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LAWS20059 Corporation And Business Structures

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LAWS20059 Corporation And Business Structures

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Course Code: LAWS20059
University: Central Queensland University

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Country: Australia

Question:
You are working at an accounting firm. Your overall task is to advise clients on how to structure their business – either as a partnership or company. The clients’ circumstances are extremely important considerations.You should not consider the topic of trusts, as they are used primarily to minimise tax, and tax law is not part of this course. (Assume that the clients instruct you that they’ve had bad past experience with trusts because of the extra administration and accountancy fees that trusts create, and they don’t want to do that again). You should also avoid any advice on tax. The tax implications of business structures are more complicated than websites suggest, and since tax is not part of this course, you should avoid it.
 
(Assume that the clients specifically instruct you not to advise on tax). In order to provide this advice you need to perform several sub-tasks:-1. Research the law relevant to your advice.2. Provide a written report to your supervising partner on your research.3. Provide a written report to your supervising partner weighing up the alternatives for your clients and making a recommendation for a particular business structure.4. Provide a separate written report to the supervising partner on the selected case showing the responsibilities imposed on a company director by legislation.5. Provide an oral advice (in plain language) to the client in the form of a YouTube video,advising on the law, weighing up the alternatives and providing a recommendation.
Answer:

Before starting a business, parties are required to decide the legal structure of such business. Based on the selection of a legal structure, parties have to comply with relevant laws and regulations which affect the business and its operations. It is important that parties select the right business structure or else they could face negative consequences. In order to identify which is the most suitable structure for parties, they are required to analyse different legal characteristics of the legal structure. This report will focus on identifying various factors in order to define the legal characteristics of partnership and company structure.
Partnership
The partnership is one of the easiest legal structures which can be formed by parties because parties did not have to comply with strict legal compliances. Two or more parties agreed to form the partnership business and decide to run its operations based on mutual understanding[1]. The process of forming the partnership is easy since partners did not have to comply with complex legal regulations.
Moreover, the cost incurred in the process is low as well. The business did not have a separate personality which means that all the partners have unlimited liability in the business. Due to unlimited liability, the personal assets of the partners can be used by to repay any loan or liability of the business. In order to construct a partnership business, certain elements are necessary to be fulfilled by the parties[2]. Firstly, a relationship is formed between partners to run the operations of the business together.
Running the operations of the business means that the partner must repeat the acts because the court provided in Smith v Anderson[3] case that partnership to do only a single act which will not be repeated in the future is not valid. Another key element is that the operations of the business must be carried out by the partners in common which means that they should all perform different roles in the business. All partners have mutual rights in the business, however, it is not necessary that all partners participate in the decision making as provided in the case of Strathearn Gordon Associates Ltd v Commissioners of Customs and Excise[4]. Lastly, the objective of partners to form the partnership is to generate profits for the business and themselves[5].
Company
The formation of a corporation is complex procedure because parties have to comply with various legal compliances in order to register the corporation[6]. The companies operating in Australia are governed by the Corporations Act 2001 (Cth). The corporation has a separate legal entity which differentiates its legal existence from its owner. As per section 119, the corporation brings into existence on the day of its registration after which it acquires various rights and liabilities[7]. The company has the right to form a contract with third parties under its own name. It can also sue or get sued by others under its own name. In Salomon v Salomon & Co Ltd[8]
case, the court provided these principles. In this case, the court provided that a person cannot be held personally liable for the debts of a company only because he/she is the majority shareholder. A company has its legal entity which is separate for its shareholders and directors. Since a corporation is an artificial person, its operations are managed by its directors who act as its mind and will. They have immense powers based on which they take business decisions in the company. The Corporations Act imposes various duties on directors which they have to comply with while doing their job to ensure that they prioritise the interest of the company and avoid taking decisions which could harm its existence. Violation of such duties leads to legal consequences for which directors can be held personally liable.
Conclusion
Based on the analysis, both partnership and the company have a separate legal framework which parties have to comply with while starting their business. Furthermore, the guidelines for managing both of these businesses are different based on which parties have to deal with different regulations.
Part 2
While selecting a business structure, parties evaluate different characteristics of the structures which affect their business and its decisions. Based on these legal attributes, parties also receive various advantages and disadvantages while starting and operating their business. This report will evaluate such pros and cons for partnership and company structure in order to compare them with each other to provide legal advice to our clients regarding which is a more suitable structure for their business.
Partnership

