• Internal Code :
  • Subject Code : LAWS20059
  • University :
  • Subject Name : Law

Advice On An Appropriate Legal Structure For Their Business

Executive Summary

This assignment provides a complete analysis of the comparison and comparative analysis of the different business structure in Australia such a sole trader, partnership firm, and company form of business. The assignment includes comparative analysis of administrative cost of the different form of business structure, Liability of a Partner in a Partnership Firm, Liability of a director in a Proprietary Company, Duties and Responsibility of a Director in a Company and Duties of Partners in a Partnership Firm7
 

Introduction

As an advisor of the client to advice about the business structure, I have made a comparative analysis on all the aspect of different structure of businesses and its legal structure of the business in Australia. The main statues operating in Australia is respect of business structure is corporation Act 2001, Australia Securities Investment Commission and Partnership Act. The legal aspect of choosing a business structure has been provided in the below mentioned paragraphs.

Part A -

A comparative analysis of the operating cost of sole trader, partnership and company form of business has been discussed below

Sole Trader Company Partnership Firm

Generally, sole trader business is a simplified business structure which involves less operating cost and less paperwork as well. A sole trading business has the following advantages in terms of less ongoing costs and operation cost Tax Returns Most of the sole trading business files income tax return individually including and that they do not file income tax return separately for business. It provides an advantage to the sole trader in terms of savings of the operating cost.
Financial recordsRecord keeping is one of the important aspects of running a business. As a sole trader, it is the choice of the sole trader to keep it in paper form or electronic form. In case, the sole trader is keeping the record in electronic form it is recommended that all the records have also a record of back up. This process of keeping record is these days considered as a legal requirement and that every business has to keep the record of its financial years for at least last 5 years.
Cost of IncorporationAs compared to partnership firm and company the incorporation cost is also very limited in a sole trading business. For a sole trader the business registration has a exemption in relation to cost. According to the law of Australian Government a business must registered and the cost of registering a business name is 35 for a year and the same has to ve renewed in the future.
A Company form of business is one of the complex business structures and basically this form of business has high volume of ongoing cost and paperwork. Some of the examples of paperwork and ongoing cost in relation to a company form of business is provided below

Tax Returns -

The Company as a separate legal entity have to file the income tax return separately and also have to pay tax on the basis of its annual income. If a person is working as a director in the company, apart from the company the director of the company also have to file a separate income tax return as an individual. Similarly, if there is a subsidiary to associated trust with the company, it also has to file separate income tax return. However, a director of a company can claim for the fringe benefit tax (FBT) in case he is entitled for the same

Record Keeping

The record keeping aspect of the company has a more depth analysis. According to the legal requirement the books of account of the company must be kept for at least last 7 years.
General Compliance CostsThe compliances cost of the companies is higher as compared to any other form of business. There can be different fees that can be applicable to companies at different time. For example, the ongoing fees will be applicable to the company as annual fee which is presently from 254 for a proprietary company
Partnership firm involves less operating cost and less paperwork as well. A partnership business faces the following ongoing costs and operation cost

Tax Returns

The partnership firm income tax return separately distinct from the other partners as the partners has to file the income tax returns individually. In that case the operating cost of the business increases.

Financial records

Record keeping is one of the important aspects of running a business. As a partnership firm, it is the mutual decision of the partners to keep the financial records in paper form or electronic form. In case, the partners are keeping the record in electronic form it is recommended that all the records have also a record of back up. This process of keeping record is these days considered as a legal requirement and that every business has to keep the record of its financial years for at least last 5 years.

Cost of Incorporation

The registration of a partnership firm is not mandatory. However, to avoid any sort of dispute the partnership can be registered with a prescribed few and a partnership deed. The cost of the same is very limited. As per the law of Australian Government a business must registered and the cost of registering a business name is 35 for a year and the same has to be renewed in the future.

Part B -

A comparative analysis of the liabilities of partners in respect of partnership and directors in respective of a company has been provided below
Liability of a Partner in a Partnership FirmLiability of a director in a Proprietary CompanyA partnership firm generally has unlimited liability as that of the partners. However, the important aspect to analyze is what the liabilities of partners in a partnership firm are. The liabilities of a partner in a partnership firm can be analyzed as follows
The liability of a partner in a partnership firm is large. In a partnership firm every partner act as a principal as well as agent of the partnership firm as a result of which there exists a binding relation between the firm and its respective partners. In simple words, each and every partner of the partner of the partnership firm are financially and legally liable for the actions they have taken during the day to day operation of the business.

