business ownership overview

Business Ownership Overview

  • Key Considerations:

    • Tax:

    • Aim to minimize tax burden.

    • Ownership:

    • Consider solo ownership, partnerships, and shareholding.

    • Liability:

    • Protect owners and investors from being personally liable for business debts.

    • Succession:

    • Establishing ownership and control for future (especially important for family businesses).

    • Sources of Finance:

    • Consider capital needed to start the business.

Types of Business Ownership

  • Identification of Business Ownership Types:

Sole Trader

  • Definition:

    • A single person operating a business under their own name.

  • Liability:

    • Unlimited liability; the owner is liable for all debts and damages owed by the business.

  • Taxation:

    • Profits of the business are considered taxable income for the owner.

  • Ownership:

    • Business can be run in the owner's name or a registered business name.

Partnership

  • Definition:

    • Two or more individuals engaging in business together to make a profit.

    • Governed by the Partnership Act 1895 or a formal Partnership Agreement.

  • Liability:

    • Unlimited liability.

  • Taxation:

    • Profits are distributed among partners and seen as their personal taxable income.

  • Ownership:

    • Contracts entered into by one partner are binding on all partners; new partners can join with consent.

    • Maximum of 20 partners, with exceptions for some professions (e.g., accountants, lawyers).

Small Proprietary Company

  • Definition:

    • A separate legal entity often indicated by "Proprietary (Pty)" or "Limited (Ltd)" in its name.

  • Liability:

    • Shareholder liability is limited to unpaid shares.

  • Taxation:

    • Requires a company tax return and pays at company tax rates.

  • Ownership:

    • Limited to a maximum of 50 shareholders; shares cannot be offered to the public.

Not-for-Profit Organization (NFPO)

  • Definition:

    • Operates without intention for profit or gain to individual members.

  • Liability:

    • An incorporated NFPO limits personal liability to membership fees; unincorporated can expose members to personal liability.

  • Taxation:

    • If approved by the ATO, can be exempt from income tax.

    • Incorporated NFPO is a separate legal entity.

Franchise

  • Definition:

    • A franchisor licenses the business model to franchisees in exchange for ongoing fees or royalties.

  • Liability:

    • Debt liability depends on the form of business that owns the franchise.

  • Taxation:

    • Fees and royalties can be tax-deductible; taxation is based on the franchise's operating form.

  • Ownership:

    • Franchisee owns the franchise but must adhere to franchisor's conditions; transfer of ownership is conditional and regulated.

Comparison Activities

  • Choose 2 Business Ownership Types:

    • Fill in a comparative table.

    • Write a paragraph to compare and contrast the two chosen business ownership types covering definitions, liabilities, taxation, and ownership.

Advantages and Disadvantages of Different Business Types

  • Sole Trader:

    • Advantages:

    • Full control of the business.

    • Owner keeps all profits.

    • Easy to establish.

    • Disadvantages:

    • Unlimited liability; must pay off all debts.

    • Full workload falls on the owner.

  • Partnership:

    • Advantages:

    • Simple to establish; partners contribute skills and capital.

    • Workloads can be shared.

    • Disadvantages:

    • Unlimited liability; disagreements may arise.

    • Need to set rules concerning dissolving partnerships.

  • Small Proprietary Company:

    • Advantages:

    • Limited liability protects personal assets.

    • Shareholders can sell shares to exit the company.

    • Disadvantages:

    • More expensive and time-consuming to set up.

    • Limited control for shareholders; must operate within Corporations Act.

  • Not-for-Profit Organization:

    • Advantages:

    • Inexpensive incorporation; may receive tax exemptions.

    • Disadvantages:

    • Limited operation state; less clarity on dispute resolution.

  • Franchise:

    • Advantages:

    • Uses established branding and operational support.

    • Easier to secure financing.

    • Disadvantages:

    • Less autonomy in business decisions; ongoing fees.

    • Restrictions on business dealings and territory.

Group/Individual Activity

  • Legal Structure Choices:

    • Identify legal structure impacts based on selected business types.

Activity Questions for Understanding

  1. List 3 differences between sole traders and partnerships.

  2. Discuss 2 factors to consider when deciding on a legal structure for a business.

  3. Why is it important to consider liability when choosing a business structure?

  4. Which business type is best for minimizing personal liability?

  5. List some advantages of a small proprietary company.

  6. Identify disadvantages of a partnership.

  7. Define a franchise.

  8. Discuss why a franchise might be an ideal entry point into business ownership.

Research Activity

  • Investigate examples representing each of the five types of business ownership.