CHAPTER 3

Question 1

What are the features of a sole trader, partnership and a company

Answer 1

Set up: straight forward, relatively, complex
Life of entity: limited to desire of owner, limited to desire of individual partners, Indefinite
Reporting status relative to owner: Separate reporting entity.
Legal status relative to owner: Not a separate legal entity, ‘’, Separate
Extent of owners’ liability, unlimited, unlimited, limited
Tax implications: Owner declares profit as income, partner declares share of profit as income, entity taxed on profit, shareholders declare dividends as income.

Question 2

Features of a company

Answer 2

• Owners are the shareholders
• Bound by the CA 2001
• Must follow IFRS and local GAAP

Question 3

Features of a Public company

Answer 3

Minimum one shareholder, Mostly LTD or PLC, no restrictions on transfer of ownership, limited guarantee (liability extends to an amount guaranteed by members), No liability companies (no liability even if amount unpaid on shares).

Question 4

Private companies

Answer 4

• Need to specifically state to be a proprietary company - must include PTY Ltd
• Cannot have more than 50 shareholders
  Restrictions on raising capital
• need to target specific investors
  Shareholders often business associates
• don’t want the complexities of owning a public company. All members of the same family (common)

Question 5

What is a soletrader, advantages and disadvantages

Answer 5

Soletrader
- An individual who controls and manages a business - fully liable of all debts
- Easy to set up
- Tax purposes - income treated as the owners personal income
- Not bound by acc standards - reporting very flexible
**Advantages **
Quick and inexpensive form of business - inexpensive to wind down
Not subject to CA regulation
Does not pay separate income tax
Total autonomy
**Disadvantages **
Unlimited liability - full responsibility for debt or legal actions
Limited by the skills and qualifications of the owner

Question 6

Define the term Partnership and discuss the main features

Answer 6

Partnership
- An association of two or more persons or entities that carry on business as partners, and share profits or losses according to the ownership structures outlined in the agreement.
- Enables the sharing of ideas, talent and skills
Must apply for new ABN
- Each Aus state has its own Partnership Act \
Not legally required to have a written partnership agreement - although strongly advised - should include name, contributions and other assets to partnership.
- Also the profit and loss sharing, workload, business decision making, rights and what happens when death.
Advantages
- Easy to set up and wind down, No fin statements, No tax on income, combines skills
Disadvantages
- Unlimited liability
- Limited life - if partner dies automatically dissolved
- Mutual agency: when each partner is seen as an agent if the business and being bound by any partnership contract - could be risky - large sums of money owed