Business Law: Guidance on Forming the Best Business Structure

This report provides a letter of advice regarding the formation of the most appropriate business structure for a small business in Australia. It analyzes different business structures, including partnerships, trusts, sole proprietorships, and companies, highlighting their advantages and disadvantages. The report emphasizes the importance of considering factors such as liability, capital raising, and regulatory compliance. It recommends registering the small business as a proprietary company limited by shares under the Corporations Act 2001 (Cth), managed by the Australian Securities and Investments Commission (ASIC), to benefit from limited liability and controlled external interference. The analysis includes references to relevant legislation and academic sources to support its conclusions. Desklib provides past papers and solved assignments for students.

Running head: BUSINESS LAW
Business Law
Name of the Student
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Author Note

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Letter of Advice
To: John Smith
From: Accountant
Date: 27 May 2019
Subject: letter of advice for formation of the most appropriate business structure
A small business can be operated as per several business structure, each one of which
has a different aspect and approach. Business structure like partnership form of business, trust
business, sole proprietorship and company are available to a businessman who can get his
small business registered under these business structures.
A partnership form of business structure asks for at least 2 partners to begin. A
partnership firm vests unlimited liability on the partners of the firm which makes them jointly
as well as severally liable to share the debts, liability as well as the profit of the firm as
partners. The partners act as the principal as well as the agent of the partnership firm who
stand liable for all the dealings and transaction of the firm (Lewis 2013). The profit and loss
is mainly shared as per the contribution of each partner towards the business. A partnership
business unlike any other business structure, gets dissolved when one out of the two partners
dies or fails to carry out his duties and responsibilities as a partner. The Australian law does
not ask a partnership business to be mandatorily registered, unless its annual turnover exceeds
$75000 (Lewis 2013). As a partnership business is easy to establish, it is easier to change its
structure as well. It is easier to borrow in a partnership business. It is easier to keep internal
dealings private for the transactions are only known to the partners and therefore, it is easier
to secure information and maintain privacy. A partnership form of business involves less
external control as it is not bound by the decision of any authority or auditors, for
partnerships do their own audit. However, it is a drawback that the personal property of the

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partners are affected in case the firm incurs a debt and fails to pay back to the creditors
(Lewis 2013). One partner shall be held liable for the liability of another; all the partners shall
be marked liable to sustain the loss of the entire firm and the loss shall be shared as per their
contribution, just like profit-sharing. In spite the several advantages of a partnership form of
business, it is true that it becomes complicated and costly to divide the asset of the
partnership firm in case a partner leaves the set up (Lewis 2013).
A trust, on the other hand, is an expensive business structure which requires a trustee
to take the responsibility of the trust property for the benefit of the member of the trust or the
beneficiaries. The trustee is only responsible for taking care of the trust property or business,
however he is not supposed to derive any benefit out of such business. A trustee is only liable
to draw remuneration from the trust business (DeMott 2014). It is however not a legal entity
like a company, yet it is easier to raise capital for the trust business, having a lesser amount of
liability, compared to other form of business set up. It is expensive to set up and difficult to
divide in case member wants its share. A formal trust deed is required in a trust business to
outline the operation of the trust business and decide the share of the beneficiaries. A trust
business requires the trustee to undertake yearly administrative task. A trustee is to be held
legally responsible for the operations of the business, where a trustee of a trust can even be a
company who liability would be to protect the asset of the trust business. A trust business is
liable to pay tax on its general income as a business. Amidst several advantages, there are
several issues that trust might face, like higher expenses, difficulty in borrowing,
complexities in incurring loans, restricted power of trustees, et cetera, which can be hindrance
on its growth and development (DeMott 2014).
A sole trader business structure involves a single person trading as a sole trader
thereby becoming responsible for all the aspects and transaction of the business, including the
debts and losses which are bore by the sole trader alone as there is no one else to share the

