LAWS20059-Advise Clients On How To Structure Business

Part 1

This section of the paper would provide a discussion in relation to the features of two different forms of businesses which the clients are looking to select for carrying out their real estate business.

Partnership

Partnership Act 1891 (Qld) governs the partnership law in the state of Queensland. There is no requirement of registration for carrying out the partnership. Partnership is kind of a structure for carrying a business that is operated by at least two or more people that can go up to maximum 20 people the agreement of the partnership or the deed of partnership decides how the relationship of the business and the owners must be conducted. Common law also governs partnership. Partnership is identified by applying statutory provisions and the common law. Under section 5 of the PA 1891 a business is said to be carried out in partnership if it is seen that there are more than one person who is carrying out the business for making profit. Partnership is different from joint venture as partnership is continuous in nature and it is not a sole project. Every person must take part in the business management. A partnership kind of business carries different features. The partners are severally and jointly responsible for the acts they have done. This states that if a partner does an illegal act then the other one is also responsible for it. The partners are said to be the principal as well as agent of business. There are several responsibilities that partners hold on to this kind of business. No separate legal identity has been given to this kind of business. This means that the partners can attach their assets. The loss and profit in the partnership form of business is shared as per the contribution to the terms that has been provided in the agreement.

Company

A company has several features and differs from the other types of businesses. The registration of the Company must be done under Corporation Act 2001 (Cth).  A company is said to be the separate legal entity. It is said to be an artificial legal person and is created by the rules of law. There is no relation between the owner’s identity and the company’s identity itself. The company is permitted to own a property in its own name and be a part of any lawful case by its name and not in the owner’s name. The property that a company owns is the company’s property and not its owner’s property. There were two cases in which this rule was recognised and the cases are Macaura v Northern Assurance Co Ltd[1925] AC 619. Limited liability is one of the feature or the characteristics of an organization. Unlike the feature of the partnership, the limited liability assures the restriction of the shareholder’s liability. Another feature of the company is separate management. The appointment of the company’s owners are not compulsory for the management of the company. A common seal is given to the company that helps in executing any kind of documents in the company’s name. Another feature of the company is the transferability of the ownership. This feature permits the shareholders in transferring their shares or to sell to any person they want to. The company’s constitution helps in creating the contractual relationship among the company’s management, shareholders of the company and the company itself. Every activity of the organization must be carried as per rules mentioned in the company’s constitution. The requirement of the level of legal compliance in the company is significantly high. The end of the company is done by the lawful process of called winding up when it becomes insolvent under section 92 of the CA.

Part 2

Pros of Partnership

There are several advantages of partnership kind of business that will help in selecting this as the structure of business and they have been mentioned:

Saves time and Cost

The registration is not required to create a partnership. It states that creating a partnership kind of business is easy, cost-effective and fast. There is no investment required by a person in regards with registration cost.

Comparatively provides increased degree of control

The owners of the partnership and the management are similar. It means that they have the right to decide about the business and how it should be operated.

Simple operational process

In partnership kind of business the compliance level is low in comparison with the company because not many reporting responsibilities have been imposed on partnership kind of business like that on a company.

Help by other partners

The partnership kind of business has better funds availability in comparison to the sole proprietorship. This is because the business is conducted by more than a person and can also share the business’s responsibility.

Cons of partnership

The partnership kind of structure of business has some disadvantages along with the advantages and it is needed before choosing it as a structure of business.

No having a different Identity

There is no separate legal entity in the partnership kind of business. The partnership kind of business do not permit to own a property in its own name. The partnership’s identity is as similar as the partner’s identity.

Several and joint liability

In the partnership kind of business, the partners are said to be severally and jointly liable. This means that any activity of one partner will make the other partner legally responsible even if the other partner was not part of that activity.

No limited Liability Protection

The partners have unlimited liabilities. The creditors has the right to prosecute the partners directly and can also attached their own assets in case of debts in business.

No Surety of existence 

This means that a partnership comes to an end if any one partner dies or leaves the partnership. This does not take place in case of the company. If there are three partners and one partner has left out the partnership then the business will end there itself. Thus, there is less certainty in partnership kind of business.

The discussion that has been given above states that choosing of partnership kind of business can turn out to be risky if it is performed on large business. Partnership kind of structure of business must be carried out in small or medium range of business operations.

