing the
case of
ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72.
SUMMARY OF ASIC V ADLER
In order to understand the role of director duties, analysis of the facts of
ASIC v Adler16 case
is relevant. In this case, various duties were breached by Adler while he was acting as the
director. Firstly, a loan was authorised by HIH Casualty and General Insurance which was not
properly. The loan was given to Pacific Eagle Equity Pty Ltd (PEE) which was acting under the
control of Adler. Adler played a significant role in authorising this loan since he had a large
shareholding in HIH, and he was acting as non-executive director of Australian Equities Unit
Trust17. PEE invested $4 million from the loan in purchasing the shares of HIH and later the
company sold the share at a loss of $2 million. The company also invested $4 million in Adler
Corporation Limited by purchasing its shareholding at a loss as well. The company gave the
rest $2 million as a loan to various parties in which Adler was included as well. All these
transactions were not recorded properly in the accounting statements and Adler breached
various duties by authorising this transaction. He was held guilty for breaching section 180
to 183 of the Corporation Act.
DIRECTORS’ DUTIES AS PER THE CORPORATIONS ACT
Section 180
Firstly, it is the duty of directors to maintain a standard of care and diligence to ensure that
the interest of the company and its stakeholders is secured. In
ASIC v Cassimatis (No. 8)18
16 (2002) 20 ACLC 576; 41 ACSR 72
17 Wells Philippa and Mueller Jens “Boards of directors in New Zealand: what do they reveal about
governance?” (2014) 12(3)
International Journal of Business and Globalisation
18 (2016) FCA 1023

case, the directors failed to fulfil the interest of the company and took actions which no
reasonable person would in such situation19. Similarly, in the case of Adler, he was involved
in authorising the issue of $10 million loan which was unsecured. This decision was not in
the interest of the company or its stakeholders based on which he breached his duty.
Section 181
It is the duty of directors to ensure that they took action in good faith of the company. They
should avoid taking business decision which no reasonable person would in the particular
situation which could ultimately harm the corporation or its stakeholders. In case of Adler,
he authorised the decision for giving an unsecured loan of $10 million to PEE. No reasonable
person would have approved this decision. Furthermore, Adler used such money for
personal gain based on which he breached his duties given under section 181.
Section 182
Since directors act at the top position in a company, they have significant powers to take or
influence business decisions in the company. It is their duties to ensure that they did not use
their position for unfair practices which result in adversely affecting the company or its
stakeholders. They should avoid using their position for personal gain. Adler used his
position to authorise the loan which ultimately benefited him. He used such money to invest
in its own company and giving loan to himself due to which he breached his duties.
Section 183
Since directors are responsible for making future strategies in the corporation, they have
access to all the confidential information regarding the company and its operations. It is
their duty to ensure that they did not misuse this information for personal benefit or
causing harm to the company or its stakeholders20. Alder misused the information for
personal gain by giving loan to himself and investing in his company. Furthermore, it
adversely affected the interest of the company as well based on which he breached section
183 of the act.
19 AICD,
General Duties of directors (2018) AICD
<https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-
6-2-duties-directors_general-duties-directors_a4-web.ashx>
20 Legislation,
Corporations Act 2001 (2018) Legislation
<https://www.legislation.gov.au/Details/C2018C00275>

CONCLUSION
To conclude, directors should evaluate their duties to ensure that they did not breach them.
The breach of these duties results in negative legal consequences which adversely affect
directors and the company, thus, effective compliance with these duties are necessary.

PART 4 (TRANSCRIPT FOR THE VIDEO)
Hello and good morning. In this video, I would give advice to our clients in order to assist
them in selecting an appropriate business structure between partnership and company. In
order to give them advice regarding selection of an appropriate business structure, it is
necessary to understand the characteristics of different structures and their role in the
organisation. In this video, attributes of both partnership and company structure will be
discussed along with their advantages and disadvantages. Finally, a recommendation will be
given to the clients based on weighing the advantages and disadvantages of both business
structures to assist them in making a suitable decision. When people decide to open a
business in Australia, they choose between different business structures. One of the
common structures selected by them is the partnership. In this structure, two or more
people can start their business by entering into an agreement. A relationship is created
between them based on which they become partners.
Based on their agreement, they decide to carry out the operations of the business together.
Partners themselves take the business decisions, thus, they are solely responsible for its
growth or failure. Since partners are responsible for all the actions of the partnership, they
can be held liable for its debts. The business did not have a separate personality of its own
based on which the liability of partners is unlimited as well. The cost of forming a
partnership business is low since parties have to comply with fewer legal requirements. The
regulations of a partnership are less complex based on which partners did not have to face
strict legal regulations. The operations of a partnership are private as well based on which
they did not have to disclose their accounts to the public. Partners share the income and
loss of the business together based on their profit sharing ratio which is given in their
partnership agreement.
On the other hand, a corporation is incorporated after complying with a large number of
regulations. The process itself is complex and expensive since parties have to spend on
various fees and preparation of documents. It is a separate legal entity which has a separate
personality from its owners. It has its own liabilities which are not imposed on its members.
Its members are liable up to the amount spend by them in the company. Furthermore,

corporations are able to generate wealth for their operations since they can issue their
shares in the public or get a loan under its own name. It provides them more growth
opportunities since they can utilise the money to expand their operations. Its accounts are
not private, and anyone can access them. Furthermore, companies have to continuously
make disclosures regarding its operations which make increases more legal complexities for
the organisation. The operations of a company are managed by its directors. They are
responsible for taking business decisions in the company while ensuring that its operations
are expanding and the interest of its stakeholders meet.
They have to avoid taking any decisions which could negatively affect the interest of the
company or any of its stakeholders. In order to ensure that directors did not misuse their
powers and position, they have to comply with various duties imposed by the Corporation
Act. In case they found breaching these duties, then they have to face legal consequences.
In case of our clients, their objective is to convert their business from a trust to start a real
estate business. They did not prefer the trust structure since it required them to comply
with a large number of strict legal regulations. As per my advice, they should form a
partnership business which would be more suitable for them. The legal structure of a
partnership is relatively easy and simple based on which they would not have to comply
with strict legal requirements. They can easily form a partnership structure with dealing
with a large number of legal regulations. It will also save the money of clients since the
process of forming a partnership is inexpensive.
On the other hand, if they decide to incorporate a company which would be an expensive
incorporation process and it would require them to comply with strict legal requirements.
They would have to hire directors, fulfil disclosure requirements and other legal regulations
while operating the business as a company, whereas, the process of managing a partnership
would be much easier. In case of a partnership, they would be under the control of the
business, and they would be able to take all of its decisions, whereas, it is not the case with
a corporation. Based on these facts, it is my advice that the clients should start their
business by incorporating a partnership structure. It would provide them more benefits than
compared to incorporating a company, and they would be able to save their capital. Since
they all are part of the same family, forming a partnership would be easier for them based
on which they have to comply with fewer legal regulations.