This can be better understandable with the help of an example. For example, in case the partners act in a negligent manner and without any insurance of indemnity, in that case the partners of the partnership firm will face the loss suffered jointly. The biggest distress arises between the partners when one of the partners of the partnership firm becomes insolvent. In that case the total liability of the firm will be vested upon the remaining partners. In simple words, if a partners only hold 30 share in the partnership firm but the other partners who holds 70 shares in partnership firm becomes insolvent in that case, the latter partner will be liable for the liability of 100 even though he holds only 30 share in the partnership firm

Considering the above-mentioned issue the concept of holding out was introduced under section 18(1) of the partnership Act in case of any particular occurrence of event. The term holding out refers to when a person shows himself as a partner to the world but actually he is not a partner in the partnership firm by means of advertisement. It is to be noted that the advertisement may be implicit as well as explicit. For example, when a partnership firm allows a non- partner to sign the books of account or any other particular financial document and the aforesaid non-partner also enjoys the perks that are being provided to the actual partners of the firm. These can be considered as the implicit indication that non-partner is actually a partner in the firm as per the world.

In the above-mentioned case, the non-partner of the firm will also be liable as a partner along with the actual partners of the partnership firm. Under the law of partnership, it has been provided that any third party who is not aware of the identity of the true position of the non partner and the non-partners conduct will also be explained in the day to day operation of the business. These two principles are a general principle if there is a transaction made which is not in the ordinary day to day running of the business in that case the possibility of belief regarding the genuineness of the non-partner is questionable

According to the guidelines of the Australian Securities and Investment Commission and Corporation Act 2001, once a business is registered in company form of business, it will have its separate legal entity status. This means that the company will have its own property, liabilities and rights until and unless it gets unlisted from the database of the Australian Securities and Investment Commission. However, even if the company gets unlisted from the database of the Australian Securities and Investment Commission, the liability of a director will be continued. In some of the cases, the director of the company will be personally liable for the losses and debts of the company.
However, it is to be noted that a member of the company will not be liable for the debts of the company. A shareholder is also liable to pay the amount unpaid on shares to the company if they called to do the same but the directors of the company will be personally liable for the losses and debts of the company in case of the following scenarios.

  1. If the debt has incurred and the company went to insolvency
  2. Due to breach of the duty of the director the company suffered losses
  3. When a director has provided security as a guarantor over his personal assets
  4. When the director is engaged in some sort of illegal activity
  5. When there are chances that other regulatory actions may be taken against the director of the company
  6. When the company has incurred debt while acting as a trustee

 

Part C -

The duties and Responsibilities of a Director and Partner of company and Partnership firm has been analyzed respectively in the below mentioned paragraphs
Duties and Responsibility of a Director in a CompanyDuties of Partners in a Partnership FirmAs a director of the company, the director of the company will be responsible for the day to day management of the company. The director of the company must comply with the legal requirements and responsibilities as a director under the provision of the Corporation Act 2001. In some of the cases, a director may be appointed as an agent to ensure the smooth running of the day to day affairs of the company
The duties and Responsibilities of a Director and Partner of company and Partnership firm has been analyzed respectively in the below mentioned paragraphs
The following are the duties and responsibilities of a director under Corporation Act 2001

  1. To act in good faith for the proper purpose and best interest of the company
  2. To act diligently and with care
  3. He should avoid conflict between the company and his personal interest for the best interest of the company
  4. To prevent the company from being insolvent
  5. In case the company is going into liquidation
  6. Appointment of an official liquidator for the affairs of the company
     

Helping the official liquidator to maintain the records and books of account The following are some of the general duties of partners in a partnership firm
General Duties The general duties of the partners of a partnership firm is to be faithful conduct towards business and each partner, to render true books of account and provide complete information of all aspects which affects the business
Indemnification for Fraud According to the law of partnership, each partner has the duty to indemnify the losses and fraud occurred to his negligent conduct of the business. The principle was adopted by the partners as the firm was liable for the negative conduct of the partners, in case any partner commits any sort of fraud or misconduct.

To Act diligently Every partner has the duty to act diligently towards the day to day conduct of the partnership firm as far as possible. If the partner will not diligently it may affect the other partner also. The partner will be liable for indemnity in case of negligence in conduct.
Use of the property of the Firm The partners also responsible to maintain the property of the firm diligently and with utmost care. They cannot use the property of the partnership form for their personal use as they are the collective owner of the partnership property. Thus, it can be concluded that the partner has the duty to deal with the partnership property with care.

Do not work for personal profit or interest In a partnership firm every partner share a common goal. As explained earlier, they cannot use the property of the partnership form for their personal use as they are the collective owner of the partnership property. The partners must not engage themselves to earn profit personally with the use of partnership property.

Conclusion

From the above analysis and discussion it can be concluded that the choosing a business structure is one of the complex things while deciding the structure of business as very business structure has its own advantages and disadvantages. Every form of business which may be partnership firm, sole trading or company all of them have their own pros and cons. Thus, while deciding a business structure it is necessary to have close look on all the aspects of the business before incorporating the same as a company, partnership or sole trading concern.

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