Pros of company

Different Identity

The company is permitted to own a property in its own name and if there is any kind of legal dispute then the company’s name might be used to address the case.

Easily transferable ownership

There is easy accessibility to transfer the shares of the owners. This feature is not present in a partnership

Protection of Limited liability

Through the rule in relation to limitation of liability or better known as limited liability, Those who have invested in the company have the privilege of not been held liable in persona capacity. The liability which is imposed on them in situation when anything in the business goes wrong is only restricted or limited to the amount of money which have been invested by them into the shares of the company or which is unpaid in relation to a share.

Permanent existence

A company does not end if any one owner dies or leaves. Thus it would be helpful for the four owners to continue even if one leaves.

Wide access to resources

Company is that form of business structure that gives out better access to funds in comparison with any other kind of business structure.

Cons of company

Compliance and registration cost

In order to form a company the process in this formation is time consuming and on the other hand it requires major investment.

Management

There is no such control on the management as well as on the affairs of the organisation or the company by the owners. The directors hold the management of the company.

Legal compliance

Certain regulatory obligations have been implemented in an organisation or a company and the company needs to obey with it under the Corporation Act 2001 and also under the Australian securities and investment Commission.

Therefore the disadvantages and advantages of an organization states that the company is that kind of structure of the business that involves less risk by carrying out the operations of the business. It has proved to be suitable for operating a large scale of business. The business of Real estate is carried out at large scale. The business also includes risks like agency, tort, contract and vicarious liability which may make the four clients liable personally. To avoid such risk it is suitable for them to carry the business in form of a registered private company.

Part 3

A primary case named Asic v Adler and 4 Ors [2002] NSWSC 171 is related to the breach of the duties of the directors in Australia. The defendant in the above-mentioned case is a non-executive director of the organization. It was said that the defendant transferred a company $10 million. He was said to be a main shareholder of the company. In the above-mentioned case, the issue is whether the rules of the CA 2001 have been violated by the defendant. The court needs to determine that whether under the section 9 of CA 2001 the defendant will be considered as director. The company’s directors have allegedly breached the duties includes section 180 of Corporation Act 2001 that is in relation to duty of care and diligence. Section 181 acts in company’s best interest. Section 182 is related to the misusing the company’s position and lastly section 183 is in relation to misusing those information that has been gained from the organization or the company. According to the section 180(1), a company’s director as per the section 9 of the Act as well the officers must act carefully and diligently while releasing the responsibilities that have been provided to them towards the company like a reasonable individual will do if he was to hold the same position in that similar situation. The section 181 mandates a director to work in the company’s best interest and in good manner as they intend to work for a good purpose.

In the situation mentioned above, the director of the company is the non-executive director of the company. The court stated in the above-mentioned case that a director who is also considered to be an officer of the totally owned subsidiary that makes him a director in the rules of the section 9 of the Act. This section was applicable in this case as the word director had been interpreted as any person who has the role of a director in a company or may be considered as a de facto director even though he or she has not been duly appointed.  In the above mentioned case the Williams, Managing Director of Subsidiaries violated the section 180(1) because he has failed to assure proper protection while giving loan to other organization. Another failure was seen that the company’s finance director had also violated this section because he did not discuss with the investment committees about the proposal of providing loan to the other company. The rule of the management of the business that has been given in the section 180(2) of the Act did not apply in this present situation because the decisions that was made by the company’s directors was not considered as an informed decision and it was seen that there were some personal interest in this decision. This rule protects the directors if they have been charged against violating the section 180(1) of the Act. In the above-mentioned situation, the director do not act in a good purpose that is a major requirement under the section 181 of the above mentioned act. This situation arrived because the director had not acted as per the company’s best interest.

The loan or the transaction that was provided to the other company was for the personal interest and for the improper use. In the above mentioned case, the court stated the information and the position that was used by her was for fulfilling her personal interest which means that it was not for the company’s best interest. Thus, the primary suggestion that the case would give that directors must perform their duty according to the company’s best interest. The decision of the company’s director must be such that it must comply with the company’s best interest. The directors must take decision with care and diligence and they must involve in the informed making of the decision. As per the legislation, the directors will be held responsible if it has been noticed that they are violating their duties towards the company. According to the section 206C of the Act, it has been stated that the directors will be forbidden or prohibited to work or manage any other company in Australia in future for a certain period of time. Another penalty has been added for violating the duty of the director and it is the financial penalty that can be extended to 200,000$

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