01 Business Structures

Question 1

Sole Trader

Answer 1

An individual who controls and manages a business

Question 2

Advantages of a sole trader

Answer 2

Quick to set up and wind down

Owner has total autonomy over business decisions

Question 3

Disadvantage of a sole trader (unli…)

Answer 3

Unlimited liability; since business and self is seen as same entity, there is no separation from business and owner of business. If business fails and there is debt, then individual personally has to pay.

Question 4

Disadvantage of a sole trader (pers…)

Answer 4

Has to pay personal income tax

Question 5

Disadvantage of a sole trader (limi…)

Answer 5

Limited by time, skill, investment by owner. May not be able to expand if limited by skill of etc. selling.

Question 6

Disadvantage of a sole trader (ends…)

Answer 6

Business ends if owner dies or withdraws.

Question 7

Partnership

Answer 7

An association of two or more persons that carry on business as partners.

Question 8

Advantage of a partnership (par…)

Answer 8

Partnership Act requirement to set up agreement; mostly relates to how profits are split.

Question 9

Advantage of a partnership (ski…)

Answer 9

Combines skills, talents, investment of each partner.

Question 10

Disadvantage of a partnership (unl…)

Answer 10

Unlimited liability; if business fails and left with lots of debt, you are solely responsible.

Question 11

Disadvantage of a partnership (pers…)

Answer 11

Has to pay personal income tax

Question 12

Disadvantage of a partnership (mutu…)

Answer 12

Mutual agency; e.g. one partner can bind other partners to a contractual relationship (without agreement from other partners).

Question 13

Company

Answer 13

A form of business characterised by owners known as shareholders.

Question 14

Advantage of a company (sepa…)

Answer 14

Separate legal entity; separation from business. Business can solely sign contracts

Question 15

Advantage of a company (limi…)

Answer 15

Limited liability; no personal approaches as business is responsible.

Question 16

Advantage of a company (chea…)

Answer 16

Cheap and easy to set up in NZ

Question 17

Advantage of a company (shar…)

Answer 17

Ability to raise large sums of money by issuing more shares. If wanting to expand by wanting more money, more shares can be issued within the company. By passing and selling shares to other people, business can continue forever.

Question 18

Disadvantage of a company (reg..)

Answer 18

More regulation: compliance with Companies Act

Question 19

Disadvantage of a company (dir..)

Answer 19

If owner is not liable for company, then directors are responsible (if business fails, rather than shareholders).

Question 20

Hire purchase

Answer 20

Equipment is purchased by a financial institution which then hires he equipment to the entity for use during the agreement period.

Question 21

The main difference between the accounting reports for the various types of business structures is in the:

Answer 21

Equity section of the balance sheet.

Question 22

If the partnership agreement does not contain profit sharing arrangements then the Partnership Act states that the profit and losses must be shared:

Answer 22

Equally between all partners.