Legal Analysis of Business Structures: Partnerships vs. Companies

This report provides a comprehensive analysis of partnership and company law in Australia. It begins by defining and examining the essential elements of a partnership, including the concepts of two or more persons, common intention, carrying on business, and profit sharing, supported by relevant case law such as Smith v Anderson and Wise v Perpetual Trustee Co Ltd. The report then applies these legal principles to a scenario involving Samuel, Thomas, and Peta, concluding that their internet-based reselling venture constitutes a partnership. The second part of the report focuses on company law, specifically addressing the roles and responsibilities of company directors. It outlines the duties of care and diligence, both under common law and the Corporations Act 2001, referencing cases like Statewide Tobacco Services Ltd v Morley and AWA Ltd v Daniels. Additionally, the report explores the duty of good faith, as established in cases like Whitehouse v Carlton Hotel Pty Ltd and Walker v Wimborne, and its statutory basis under section 181 of the Corporations Act 2001. The report concludes by emphasizing the legal obligations and potential penalties associated with these duties.

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Contents
Answer 1.....................................................................................................................................................2
Issue........................................................................................................................................................2
Law..........................................................................................................................................................2
Application of law...................................................................................................................................3
Conclusion...............................................................................................................................................4
Solution 2....................................................................................................................................................4
Duty of care and diligence.......................................................................................................................5
Duty of good faith...................................................................................................................................6
Reference List.............................................................................................................................................8

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Answer 1
Issue
Whether the venture that exits amid Samuel, Thomas and Peta is a partnership or not?
Law
Any person intends to take a business in Australia can do so in the form of sole trade ship,
partnership or in the form of a company.
A partnership is one of the most promising business structures that are prevalent in Australia. a
partnership is a relationship which exists between two or more person who with common
intention decides to carry on a business of continuous nature. Once a partnership is established
then each partner is the agent of each other and that of the partnership firm and vice versa. The
law of partnership and its elements are discussed in Smith v Anderson (1880). (Cassidy 2006)
But, at times it becomes extremely difficult to distinguish whether a business structure is a
partnership or not. In order to do so, it is necessary that all the elements that constitute a
partnership must be analyzed. The same are as follows:
Two or more persons
In any partnership the basic requirement that is needed to form any kind of partnership is that
there must be minimum two and maximum twenty persons to form a partnership and is rightly
held in Playfair Development Corporation Pty Ltd v Ryan (1969). An individual can only form a
sole trader ship or company but for a partnership two persons is must.
Common intention
Common intention signifies that all the partners must aim at the same thing at the same time. The
partners who carry on the business must comply with their acts in order to achieve the objective
for which the business is formulated by them and is rightly held in Re Ruddock (1879). The law
does not establish that all the partners must indulge in the activities of the business, rather,
partners can be non active and sleeping also, but, still the intention amid them must be common
in nature.
Carrying on business

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Once two or more person join together with the common intention then it is necessary that the
business which they are carrying must be of continuous nature or at least the parties intend to
carry out the transaction of continuous nature. A single act can also be construed as an action of
partnership provided the parties intent to consider the same as an act of partnership and is held in
Keith Spicer Ltd v Mansell [1970].
Profit sharing
The partners to the partnership firm must carry on the business with common intention and the
business of continuous nature with the aim to earn profits and share them amid themselves. The
ratio amid which the profit must be shared is as per the terms of the partnership, but, it is relevant
that the profits must be shared amid them to make any association as a partnership in nature. The
concept of profit sharing as one of the elements of partnership is rightly held in Wise v Perpetual
Trustee Co Ltd [1903] .
Thus, when all the above elements are formulated amid the partners, that is, two or more persons,
common intention, carrying on business and profit sharing then the acts are carried out by the
person in the form of partnership.
The law is now applied to the facts of the case.
Application of law
An internet business of reselling products over the vast internet market is intended to be initiated
by Samuel, Thomas and Peta. Now, in order to establish a partnership business amid them it is
necessary that all the elements of partnership must be comply with.
It is submitted that the business that is intended to be carried on is by three persons, that is,
Samuel, Thomas and Peta. Thus, the first requirement of two or more person to form partnership
is met.
Now, all the three that is, Samuel, Thomas and Peta, intent to carry on the business of reselling
products over the vast internet market. The main aim of the business was that they buy the goods
and products from the companies which are at the stage of winding up and they then resell the
products so that they are able to earn the profits. Now, the main intention of the three is common.

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They want to indulge in the business of buy and sell of product so that they can make financial
gains. So there is presence of common intention in order to hold partnership amid them.
Further, Peta invested $100,000 equity in her home to finance the start-up costs of the new
venture. All the three are actively taking part in the running of the business. The business is
considered to be intend by all the three on continuous basis from the fact that they decided that
when the profit will be earned then they will not pay anything to Peta and the $6000 per month.
Thus, the intention of paying an amount to Peta per moth depicts the intention of the parties that
they want to continue the business. So the business is carried on continuous basis.
Last they decide to share the profits amid themselves, as Peta is given $6,000 per moth and
Samuel and Thomas were paid as per the consultancy arrangements with the venture. It does not
make any difference as to what names they gave to the profit sharing but it is necessary that the
profits must be divided amid them.
There is compliance of all the elements of partnership.
Conclusion
To conclude it can be submitted that all the three persons, that is, Samuel, Thomas and Peta have
initiate the business with common intention and a business of continues nature with the aim to
share profits. Thus, there exists partnership amid them.
Solution 2
The Corporation Act 2001 specifies that a any business acquires the status of a company only
when the same is incorporated as per the registration process submitted by ASIC and is held in
(Salomon v A Salomon and Co Ltd [1897]. A company is an artificial person and does not have
heart or soul. So, in order to make any company work, it is necessary that there must be some
officers or persons who act on behalf of the company. Section 9 of the Act defines a company
director as a person who is appointed or acts in the capacity of the director including de facto and
shadow directors. These director gain power under section 198A of the Act to act on behalf of
the company. (Latimer, 2011)

