Small Business Ownership

Chapter Overview

  • Financial systems and fundamental principles

  • Characteristics of main types of small business ownership:

    • Sole Trader

    • Partnership

    • Small Proprietary Company

  • Types and characteristics of business undertakings:

    • Service providing businesses

    • Manufacturing businesses

    • Retailing/trading businesses

Types and Characteristics of Business Undertakings

  • Over 90% of Australian businesses are small.

  • Industries with the largest number of small businesses (Descending Order):

    1. Construction

    2. Professional, Scientific and Technical Services

    3. Rental, Hiring and Real Estate Services

    4. Agriculture, Forestry and Fishing

    5. Financial and Insurance Services

Types of Businesses:

  1. Service Providing Business:

    • Offers services (e.g., tutoring, lawn mowing, accountancy).

    • Usuallyhas lower start-up costs (no inventory needed).

  2. Manufacturing Business:

    • Purchases raw materials and converts them into products for sale.

    • Example: Home-made greeting cards or gourmet food.

  3. Trading/Retailing Business:

    • Buys already manufactured products to sell at a profit.

    • Example: Clothing or books stores.

Sole Trader

  • Definition: A business owned by one person.

  • The owner is responsible for all business decisions and finances.

Advantages of Being a Sole Trader:

  • Complete control over decision-making.

  • Retains all after-tax profits.

  • High flexibility in managing the business.

  • Easiest and least expensive type of ownership to start.

  • Simple process for winding up the business.

Disadvantages of Being a Sole Trader:

  • Limited to the owner's personal financial resources for funding and expansion.

  • Unlimited liability for business debts; personal assets can be at risk.

  • Difficulties arise if the owner becomes ill or absent.

Operating as a Sole Trader:

  • May trade under own name or business name (needs to be registered).

  • Tax obligations fall upon the owner, as the business is not a separate legal entity.

Winding Up a Sole Trader Business:

  • Steps to wind up:

    1. Finalize contracts and agreements.

    2. Sell remaining assets.

    3. Collect debts.

    4. Pay creditors.

    5. Cancel registered business name.

Partnership

  • Definition: A relationship between 2 to 20 individuals carrying on a business.

  • Must be formed with a valid agreement to operate an ongoing business for profit.

Advantages of a Partnership:

  • Greater capital access from pooling resources.

  • Generally less expensive to establish.

  • Shared workloads, providing flexibility.

  • Not subject to business tax (individual partners are taxed on their share of profits).

Disadvantages of a Partnership:

  • Unlimited liability for all partners; risk of personal assets.

  • Possible limited lifespan; may dissolve with partner changes.

  • Decision-making can take longer due to disagreements.

Partnership Agreement:

  • Written agreement outlining responsibilities, profit sharing, and dispute resolution.

  • Important for protecting interests and managing relationships between partners.

Small Proprietary Company

  • Definition: A business structure limited by shares with up to 50 members.

  • Requirements to be classified as 'small':

    • Assets under $12.5 million.

    • Fewer than 50 employees.

    • Revenue under $25 million.

Advantages of a Small Proprietary Company:

  • Separate legal entity, protecting personal assets.

  • Limited liability for shareholders.

  • Easier capital raising due to multiple share ownership.

  • Generally lower financial compliance requirements.

Disadvantages of a Small Proprietary Company:

  • Higher setup and administrative costs.

  • Limitations on Revenue and capital loss offsetting.

  • Complex formation and ongoing compliance obligations.

Setting Up a Small Proprietary Company:

  • Apply to ASIC for registration.

  • Obtain an Australian Company Number (ACN).

  • Establish a registered office, internal governance, and declare a shareholder register.

Winding Down a Small Proprietary Company:

  • Appointment of a liquidator if the company cannot meet its debts.

  • Steps to deregister and wind down include ensuring no outstanding debts or legal proceedings.