Types of Business Ownership and Their Characteristics

Manufacturing Business

A manufacturing business produces goods from raw materials or semi-finished products.

Trading Business

A business that purchases goods and sells them for a profit.

Service Business

A service business provides a service to a customer in exchange for a fee.

Limited liability

Owner’s personal assets are protected and cannot be used to pay off business debts.

Unlimited Liability

The owner is personally responsible for all debts of the business, which can extend to personal assets.

What is the partnership legislation act?

Partnership Act 1985 (WA)

Examples of Sole Traders

Freelancers or consultants.

Sole trader

A type of business ownership where an individual operates the business and is solely responsible for its debts.

Funding for Sole Trader Business

Mainly capital provided by the sole owner, with potential borrowing from banks or personal connections.

Sole Traders legal or separate accounting entity?

Sole Traders are separate accounting entities.

Continuity of existence for Sole Traders?

Sole traders do not have continuity of existence; if the owner dies or retires, the business ceases to exist.

Liability of a Sole Trader?

Sole traders are subject to unlimited liability, meaning personal assets can be sold to pay business debts.

Partnership

A business structure where two or more individuals share ownership and responsibilities, such as debts. (2-20)

Transfer of ownership in partnerships

Can be difficult, but with partner agreement it is possible

Partnership liability?

The partnership has unlimited liability. (Jointly liable both partners have to meet the debts of the business.)

What is the ability to raise capital in a Patnership?

Can raise capital between partners or borrow from banks/other institutions.

Continuity of existence for patnerships?

Do not usually continue if one owner dies or retires.

Distribution of profits for Patnerships?

Any profits that the business makes are split evenly between the partners (unless an agreement has been written).

What is a Small proprietary company?

A company that is a separate legal entity run by director/s and is owned by shareholder (1-50 shareholders)

Funding for a small proprietary company?

Ability to raise capital from up to 50 owners.

Transfer of ownership for a small proprietary company?

Shares in a proprietary company can be transferred to a new owner/s if the existing owners agree.

Profit distribution in a small proprietary company?

Company profits are distributed as dividends based on the number of shares owned.

Legal or separate accounting entity for a small proprietary company?

Both - Has separate assets/liabilities and owners are separate (company has its own rights - so can be sued or sue.)

Liability of owners in a small proprietary company?

The company has limited liability; if a company cannot pay its debts, the company would go into liquidation but the owner/s would not risk losing their personal assets.

Continuity of a small proprietary company?

Corporations have continuous life; does not die if an owner dies.

What is a separate legal entity?

An incorporated body, is an entity that can buy/sell assets in its own company, sue and be sued.

Separate Accounting Entity

Business assets and liabilities are separate from the owners’ personal assets and liabilities.

What is the business names’s legislation?

Business Names Registration Act 2011 (Cth)

What type of entity is a partnership?

Separate accounting entity

Why is partnership agreement important?

Personal liability is unlimited for partners. You will be held liable for any debts if partner cannot pay their share of debt. Both are jointly responsible for any debts a partner incurs, with or without your knowledge

Example of rules laid out in the Partnership Act 1985 (WA)

Partners will share profit equally, Receive equal compensation for their investment in the partnership, No partner is entitled to a salary for working in partnership.

Advantages of a sole trader?

All decisions made by you, receive all profit, own boss, less rules/regulations and easy to set up.

Disadvantages of a Sole Trader?

Unlimited liability, needs loads of expertise, limited ability to raise capital, lack of continuity

Advantages for a Partnership?

Moderate ability to raise capital, shared decisions making/responsibilities, more expertise shared

Disadvantages for a Partnership?

Unlimited liability, Disagreements, Share profit, Could be unfair - one partner does all work.

Advantages for a small propriety company?

Limited liability, more ability to raise capital, tranfer of ownership easy

Disadvantages for a small propriety company?

More costly to set up, subject to more regulations/paperwork, subject to company tax and more complex record keeping.

Collateral Meaning?

A form of security required by the bank, when lending. (land)

When do you not have to register a business name?

When the name is your first and last name.

What is equity?

Money put into the business put in by the owner.