Week 2 - Business Structure
Reading (Chapter 3 – Business Structure)
Sole Trader: individual who controls and managers a business. The business is not a separate legal entity but the owner is fully liable for all debts and if the business incur debts the sole trader’s personal property will be sought. General registration requirements involve applying for an ABN.
Advantages and Disadvantages of Sole Traders:
Quick and easy process
Inexpensive
Not subject to company regulations such as the corporations act 2001 (+ve)
Autonomy of business decisions
-VE
- Sole traders are not a separate legal entity meaning in cases where disputes are brought, the sole trader is fully liable.
- Limited by time
- Restrictive when wanting to collaborate with the government
Features of a partnership
Is an association of two or more persons or entities that carry on business as partners
Brings together different skills and talents
Collaborated taxation is payed
Shared liability between partners
Partnership Agreement
It is important to write up an agreement between partners (optional)
Include details such as:
Name
Contributions of cash
Other assets
Profit and loss sharing agreements (different contributions can be brought by different partners)
Advantages and Disadvantages of a Partnership
Easy to set up
Financial statements not required
Taxes are not paid on income earned by the partnership
Partnership are a combination of different skills and assets
-VE
Fully responsible for all business debts and obligations
It will automatically dissolve if one partner withdraws
Disagreement is open to interpretation
Mutual agency: Each partner is seen as an agent for the entity and has a right to enter into contracts for that business. May involve unreasonable repayments etc.
Many partnerships argue about decision making and profit sharing etc.
Definition and Features of a Company
A company is a form of business characterised by its owners (shareholders).
It runs on an independent legal entity, meaning it is separate from its owners
Taxes can be payed independent of its owners
Owners pay individual taxes on the profits
A dividend is the distribution of part of the company’s profit to shareholders
Owners are not responsible for debts of company
Shareholders have limited liability, the company cannot die when the shareholders withdraw.
Types of Companies
Proprietary companies: Also known as private companies, are a common form of business structure used by small-medium sized businesses. These companies are usually family owned. They are denoted by the words ‘Pty Limited’ or ‘Pty Ltd’. Meaning their shares are not offered to the public.
Public companies:
Limited by shares (Ltd): public companies can offer shares to the public.
Must have 3 directors and at least one shareholder.
Shares classified under two headings:
Ordinary or common shares: part owners, and may receive dividends
Preference shares: receive a fixed rate, in the event of liquidation.
Limited by guarantee: owners guarantee to contribute to an agreed amount of cash. This is usually a small amount.
No liability companies: shareholders not responsible to repay any uncalled portion on their shares.
Unlimited company – no limit on liability.
Advantages and Disadvantages of a Company
Limited liability for shareholders (debts – shareholders don’t pay for debts)
Tax rate is low (30%)
Business expansion made easy
Additional equity can be raised through public share offerings.
Disadvantages include:
More time consuming and costly to set up
Must comply with strict company rules and other legal requirements (corporations act)
Taxed from first dollar of profit
Limited liability aspect may cause problems
Banks prefer personal guarantee instead
Separation of ownership and control
Issuing shares to the public is not always trustworthy.
Annual shareholder meetings must be held.
Owners have little say in the day to day activities
When a company “goes