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liability with. It is one of the simplest form of business structure involving investment of a
lesser amount of capital, especially when starting a small scale business. A sole trader runs
his own business single-handedly and therefore he is not answerable to any external authority
for the transaction of the business; however, a sole trader can always employer other
individual to work for him as agents or employee on a contract for employment in lieu of
remuneration. A sole trader has the complete control of his business including its assets and
liabilities. A sole trader is required to file for income tax out of the income that he receives
from the business. He has an unlimited liability towards the business. He may not keep a
separate bank account for dealing with the transaction of the business, unlike a company. The
sole trader is the owner of the business and not an employee of the business, like it is in case
of a company; therefore he has no liability to share the profit incurred from the business apart
from paying the usual remuneration and occasional dividend to the employees. In case the
business does not have any employee, the sole trader shall not be liable to pay payroll tax,
contribution for their superannuation or worker’s compensation from the incomes incurred
from the business. A sole trader is liable to arrange for his superannuation out of the income
of the business. As it is simple to form a sole proprietorship, it is also simple to change its
business structure.
There are various business structures under which one can register his business;
however, as for a small business, it is directed to be registered as a proprietary company
limited by shares. The Corporations Act 2001 (Cth) is the federal legislation that asks for a
small business to be registered as a proprietary company limited by shares. Under the
Corporations Act 2001, a company is considered legal entity which is a body corporate and
therefore, it can sue and can be sued. A company being a legal entity and a body corporate it
has a perpetual succession for which it can acquire hold as well as sell property in its own
name under its own seal. Under Corporations Act, a company can be public company which

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raises capital from the public by selling shares and proprietary limited companies which do
not raise it start-up capital from the public by selling its shares; the corporations act governs
both of these types of companies (Hanrahan, Ramsay and Stapledon 2013). A company being
a separate legal entity, the shareholders bear limited liability towards its debt. It is the
company to which the turnover belongs to. To start up a company it is important to get a
registered under the Australian securities and investments Commission (ASIC), however it is
not mandatory to get registered unless the annual turnover exceeds the amount of $75,000. As
the shareholders bear a limited liability, therefore the shareholders and the directors are not
held responsible for the debt, transactions and bankruptcy of the company. It is easy to
transfer for ownership in a company for flexibility to buy and sell shares of the company. It is
easier to receive investments for a public company by way of offering shares to the public
than a proprietary company for it does not involve public offering of shares and therefore can
only approach the investors and financial institutions for financial help. The directors and the
shareholders are not held liable if the company incurs certain debt or loss due to its unique
feature of the company for being a legal personality, separate from that of its shareholders
and directors. However it is costly to create and maintain a company along with the
complexities that comes along with it. It is both difficult to create as well as wind up a
company it involves various procedures. Usually the directors cannot be held responsible
personally for the debts that the company has incurred; however the principle of lifting of
corporate veil states that in certain occasions the directors can be held responsible for all the
adverse situations as well as debts of the company (Hanrahan, Ramsay and Stapledon
2013). .
Therefore by assessing all four types of business structure, it could be concluded that
proprietary company limited by shares is the best form of business structure in this
scenario. Part 1.5 of the Corporations Act 2001 is the federal legislation in Australia that

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asks a small business to get it registered as a proprietary company limited by shares for it
would be bear limited liability along with the power to restrict external interference in the
internal matters of the company. Section 45A of the Corporations Act differentiates between a
large and small proprietary depending on the turnover of each of the business structure. A
proprietary limited company can have maximum 50 non-employee shareholders who could
be held liable for the condition of the company. The members shall only be held liable for the
unpaid amount of their shares that is due to the company and not for the debt of the company.
Therefore, it would be advisable to get the small business registered as the proprietary
company limited by shares under the Australian Securities and Investments
Commission, governed by the Corporations Act 2001 (Cth).

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References
Corporations Act 2001 (Cth)
DeMott, D.A., 2014. Relationships of Trust and Confidence in the Workplace. Cornell L.
Rev., 100, p.1255.
Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company
law. COMMERCIAL APPLICATIONS OF COMPANY LAW, CCH Australia Ltd,
Lewis, W.A., 2013. Waiving Fiduciary Duties in Delaware Limited Partnerships and Limited
Liability Companies. Fordham L. Rev., 82, p.1017.