Business Structure notes
Types of Businesses
Characteristics of Business Undertakings
Business undertakings can be classified into the following types:
Manufacturing: Produces goods from raw materials.
Trading/Retailing: Buys and sells goods to earn profit.
Service Providing: Offers services in exchange for a fee.
Business Structures
Types of Small Business Ownership
The main types of small business ownership include:
Sole Trader
Partnership
Small Proprietary Company
Key Characteristics
The characteristics affecting business ownership include:
Number of Owners: The number of individuals involved.
Liability of Owners: Legal responsibility for business debts.
Ability to Raise Capital: Methods to obtain funds.
Distribution of Profits: How earnings are shared.
Transfer of Ownership: Process for changing ownership.
Separate Accounting/Legal Entity: Legal distinction from owners.
Continuity of Existence: Business longevity despite owner changes.
Legislation Relating to Business Formation
Business Names Registration Act 2011 (Cth)
Partnership Act 1895 (WA)
Sole Trader
Definition and Characteristics
A sole trader is owned and operated by a single person.
Liability: Owners have unlimited liability; personal assets can be sold to settle business debts.
Capital Raising: Mainly funded by the owner, with the possibility of borrowing from banks or personal connections.
Profit Distribution: All profits belong to the sole trader.
Ownership Transfer: Difficult unless the business closes; generally ceases to exist if the owner retires or passes away.
Separate Entity: Not a separate legal entity; accounting is separate but personal assets are not protected.
Concept of Unlimited Liability
Personal assets (e.g. house, car) can be claimed to pay off business debts.
Partnership
Definition and Characteristics
A partnership involves 2-20 owners working jointly.
Liability: Unlimited; owners share responsibility for debts.
Capital Raising: Funded by all partners' contributions.
Profit Distribution: Profits shared (unless agreed otherwise).
Difficulties in Ownership Transfer: Ownership changes are cumbersome; can cease if one partner dies or retires.
Separate Entity: Treated as a separate accounting entity, but not a legal entity unless incorporated.
Partnership Act (1895)
Profits must be shared equally. Partners receive equal compensation.
An agreement is recommended to address profit sharing and other terms.
Small Proprietary Company
Definition and Characteristics
A company operated by directors and owned by shareholders (up to 50).
Liability: Limited; owners are not personally liable for business debts.
Capital Raising: Funds can be raised through shares.
Profit Distribution: Dividends paid based on shareholder shares.
Ownership Transfer: Shares can be transferred with existing owners’ agreement.
Separate Entity: Legally recognized; can sue or be sued independently.
Continuity of Existence: The company continues regardless of owner status.
Advantages and Disadvantages of Business Ownership
Sole Trader
Advantages:
Full control and decision-making power.
Retains all profits.
Minimal regulation and easy setup.
Disadvantages:
Unlimited liability - This means if the business cannot meets its debts the owner’s personal assets can be sold to meet these debts.
Challenges in taking breaks due to workload.
Difficult to raise capital/funds
Partnership
Advantages:
Shared responsibility and expertise.
More capital than a sole trader.
Disadvantages:
Unlimited liability.
Potential conflicts based on shared decision-making.
Shared profits
Small Proprietary Company
Advantages:
Limited liability for owners (only lose what you invest; shareholders only liable for unpaid shares)
Easier transfer of ownership.
More ability to raise capital
Disadvantages:
More expensive to set up and maintain.
Subject to more regulations and tax obligations.
Complex record keeping
What is a stakeholder?
A "stakeholder" is a person or group that has an interest in a project or decision, and can be affected by the outcome.