Business structures Flashcards
What is limited liability?
The Shareholders of the company are not responsible for the debts of the entity should it fail. Personal assets will not be sold to repay the entities debts.
Note: Directors can be personally pursued for business debts if they act inappropriately.
(Use members for incorporated organisations)
What is unlimited liability?
Owners of the business could be responsible for the debts of the business should it fail. Personal assets may be sold to repay the entities debts. (Use members for unincorporated organisations)
What is the difference between business entities and incorporated entities?
Incorporated
- Members not owners
- Profits are not distributed to members
- Accumulated funds for future, NOT equity of owner
- No drawings
- If it closes down funds NOT distributed to members
- Fundraising for raising cash
What are the advantages of a sole trader?
- All profits for the owner
- Flexible working hours
- Own boss
What are the advantages of a partnership?
- Greater access to capital than sole proprietor.
- Sharing of skills, risk and workload.
- Partners liable for tax on profits, as opposed to a company which is taxed on profits and shareholders taxed on dividends.
What are the advantages of a Limited liability company?
- Limited liability
- Has perpetual succession
- Large amounts of capital can be raised through shares/debentures
- Separation of ownership from day to day management of business
- Can borrow by way of debentures
What are the disadvantages of a sole trader?
- Owner takes all responsibility/risk
- Limited access to funds for expansion
- Operating problems whenever owner is sick or on holiday
- Unlimited liability
What are the disadvantages of a partnership?
- Share profits
- Partners have joint & several liability, therefore one partners actions can blind all other partners
- Unlimited liability
- Limited life on the death or retirement of a partner, the partnership is dissolved
What are the disadvantages of a Limited liability company?
- Executive set-up costs
- Strict legal/reporting requirements
- Company profits are taxed and the shareholders dividends are also taxed (double taxation)
State the main sources of finance for a sole trader?
- Capital
- Revenue from sale of goods/service
- Accounts payable
- Loans from banks
State the main sources of finance for a Partnership?
- Partner’s Capital
- Revenue from sale of goods/service
- Accounts payable
- Advance from partner
- Loans from banks
State the main sources of finance for a Limited liability company?
- Share capital
- Revenue from sale of goods/service
- Accounts payable
- Loans from banks
- Debentures
State the main sources of finance for an incorporated community organisation?
- Membership subscriptions
- Fundraising
- Donations
- Grants
- Loans from banks
- Debentures
State the main sources of finance for an unincorporated community organisation/club?
- Membership subscriptions
- Fundraising
- Donations
- Loans from banks
Which two entities must have their financial statements audited?
- Limited liability companies
- Incorporated organisation
(This is an advantage as it costs more money for and audit)
