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COMMERCIAL LAW
WEEK 12 ANSWERS
STARTING A BUSINESS

1. Why is the choice of business structure an important decision?

The choice of business structure has important consequences with respect to:
the ease and cost of setting up a business
legal and financial liability
tax payment and liability
ability to raise finance; and
ongoing regulatory obligations.

2. Compare and contrast the differences between (a) a sole trader, (b) a partnership and
(c) a company.

Structure Definition Advantages Disadvantages

Sole trader An individual who directly Sole control Sole responsibility for
owns and operates a All profits belong raising funds to start
business by himself. to the individual business
Simplest form of Unlimited personal
business structure liability for debts
Partnership A group of two or more Ease and low cost Each partner remains
people who directly own to form personally liable for
and operate a business Flexible structure the debts
together. Privacy (do not A partnership is not a
have to be separate legal entity so
registered with it does not have
government perpetual succession
authority)
Pooling of
resources to start
partnership
Company A corporation incorporated Separate legal Must be registered
under and regulated by the personality with government
Corporations Act 2001 Limited liability authority
(Cth) (shareholders are Strict rules for
not liable for governing companies
debts) are contained in the
Continuity of Corporations Act 2001
existence (Cth)
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3. You are about to complete your accounting degree and are talking with an
entrepreneurial fellow student about running a business together upon graduation.
What are some relevant business structure choice factors that may be important to you
if for example your business is a caf, an executive commercial premises cleaning
service, an accounting firm, an import/export business, a lending institution?

Various factors may be important depending on the type of business you are intending to
operate.

The factors include:

Raising start-up capital

Shareholding
Taxation
Co-ownership of property
Sharing of profits

4. What are the four requirements necessary to satisfy for a business organisation to be a
partnership?

Section 5 of the Partnership Act 1958 (Vic) defines a partnership as the relation which
subsists between persons carrying on a business in common with a view of profit.

A business organisation will be a partnership if the following four requirements are satisfied:

1. There are two or more persons involved.

2. Those persons are carrying on a business: Evans v Federal Commissioner of Taxation
(1989); Smith v Anderson (1880).
3. They are carrying on the business in common: Degiorgio v Dunn [2004]
4. They are carrying on the business with a view to profit.

5. Shivani and Asher decide to advertise together offering landscaping services. Shivani
already owns the necessary tools and pays the advertising costs. Shivani and Asher
agree that for any customers that Asher finds Shivani will pay her a fee but that Shivani
herself will receive the payments made by the customers.

Are Shivani and Asher in a partnership?

ISSUE

The legal issue in this matter is whether Shivani and Asher have satisfied the four
requirements that constitute a partnership.
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RULE

A business organisation will be a partnership if the following four requirements are satisfied:
1. There are two or more persons involved.
2. Those persons are carrying on a business: Evans v Federal Commissioner of Taxation
(1989); Smith v Anderson (1880).
3. They are carrying on the business in common: Degiorgio v Dunn [2004]
4. They are carrying on the business with a view to profit.

(Section 5 of the Partnership Act 1958 (Vic))

APPLY

The first requirement has been satisfied because there are two persons involved, namely
Shivani and Asher.

The second requirement has been satisfied because Shivani and Asher are carrying on a
business providing landscaping services.

In order to satisfy the third requirement, we must demonstrate that Shivani and Asher are
carrying on the business in common. This means that each person is acting on behalf of the
others as well as on their own behalf. In Degiorgio v Dunn [2004] the court held the parties
were not carrying on the business in common because Dunn had paid all of the establishment
costs himself and Degiorgio was paid a fixed fee for each performance. This is very similar to
Shivani and Ashers circumstances, where Shivani has paid for the start up costs and Asher is
simply receiving a fee. Therefore it is unlikely the third element is satisfied.

The fourth requirement is satisfied, as both Shivani and Asher are seeking to make a profit.

CONCLUSION

Based on the preceding analysis, it is unlikely that the third element will be satisfied and
accordingly Shivani and Asher have not formed a partnership.

6. You are working as an assistant at a small firm of accountants. A new employee

assistant who has a non-business background has asked you what is the doctrine of
separate legal entity? He has to brief a client and requires a short legal explanation.
Please provide him with one.

The doctrine of separate legal entity refers to the laws treatment of a company as a legal
entity separate from its owner or owners. The company can incur debts, hold property and be
sued in its own name. In Salomon v Salomon [1897] the court held that a company (Salomon
& Co Ltd) was a separate legal entity from its owner (Mr Salomon) who was the majority
shareholder in that company.
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7. What are the two main ways that companies can be classified?

Companies can be classified according to the nature of the members liability and according
to whether they are a public or proprietary company.

(1) Members liability

a. Companies limited by shares: The members contribute money to the company by
purchasing shares. The liability of shareholders is limited to the amount (if any)
unpaid on their investment.
b. Companies limited by guarantee: The liability of members is limited to the amount
that the members have guaranteed to contribute in the event that the company is
would up. For example, sporting organisations may be companies limited by
guarantee.
c. No liability companies: The company has no right to recover from members any
amounts unpaid on their investment. Only mining companies can be no liability
companies.
d. Unlimited companies: Members have no limit placed on their liability for debts.
For example, doctors and lawyers.
(2) Proprietary and public companies
a. Proprietary companies are privately owned. They must be either a company limited
by shares or an unlimited company. They are not permitted to have more than 50
non-employee shareholders. They are not allowed to undertake fundraising
activities that require the issue of a prospectus.
b. Public companies are listed companies that have shares which can be bought and
sold at the stock exchange. A public company must have at least 3 directors and
must hold an annual general meeting every year.

8. Ryder wants to form a company to provide investment and business finance services.
Advise Ryder generally how a company is established.

Ryder is advised that ASICs website outlines the following procedure for forming a
company:

Step 1: Decide if a company structure is right for an investment and business finance service
business.
Step 2: Choose a company name. Proprietary companies must have the word Limited or
Ltd in their name.
Step 3: Decide how to internally govern your company.
Step 4: Understand your legal obligations as a director or office holder.
Step 5: Appoint a director, secretary and member.
Step 6: Register your company. A company must be registered with the Australian Securities
and Investments Commission (ASIC). To do this, a form must be completed and a prescribed
fee paid. ASIC then registers the company and issues a 9 digit Australian Company Number
(ACN).
Step 7: Understand your legal obligations regarding a company.

(Source: http://asic.gov.au/for-business/starting-a-company/how-to-start-a-company/