BSB111 Lecture Notes - Lecture 7: Secret Profit, Corporations Act 2001, Settlor
Week 7 – Business structure and
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:
◦the sole trader,
◦the partnership,
◦the trust and
◦the company.
These business structures are not always mutually exclusive.
The person’s choice of business structure will have important consequences in terms of:
◦the ease and cost of setting up the business,
◦their legal and financial liability,
◦the way they pay tax,
◦their ability to raise finance, and
◦their ongoing regulatory obligations
Sole trader
A person is a sole trader if they directly own and operate the business by themselves.
A sole trader:
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◦may engage employees but they are the sole owner of the business,
◦has sole responsibility for raising the funds to start the business,
◦has sole control over the operation of the business, and
◦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
◦Very little formalities to comply with
◦Full ownership means the owner makes all decisions and gets all profits
Disadvantages
◦Personally liable for any business debts (unlimited liability)
◦Limited sources of capital
◦One person may not have all the skills needed to be successful
Partnership
A person is a partner in a partnership if they and at least one other person directly own and
operate a business together.
Partners generally have ‘mutual agency’.
◦Each partner is both the principal and the agent of the other partners.
◦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.
◦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 partnership is ‘the relation which subsists between persons carrying on a business in
common with a view of profit’.
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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, even if the parties don’t realise it or if they try to call it
something else.
Persons:
◦There can be no more than 20 partners (subject to certain exceptions).
Carrying on a business:
◦There must be some continuity or repetition of trading activities.
In common:
◦Each person must be acting on behalf of the others as well as on their own behalf.
With a view of profit:
◦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:
◦a formal written document,
◦partly in writing and partly oral, or
◦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:
◦The names of the partners and the name of the partnership
◦The nature of the business
◦The term of the partnership
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Document Summary
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). 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: the sole trader, the partnership, the trust and the company. These business structures are not always mutually exclusive. A person is a sole trader if they directly own and operate the business by themselves. 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.
