LAWS1100 Study Guide - Final Guide: Sole Proprietorship, Franchising, Capital Structure
1
Business Structures
1. Sole traders
2. Partnerships
3. Joint ventures
4. Trusts
5. Companies
6. Franchises
• Choosing the right business structure really depends upon what stage your business is at and what
you are aiming to achieve.
• There is no such thing as the “perfect” business structure.
• Each type of business structures has its own unique positive and negative attributes.
Factors to be considered when choosing or transferring into a business structure include:
• The purpose, nature and objectives of the business;
• The duration of the venture;
• The availability of finance;
• Capital and credit requirements;
• Management;
• Degree of control of owners and investors;
• Types of assets to be acquired;
• Taxation Implications;
• Extent of liability;
• Privacy and confidentiality;
• Formalities and cost; and
• Transferability of interest.
SOLE TRADER
A person is a sole trader if they directly own and operate the business themselves.
A sole trader:
1. May engage employees but they are the sole owner of the business;
2. Has sole responsibility for raising the funds to start the business;
3. Has sole control over the operation of the business;
4. Is entitled to all profits of the business.
• There are no formal legal requirements that need to be satisfied to establish this type of business
structure.
Advantages
• Profit is not shared;
• No outside interference;
• Easy to establish and manage;
• Low-cost and no formality;
• Confidential;
• Personal and high degree of control;
• Decision making is speedy.
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Disadvantages
• Unlimited personal liability for the debts and other legal obligations of the business.
• Isolated working and business environment;
• Limited lifespan, no continuity;
• Business closure or limited trading capacity due to holidays, illness or incapacity;
• Long working hours;
• Limited access to finances;
• Normally quite hard to raise capital.
PARTNERSHIP
Exam Note: In an Exam question, partnership and Agency are going to be linked. If you get a question
that is around Agency/Authority the first thing you should work out is if they are partners. If they aren’t,
what is their relationship?
• According to the definition in the Partnership Act, “A partnership is the relation which subsists
between persons carrying on a business in common with a view of profit.”
Statute Partnership Act 1891 (Qld) s5(1)
• A partnership is a group of two of more people who directly own and operate a business together.
• Key concept is “mutual liability”: Each partner in a partnership is both the principal and agent of
the other partners.
• Each partner has unlimited personal liability for the debts and obligations of the business.
• The relationship between partners can be contractual (in a partnership agreement) or regulated
by legislation (Partnership Act 1891 (Qld)) (PA) and is governed by laws of agency and
fiduciary duties.
• The relationship between partners is a contractual one.
• The terms of the contract are set out in the partnership agreement which may be:
1. A formal written document;
2. Partly in writing and partly oral; or
3. Wholly or partly implied
from the conduct of the
partners.
• A written partnership agreement is not required for the existence of a partnership.
• However it is a good idea to have one, setting out:
1. The names of the partners;
2. The name of the partnership;
3. The nature of the business;
4. The term of the partnership;
5. Each partner’s contribution;
6. Sharing of profits and losses;
7. Authority of partners;
8. Decision-making;
9. Duties and obligations;
10. Admitting new partners;
11. Withdrawal or death of a partner;
12. Dispute resolution procedures.
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3
Advantages:
• Ease of formation;
• Relatively low-cost;
• Flexibility of structure;
• Combine skill and expertise;
• Have the resources of a number of persons;
• Greater access to finances.
Disadvantages:
• Mutual Liability;
• Joint and personal liability of partners for partnership debts.
Case Law: Kendall v Hamilton (1879) – may be jointly and severally liable for torts and crimes
committed by a fellow partner;
• Upper limit on numbers (usually 20, except in the case of certain professional partnerships);
• Not a separate legal entity (although it may sue and be sued). Therefore it does not have perpetual
succession – transfer of partnership interest may not be that easy (compare this with Companies).
Requirements for a Partnership
• No formal registration requirements or legal formalities associated with the establishment of a
partnership.
• A partnership exists as long as the 4 requirements in the definition of ‘partnership’ in the
legislation are satisfied (regardless of the intention of the parties).
Statute: s5(1) Partnership Act.
1. Persons
2. Carrying on a business
3. In common
4. With a view to profit
1. Persons:
2. At least 2 persons are required to form a partnership.
3. General rule is that there can be no more than 20 partners:
Statute: s115: Corporations Act 2001 (Cth).
4. However, certain professional partnership are excluded.
- Example: law firms can have up to 400 partners.
- Example: accountants can have up to 1000 partners.
1. Carrying on a business:
• A ‘business’ is defined as including a “trade, occupation or profession.” See: s3 (PA).
• ‘Carrying on’ suggests there must be “some continuity or repetition of trading activities”.
• A single transaction or one off project is usually not a partnership.
Case Law: Smith v Anderson (1880).
• However, if partners begin working together to prepare or establish an identifiable business, the
partnership commences from the date they begin working together.
Case Law: Khan v Miah [2000].
• The key consideration falls on the intention of the parties.
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Document Summary
A person is a sole trader if they directly own and operate the business themselves. Advantages: profit is not shared, no outside interference, easy to establish and manage, low-cost and no formality, confidential, personal and high degree of control, decision making is speedy. Exam note: in an exam question, partnership and agency are going to be linked. If you get a question that is around agency/authority the first thing you should work out is if they are partners. If they aren"t, what is their relationship: according to the definition in the partnership act, a partnership is the relation which subsists between persons carrying on a business in common with a view of profit. Advantages: ease of formation, relatively low-cost, flexibility of structure, combine skill and expertise, have the resources of a number of persons, greater access to finances. Joint and personal liability of partners for partnership debts.
