Week 4 Tutorial - Types of Business Associations
The process of establishing a partnership is informal and inexpensive. Commonly established under a written contract but at times can be established simply without any express oral or written consent, so long as it satisfies the definition outlined in section 1.1 of the partnership act: “Partnership is the relation which exists between persons carrying on a business in common with a view of profit” Advantage(A) Enjoys financial privacy- no obligation for disclosure of financial information to the public. A Control: Total control between partners (smith v anderson) A * Tax benefits for venture capital limited partnerships A
Easily changed, reinforced by section 19 which states “The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing” A Limited life – as a result of death, bankruptcy etc. D
Suitability for financing purposes
Enjoys greater capital resources compared to sole traders ⋄ increases pool of funds available for financing. However this can also be seen as a disadvantage when compared to companies as they cannot raise funds from the general public and are limited by section 115 of the Corporations Act 2001 to a maximum of 20 partners. A and D
Unlimited liability (for limited partnerships)
Agency relationship exists between partners as stated under section 5 – a partner has the power to bind the other partners when acting within the normal scope and authortiy of the business. That is, innocent partners may still be liable for the actions of a partner who may have acted in breach of the partnership. Mercantile Credit Co Ltd v Garrod 1962. Disadvantage (D) Section 9 (partners jointly liable for partnership contracts”: “Every partner in a firm other than an incorporated limited partnership is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner” Section 10 - Each partner is jointly and severally liable for any tort committed. Polkinghorne v Holland & Whitington Other areas include liability for misapplication of money or property (s.11), misapplication of trust property (s.13) and liability by holding out/estoppel (s.14) D Fiduciary relationship (s28-30) – bound to act in good faith and best interests. Includes: duty to render accounts (28)
duty to account for private profits (29) – Birtchell v Equity Trustees duty not to compete with the firm (30)
The advantages of the partnership structure lie primarily in its relative simplicity in terms of establishment and flexibility. However, its downside is the burden of unlimited liability, which may act as a deterrent to the family. Of the investments under consideration, this structure is best suited to the plans for a retail business.
No formal or legal requirements (Brian Pty Ltd v United Dominions corporations Ltd ) – defined as “an association of persons… who agree by contract to engage in some common, usually ad hoc undertaking for joint profit by combining their respective resources without, however, forming a partnership in the legal sense or corporation..” However, it may be complex as absence of a written agreement entailing the rights and liabilities of the parties may add to confusion and ultimately costs of resolving these issues. D Disclosure of public information only required for incorporated joint ventures. A Management and control by joint committee – joint venturers will bring a variety of benefits (skills, working capital etc) to the project. Control over individual assets A Unincorporated JV is not a separate legal entity ⋄ each party responsible for own taxes. However if JV is using a company as the management mechanism then they will be taxed accordingly....
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