A Partnership Business in Australia - Essay Example

Australian company law Question one: Answer Partnership business in Australia is governed by several laws including the Partnership Act 1895(WA) of Western Australia. Other guiding law provisions of a partnership business include Business Names Registration Act of 2011. Partnership business can be defined as an association between two or more persons with a shared objective of making a profit. Partnership business is not a separate legal entity and partners are personally liable for the debts and obligations of the business. Tom and Adam are in a partnership business even though no written agreement has been made. Partnership business can be established through written partnership deed, orally or by estoppels through the actions of the partners1. Rule 6 (3) of the Partnership Act is mainly used by the courts in determining the existence of the partnership relationship. This rule provides that sharing of the profits and losses is enough evidence of existence of a partnership. Joint ownership of property or sharing of the gross returns does not necessary create a partnership association. According to the case of Smith v. Anderson (1880), partnership business must intent to carry on business and not domestic transactions since the repletion or continuity of business transactions will be evidence of a partnership business2. Adam and Tom must be aware that every partner other than in limited partnerships, or incorporated limited partnerships can act as an agent of the business and his actions are binding to the business.. Partnership business is not regarded as a separate legal entity thus third parties will be contracting with the partners as individual agents of the business. In the case of Mercantile Credit Ltd v. Garrod (1962), the courts held that partners have the capacity to bind the firm and third parties must not have the knowledge that such partner lacks the authority to transact on behalf of the business3. There are numerous advantages and disadvantages of Tom and Adam conducting their business as a partnership. The main advantages of a partnership business include the ease of formation. Partnership formation does not require many legal formalities but only business registration and business permits. Partnerships offer certain tax incentives since each partner share of profits is added to his or other sources of income and taxed as personal incomes. Partnership business allows for flexibility since the partners can easily alter the partnership deed that contains the rights and obligations of each partner, the profit and loss sharing ratios and liability of each partner depending on the nature of the partnership. Partners can access 50% CGT discount since they hold an interest in each business asset as an individual. The partners also share losses, decision making and responsibilities of running the business. However, Tom and Adam must also understand the disadvantages of partnership form of business since partners are jointly and severally liable for the liabilities of the business. Partnership business lacks continuity since dissolution can be occasioned by the death of the partner, or disagreements of the partners, bankruptcy of a partner, and retirement. It is difficult to transfer the ownership of the partnership business and partners have unlimited liability for the debts of the business. Since Tom and Adam have the intention of expanding their Winery business, I would advice them to form a limited company since their liability will be limited and their business will be a separate legal entity that can incur debts, sue or be sued. A limited company will allow them easy access to expansion capital. Tom and Adam will be able to easily transfer their ownership in the company through sale of their shares to third parties. Limited Liability Company will allow Tom and Adam to limit their tax liabilities since the company is taxed on its own entity. However, there are many legal formalities and strict regulations that guide the registration and operations of limited companies. The best option for Tom and Adam to undertake is to form a limited liability Company if they wish to carry out business together. Question two Answer: According to Section 13 of the Partnership Act 1895, the partnership business is bound actions of Adam and both Adam and Tom are required by law to pay the debt. Since Adam order the cases of French wine worth $ 5,000 in the name of the firm, he showed his intention to bind the partnership to the debt regardless of his authority. Section 14 of the Act is also clear that partners cannot use credit of the partnership business for private purposes without authorization of the other partners, but all partners will be liable if the partner conducts himself in a manner for the third party to believe such partner has the authorization of other partners. In the above case, Adam ordered wine bottling equipment and French wine cases which is a reasonable conduct for the third party to believe Adam was acting on behalf of the partnership business. According to Section 15, a notice that the business will not be bound by the actions of a partner is required, but no such restriction had been put on Adam thus both partners are jointly reliable for the debt. According to Section 16, both Tom and Adam are liable for the debts of the business jointly even after the death or dissolution of the partnership, but such liability will extend to the prior payment of each partner’s separate debts4. Section 19 of the Act provides for joint and several liabilities of all partners when a partner exercises his special power contained in Section 27 of the Act. The special powers include the right to draw, issue bills and negotiable instruments in the name of the firm. The case of Union bank of Australia v. Fisher concluded that transactions cannot be binding if carried out in an unusual way that raises suspicion on the third party. According to the case of Polkinghorne v. Holland, transactions within the scope of the ordinary business carried out by one partner will be binding to all partners. Other powers include the power of any partner to incur credit on behalf of the business, pledge assets of the business or make equitable mortgages by the deposit of deeds of the firm. Tom is bound by the debt incurred by Adam since Section 26 of the Act expressly clarified circumstances where a firm by not be bound by the actions of one partner in the ordinary course of business5. According to section 26, Adam must have no authority to procure the bottling equipment on behalf of the business and the third party must know that Adam has no authority or must not be knowing or believe Adam to be a partner to the Winery business. Section 26 can be demonstrated by the case of Mercantile Credit Ltd v. Garrod (1962) when two partners in garage business disputed when one of the partners sold a car to a third party. The partner had no authority to sell the car, but the court held that selling the car was in the ordinary business of the garage. The innocent partner was liable for the actions of the other partner. Section 23 requires that a notice to acting partner is equivalent to a notice to the firm unless incases of fraud committed with the consent of such partner. Representations of Adam in partnership affairs in ordinary business transactions or liabilities of the firm will construed as representations of all partners in the business according to section 22 of the Act6. Tom and Adam must be aware that partnership business requires fiduciary duty of utmost faith and partners must not engage in conflict of interest. Tom and Adam must desist from making personal gains and act honesty when dealing with third parties. Both Tom and Adam are jointly liable for the debt incurred by Adam without express authority. However, Adam may have bought the bottling equipment in the best interest of the firm; he should have avoided buying the French wine cases in the name of the firm. Tom and Adam must pay the debt and expressly outline the authority of each partner and provide a notice. Works cited: Burnett, Robin and Bath, Vivienne. Law of international business in Australia. Annandale. Federation Press. 2009. Christensen, S and Duncan, W. Sale of businesses in Australia. Annandale. Federation Press. 1997. Graw, Stephen. An outline of the law of partnership. Rozelle. Thomson Reuters. 2011. Western Australia. Partnership Act 1895. Perth. Government Printer.1985. Western Australian Consolidated Acts. (2012). Web; http://www.austlii.edu.au/au/legis/wa/consol_act/p84a1895135/ Read More