Pros

Most parties in Australia prefer to choose a partnership structure since the process of its formation is easier than compared to other structures such as a company or trust. Parties can simply form a contract to carry out the operations of their business. The cost which is suffered by the parties while registering or starting the business is low as well[9]. After its formation, the legal framework which parties have to comply with while operating is operations is simple as well. Partners did not have to take outsides permissions regarding taking their business operations which increase the efficiency of decision making. Since they are solely responsible for the operations of the business, they mutually make decisions in the business, and their accounts remain private[10]. The revenue and loss of the business are distributed equally between partners; however, they can change it by making changes in the partnership agreement.

Cons

One of the biggest issues with partnership structure is that it did not have a legal entity. The business is not separate from its partners based on which they have unlimited liability. In case the business becomes insolvent, the partners cannot eliminate their liabilities. They have to use their personal assets in order to repay the debts of the business[11]. If any disagreement arises between partners, it may result in dissolving the business. The ownership of partners in the business is fixed which is not transferable, and they are mutually liable for the action of other partners which are taken by them during the ordinary course of business.
Company

Pros

The key disadvantage of a partnership structure is the main advantage of the company structure that is a separate legal entity. Based on such entity, shareholders and directors are not personally liable for the debts or liabilities of the company[12]. Since the company can issue its shares in the public or take a loan to raise capital for its operations. The ownership of shareholders is not fixed, and they can easily transfer it without getting permission from anyone else.

Cons

The process of forming a company is highly complex, and parties have to comply with various legal guidelines while registering the company. The cost suffered by parties, in the beginning, is high as well due to various fees and documents costs[13]. The accounts are not a private affair, and they are open to everyone. Moreover, if directors violate their duties, they can be held personally liable for their decisions in the company.
Recommendations
Partnership business structure is more suitable for our clients as per their requirements. The main purpose for this clients wanted to change their current business structure is its legal complexity. If they select a company, they will have to deal with complex legal guidelines in its formation and while managing its operations. On the other hand, they will not face any legal complexities while forming or managing the operations of a partnership. Since they all belong to the same family, they can equally distribute the profits and losses of the business. It will also be easier for them to take business decisions since they can mutually make decisions in the business. Thus, the partnership is a more suitable business structure for our clients in order to start their business in the real estate field.
Conclusion
Based on the above analysis, there are different pros and cons which people receive while operating their business in partnership and company structure. These are received by parties due to the difference in legal characteristics of both structures. Before selecting the business structure, parties are required to analyse these factors which assist them in selecting a suitable structure for themselves.
Part 3
A corporation is an artificial person based on which it has various rights and liabilities; it did not take its own decisions, and its directors are responsible for making business decision. They act as the mind and will of the business based on which they have immense powers in the business to form future strategies and operations policies. In order to ensure that they did not misuse their powers, the Corporations Act imposes different duties on directors. In case directors breach these duties, then they can be held personally liable for the decisions taken by them in the business. In this report, the importance of director duties will be analysed by evaluating the case of ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72[14].
Summary of ASIC v Adler Case
In this case, Adler violated his duties as a director, and he breached the provisions given under section 180, 181, 182 and 183 of the Corporations Act. Adler authorised a loan of $10 million from HIH Casualty and General Insurance (HIHC) which was given to Pacific Eagle Equity Pty Ltd (PEE). The loan was given without getting any security from PEE which decreases the chances of recovery of the loan. PEE used such money to invest $4 million in purchasing the shares of HIH which was purchased at a loss and later sold out by the company for a loss of $2 million[15].
Another $4 million was invested by PEE in the Adler Corporation Limited in which Adler has a substantial interest. The rest $2 million was given by the company as loan to Adler and other parties. In order to hide these transactions, they were not properly documented in the company’s books of accounts. Adler was held liable by the court for misusing his powers as a director based on which he was held personally liable.
Directors Duties