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A director has power to act on behalf of the company but there are certain responsibilities that
must also be cater by every company director. These are nothing but the duties that must be
furnished by a company director. Every company director are obligated to comply with their
duties both under common law and statutory law.
Duty of care and diligence
Duty under common law
When a director is appointed then he must carry the acts on the behalf of the company now these
acts must be undertaken by the director will due care and diligence. The acts must be such so that
the interest of the company must be secured and the acts must be carried like a diligent prudent
man would have carried in the same circumstances. Care and diligence is comply with by the
directors of the company when the acts are for proper purpose. Diligence, care and precautions
must be carried out at every step which are taken on behalf of the company. In Statewide
Tobacco Services Ltd v Morley (1990) it was rightly held that the duty to have knowledge over
the financial matters of the company is an act of care and diligence which must be cater by the
director of the company at every level.
This duty of care and diligence is the sole responsibly of the company directors. If the director
delegate this duty to his subordinate still the duty rests on the shoulders of the company director
alone. No director can state that he is ignorant of the facts of the company and if does no then the
same are the acts of carelessness and no application of diligence on the part of the director.
Every decision of the director must be informed and he must question all the relevant
information upon which he is relying. It is his duty of care and diligence to question any
information prior relying upon the same and is held in AWA Ltd v Daniels (t/as Deloitte Haskins
& Sells) (1992). If the director of the company is making himself to rest at such a position so that
he is not able to manage the company then he is not acting in careful and diligent manner.
Duty under statutory law
The Corporation Act 2001 also imposes a duty of care and diligence by enacting section 180 of
the Act.

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Section 180 (1) of the corporation Act 2001 submits that the acts of the director of the company
must be carried out with all due care and diligence like a normal prudent man in the like
situation’s the acts must be carried out in the interest of the company and for proper purpose.
This duty of care and diligence is imposed not only on the directors of the company, but on every
officer of the company.
If the director is found to be in violation of section 180 (1) of the Act, then he can protect himself
by availing the business judgment rule that is prescribed under section 180 (2) of the Act. if the
director is acting in good faith for the interest of the company, for proper purpose, the decision is
informed, then, the detector is not found to be in violation of the duty of care and diligence as
mention under section 180 (1) of the Act.
Penalties
If any company director or the officers is found to be in violation of the duty of care then the
Corporation Act 2001 has imposed penalties upon such defaulting directors which includes the
civil penalty of $2, 00,000, disqualification from the post or compensation, if the duty is violated
with reckless and dishonest intention then jail can be imposed of 5 years along with fines.
Duty of good faith
Duty under common law
This duty of good faith is imposed on the directors of the company under common law. It is the
fiduciary duty that is imposed on the directors of the company and must be catered considering
the interest of the company. In Whitehouse v Carlton Hotel Pty Ltd (1987) it was held that while
undertaking the actions if the director thinks that the actions are not in the interest of the
company then the good faith is violated. The duty of good faith is also established in Walker v
Wimborne (1976).
The acts that are carried out while catering his duty of good faith must be carried out in a manner
as what a normal prudent man would have done in the same circumsttbces and is held in Farrow
Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997).
When the company director is considering the interest of the company then it compr8ises of the
interest of the investors and shareholders and creditors of the company and is held in Kinsela v
Russell Kinsela Pty Ltd (in liq) (1986).

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Duty under statutory law
The Corporation Act 2001 also imposes a duty of good faith by enacting section 181 of the Act.
Section 181 of the corporation Act 2001 submits that the acts of the director of the company
must be carried out with good faith like a normal prudent man in the like situation’s the acts must
be carried out in the interest of the company and for proper purpose. The acts of the director
must be coupled with honesty and bona fide intention. If the acts are carried out by the director
in good faith but the same is not the interest of the company then the duty is violated.
Penalties
If any company director or the officers is found to be in violation of the duty of good faith then
the Corporation Act 2001 has imposed penalties upon such defaulting directors which includes
the civil penalty of $2, 00,000, disqualification from the post or compensation, if the duty is
violated with reckless and dishonest intention then jail can be imposed of 5 years along with
fines.

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Reference List
Books/Articles/Journals
Julie Cassidy (2006) Concise Corporations Law, Federation Press.
Latimer, P. (2011) Australian Business Law 2012. CCH Australia Limited
Case Laws
AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ACSR 759.
Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997) 26 ACSR 544.
Keith Spicer Ltd v Mansell [1970] 1 All ER 462;
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722.
Playfair Development Corporation Pty Ltd v Ryan (1969)
Re Ruddock (1879) 5 VLR.
Smith v Anderson (1880) 15 Ch D 247;
Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405
Salomon v A Salomon and Co Ltd [1897] AC 22;
Wise v Perpetual Trustee Co Ltd [1903] AC 139.
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285.
Walker v Wimborne (1976) 137 CLR 1.