topic 2

What are the three main business structures?

Sole trader, partnership and company.

What is a sole trader?

A business owned and operated by one person.

What is a partnership?

A business owned by two or more people who carry on business together.

What is a company?

A separate legal entity owned by shareholders and managed by directors.

Which structure gives the owner the most control?

Sole trader, because one owner makes the decisions and provides the resources.

What are two advantages of a sole trader?

Simple and cheap to set up, and the owner has full control.

What is the main disadvantage of a sole trader?

Unlimited liability, meaning the owner is personally responsible for business debts.

What is unlimited liability?

The owner’s personal assets may be used to pay business debts.

What are two advantages of a partnership?

Partners can share skills, workload, capital and resources.

What is joint and unlimited liability?

Partners can be personally responsible for the debts of the partnership, including debts caused by another partner.

What is mutual agency?

Each partner can make decisions or enter contracts that legally bind the other partners.

Why is a partnership agreement important?

It helps reduce conflict by setting out roles, responsibilities, profit sharing and what happens if a partner leaves.

What are two advantages of a company?

Limited liability and the ability to raise larger amounts of capital.

What is limited liability?

Owners are generally only liable for the amount they have invested or agreed to invest.

What does separate legal entity mean?

The company exists separately from its owners and can own assets, owe debts and enter contracts in its own name.

What is a disadvantage of a company?

It is more regulated, more complex and usually more costly to operate.

Which business structure has the highest regulatory burden?

Company.

Which structure is most suitable for listing on the ASX?

Public company.

What are four factors to consider when choosing a business structure?

Control, liability/risk, ability to raise finance, and tax/growth potential.

How are sole trader profits taxed?

The owner includes the business profit in their personal tax return.

How are partnership profits taxed?

Each partner includes their share of profit in their personal tax return.

How are company profits taxed?

The company pays tax on its profits at the company tax rate.

Why might a sole trader change to a partnership?

To expand, share workload, gain more capital or bring in another person’s skills.

Why might owners choose a company instead of a partnership?

To gain limited liability, separate legal entity status and better access to finance.

What is the main exam tip for business structure questions?

Match the structure to the scenario and justify using control, liability, finance, tax, regulation and growth.