Section 180 (care and diligence)

Directors have immense powers in a corporation along with which they have heavy responsibilities as well. It is their duty to maintain a level of care and diligence while taking business decisions which any reasonable person would while acting in their position[16]. They have a fiduciary duty towards the company based on which care and diligence is expected by them. Adler failed to maintain such care and diligence and used his powers to authorise an unsecured loan of $10 million. No reasonable person would have approved a loan of $10 million without any security, thus, Adler breached section 180.

Section 181 (good faith)

Directors have to ensure that interest of the corporation while taking business decisions and act in good faith while discharging their duties. They have to ensure that they used their powers for properly and did not misuse them in making any decisions which could result in harming the organisation or its stakeholders. Directors should not focus on their personal benefits and act in good faith by focusing on the interest of the company. Adler did not act in good faith because he authorised a loan of $10 million for personal benefits, thus, he breached section 181.

Section 182 (proper use of position)

Directors operate at an apex position in the company based on which they have immense powers to take decisions for the business. They have to ensure that they properly use their position and did not misuse their powers to cause harm to the enterprise or gaining personal benefits[17]. Adler used his position to gain personal benefit by using the company’s money which harms its financial position, thus, he breached section 182.

Section 183 (proper use of information)

Directors have access to sensitive information of a corporation since they are responsible for forming future strategies. They have to use such information for proper purposes only, and they should avoid using such information for causing harm to the company or getting personal benefits. Adler misused the information for getting personal benefits while causing harm to the organisation, thus, he breached section 183.
Conclusion
Based on the above analysis, directors have to ensure that they comply with their duties while taking business decisions in order to ensure that they avoid causing harm to the company or getting personal benefits. Directors can be held personally liable for violating these duties.
Part 4 (video transcript)
Hello. Our clients wanted to change their current business structure from trust to form either a partnership or company. They wanted to change their structure because they did not prefer to comply with the strict legal regulations while managing their business as trust. In order to give them legal advice, it is important to understand the legal characteristics of both structures and find out which suits their requirements. Firstly, they can form a partnership business by entering into a contract. Since the clients belong to the same family, they can either distribute the profits and losses of the business equally between themselves.
They can also decide to share the profits or losses as per the capital which they invest in the business. While starting the business, they will not have to comply with strict regulations or guidelines since the legal structure of partnership is relatively simple. The agreement which formed between them contains all the necessary regulations and guidelines. They can also form some internal contract between themselves regarding operations of their business. The cost which they will suffer in the beginning is low as well. The expenses relating to registration or formation of the business are relatively low. The clients will be able to save their costs while establishing a partnership business.
However, selecting a partnership business has several disadvantages as well.  The business did not have a separate legal entity based on which the partners have unlimited liability. It means that partners are responsible for all the operations and liabilities of the business. The personal assets or saving which they have can be used by the court to repay the debts of the business in case it becomes insolvent. This is not the case with a company; in a company, the shareholders are only liable up to the amount which they invest in the business.
The personal assets and savings of shareholders are protected. However, the legal structure of a company is complex, whereas, our clients will not face any legal complexity while managing their operations as a partnership firm. While making business decisions, all the partners will be included in the process, however, it is not compulsory. They will take all the decision based on mutual agreement between themselves which would result in increasing the efficiency of decision making. However, it also means that if any disagreement arises between them, then it can lead to the dissolution of the business. Furthermore, the ownership of clients will be fixed in the business and they will not able to transfer it to third parties without getting prior approval from other partners.
