BSB111 Lecture Notes - Lecture 7: Sole Proprietorship, Limited Liability, Corporations Act 2001
Week 7 Business Law and Ethics Lecture Notes
Business Structure and the Law of Agency
Introduction
• When going into business, the choice of business structure is important
• It will impact on factors such as the ability to raise capital, the sharing of profit,
obligations to disclose information and much more
• Also important is whether you have people acting on your behalf (or whether you
act on behalf of someone else)
Types of business structure
Selecting a business structure
• When starting a new business one of the most important legal questions a person
will have to answer for themselves is which business structure they will adopt.
• The most common types of business structure are:
o The sole trader,
o The partnership,
o The trust and
o The company.
• These business structures are not always mutually exclusive.
• The pesos hoie of usiess stutue ill hae ipotat oseuees i tes
of:
o The ease and cost of setting up the business,
o Their legal and financial liability,
o The way they pay tax,
o Their ability to raise finance, and
o Their ongoing regulatory obligations
1. Sole Trader
• A person is a sole trader if they directly own and operate the business by
themselves.
• A sole trader:
o may engage employees but they are the sole owner of the business,
o has sole responsibility for raising the funds to start the business,
o has sole control over the operation of the business, and
o is entitled to all of the profits of the business.
• The sole trader has unlimited personal liability for the debts and other legal
obligations of the business.
• There are no formal legal requirements that need to be satisfied to establish this
type of business structure.
• Advantages
o Very little formalities to comply with
o Full ownership means the owner makes all decisions and gets all profits
• Disadvantages
o Personally, liable for any business debts (unlimited liability)
o Limited sources of capital
o One person may not have all the skills needed to be successful
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2. Partnership
• A person is a partner in a partnership if they and at least one other person directly
own and operate a business together.
• Pates geeall hae utual age.
o Each partner is both the principal and the agent of the other partners.
o This means that each partner is liable for the actions, contracts and debts of
the other partners.
• A partnership is NOT a separate legal entity.
o Each partner has unlimited personal liability for the debts of the partnership
– mutual liability.
• There are no formal steps that need to be taken to form a partnership.
• A pateship is the elation which subsists between persons carrying on a business
i oo ith a ie of pofit.
• If each of the elements of this definition is satisfied a partnership exists, regardless
of the stated intentions of the parties.
• A partnership can exist then, ee if the paties dot ealise it o if the t to all it
something else.
• Persons:
o There can be no more than 20 partners (subject to certain exceptions).
• Carrying on a business:
o There must be some continuity or repetition of trading activities.
• In common:
o Each person must be acting on behalf of the others as well as on their own
behalf.
• With a view of profit:
o If the persons are carrying on a business together for a non-profit purpose
they will have formed an unincorporated association rather than a
partnership.
• Partnership vs joint ventures – a joint venture is a contract between two or more
parties to cooperate in some project or undertaking. Members of a joint venture are
not partners and do not have mutual liability.
• Important that the joint venture agreement is drafted carefully because if the
arrangement satisfies the elements of a partnership, it would be regarded as one,
regardless of what the parties call it.
• The relationship between partners is a contractual one. The terms of the contract
are set out in the partnership agreement which may be:
o A formal written document,
o Partly in writing and partly oral, or
o Wholly or partly implied from the conduct of the partners.
• A written partnership agreement is not essential to the existence of a partnership,
but it is nevertheless a very good idea to have one.
• A written partnership agreement should set out:
o The names of the partners and the name of the partnership
o The nature of the business
o The term of the partnership
o Eah pates otiutio
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o Sharing of profits and losses
o Authority of partners
o Decision-making
o Duties and obligations
o Admitting new partners
o Withdrawal or death of a partner
o Dispute resolution
• Advantages:
o Few formalities – ease and low cost of formation
o More people to contribute ideas, skills and capital
o Privacy – partnerships do not have to be registered with any government
authority
• Disadvantages:
o Unlimited personal liability
o Lack total control as an owner
o Mutual agency combined with unlimited liability, makes it important to only
be a partner with people you trust
3. Company
• A corporation is an artificial legal person separate from its owners and able to make
contracts, own property and be a party to litigation in its own name.
• A company is a type of corporation; one incorporated under and regulated by the
Corporations Act 2001 (Cth).
• A company is created by registration by the Australian Securities and Investments
Commission (ASIC).
• A company must have:
o At least one owner or member (called a shareholder), and
o At least one directo, ho is esposile fo aagig the opas
business.
• It is possible for the director and the shareholder to be the same person, although in
larger companies there is a separation of ownership and control.
• Separate legal personality: A company -
o Can incur debts in its own name,
o Can hold property in its own name,
o Can be the plaintiff or the defendant in legal proceedings,
o Continues unchanged even if the owners sell it to another person, and
o Can enter into legal relationships with the owners.
• Limited liability:
o The owners are not liable for any debts or other
obligations of the company beyond the
subscription price of their shares.
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