On the other hand, they will not face these issues in case of a company. The ownership of the company is easily transferable, and shareholders did not have to ask for prior permission of other owners before transferring their ownership. The corporation also has a separate legal entity based on which the shareholders and directors are not liable for the liabilities and debts of the business. They are only liable up to the amount which they invest in the business. There are different options available for the company to raise capital for its operations. The corporation can issue its share in the public to raise capital or get a loan under its own name.
Easy availability of capital assists in expanding the business of the corporation which results in faster growth. However, the key issue with a company is its legal structure since parties have to comply with a complex formation and managing procedure. There are a number of legal guidelines which parties have to fulfil while establishing a company. Moreover, the cost incurred in these procedures is high as well since party have to pay registration and other fees. The accounts of the company are not private, and they can be accessed by anyone. Although the liability of directors is limited, however, they have to comply with a number of duties in order to ensure that did not misuse their powers in the company. In case they breach these duties, they can be held personally liable for the decisions taken by them in the corporation.
After evaluating the legal characteristics of both structures, it is my advice that the clients should select a partnership structure to start their business in the real estate sector. The main reason for that being the easy legal framework of the business based on which they will not have to comply with strict legal regulations. The clients wanted to change their current legal structure because they are frustrated by the legal complexities of the business and the legal requirements which they have to comply with while managing their business. In order to avoid these regulations, they wanted to form a new business.
If they select the company structure to start their business, then they will still have to comply with a complex legal framework while starting the business and managing its operations. It will defeat the purpose of changing their current business structure. In case of a partnership, they will not have to comply with complex legal requirements while forming the business and while managing its. Thus, it is my advice that they should select a partnership business structure rather than a company.
References
[1] ATO, Partnership (2018) Australian Taxation Office.
[2] Keith Fletcher, The Law of Partnership in Australia (Thomson Reuters, 2007)
[3]  (1880) 15 Ch D 247
[4]  (1985) VATTR 79
[5] Andy Gibson, Business Law (Pearson, 2016).
[6] Business, Company (2018) Australian Government
[7] Corporations Act 2001 (Cth)
[8]  (1897) AC 22
[9] Kaylee DeWitt, The Pros and Cons of a Partnership (2018) Patriot  Software 
[10] Stephen Graw et al., Understanding Business Law (LexisNexis, 2015)
[11] UpCounsel, Pros and cons of a partnership: Everything you need to know (2018) UpCounsel 
[12] Small Business, Companies – The pros and cons (2018) Small Business 
[13] Business, Company – Advantages and disadvantages (2017) Australian Government 
[14] (2002) 20 ACLC 576; 41 ACSR 72
[15] Wolters Kluwer, ASIC v Adler (No 3), Supreme Court of NSW, 14 March 2002 (2018) Wolters Kluwer <  [16] Austlii, Corporations Act 2001 – Sect 180 (2018) Free Membership to World's Largest Sample Bank To View this & another 50000+ free samples. Please put your valid email id. E-mail Yes, alert me for offers and important updates Submit  Download Sample Now Earn back the money you have spent on the downloaded sample by uploading a unique assignment/study material/research material you have. After we assess the authenticity of the uploaded content, you will get 100% money back in your wallet within 7 days. UploadUnique Document DocumentUnder Evaluation Get Moneyinto Your Wallet Total 13 pages PAY 8 USD TO DOWNLOAD *The content must not be available online or in our existing Database to qualify as unique. Cite This Work To export a reference to this article please select a referencing stye below: APA MLA Harvard OSCOLA Vancouver My Assignment Help. (2021). Corporation And Business Structures. Retrieved from https://myassignmenthelp.com/free-samples/laws20059-corporation-and-business-structures/focus.html. "Corporation And Business Structures." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/laws20059-corporation-and-business-structures/focus.html. My Assignment Help (2021) Corporation And Business Structures [Online]. Available from: https://myassignmenthelp.com/free-samples/laws20059-corporation-and-business-structures/focus.html[Accessed 19 December 2021]. My Assignment Help. 'Corporation And Business Structures' (My Assignment Help, 2021) accessed 19 December 2021.

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