Classification of business Flashcards
What is the difference between an incorporated and an unincorporated company?
Incorporated= private and public companies, separate legal entity from owners, exists in its own right
Unincorporated= sole traders and partnerships, not a separate legal entity, owner dies- business entity dies
What percentage of businesses in Australia are incorporated?
42.5%
What percentage of businesses in Australia are unincorporated?
57.5%
What is the most common legal structure for small businesses and why?
- unincorporated
- easiest and cheapest to establish
What degree of liability does a sole trader have?
unlimited liability
- business owner is personally responsible for all the debts of the business
What are the characteristics of a sole tradership?
- owned and operated by one person who provides all the finance, makes all decisions and takes all responsibility
What are the legal requirements for a sole trader in regards to the name of the business?
- register the name of the business with ASIC if different from the owner
Advantages of a sole trader?
- low start up cost and operation
- no tax on profits (only personal income)
- complete control
- owner’s right to keep all profits
Disadvantages of a sole trader?
- unlimited liability
- no perpetual succession
- burden of management
- wide variety of tasks
- difficult to raise finance for expansion
Characteristics of a partnership?
- owned and operated by 2-20 people
- no separate legal entity
- unlimited liability
How can a partnership be made?
verbally, in writing or by implication
- written agreement is the best because of case disputes in the future
What are common elements of a partnership agreement?
names and addresses, how long it will exist, how profits and losses will be shared, duties of each partner, limitations on authority of each partner, how it can be dissolved, methods of resolving disputes, arrangements regarding a partner wanting to leave
What legislation regulates the size and operations of partnerships?
Partnership Act 1982 (NSW)
Advantages of partnerships?
- low start up costs and operations
- shared responsibility and workload
- pooled funds and talent
- business can continue in death of a partner
- minimal gov regulation
Disadvantages of partnerships?
- personal unlimited liability
- possibility of disputes
- finding a suitable partner
- divided loyalty and authority
What are limited partnerships?
‘silent’ or ‘sleeping’ partner contributes financially but takes no part in running of the business
- adds capital
What is the process of incorporation?
company becomes a separate legal entity from owners (shareholders)
- ‘veil of incorporation’
- company can sue or be sued, can lease, sell or own property, has perpetual succession
- process governed by Commonwealth Corporations Act 2001- ASIC
- company name registered with ASIC
- will issue a cert. of incorporation and ACN - appointing of directors
What is limited liability?
Feature of corporate ownership that limits each owner’s financial liability to the amount of money he or she has paid for the business shares
What was the Limited Liability Act 1855?
- passed by British Parliament
- necessary for expansion of companies as it offered financial protection to shareholders
What amount of money can a shareholder lose in limited liability companies?
The amount they paid for for shares
What happens to shareholder’s personal assets if the company is liquidated?
shareholders cannot be forced to sell personal assets for debts of the business due to limited liability
Do directors of a company get financial protection in the case of liquidation of a company? Why?
Not always
- directors have the obligation to act lawfully and in the interest of shareholders
- some banks ask them to give personal guarantees for loans
- some directors can be forced to sell personal assets for business debt
- companies can insure against this
What does ‘Ltd’ in a business’ name signify?
company (public or private) that offers limited liability
Advantages of a company?
- easier to attract public finance
- limited liability
- easy to transfer ownership/perpetual succession
- greater spread of risk
- growth potential
Disadvantages of a company?
- cost of formation
- double taxation (company and personal)
- personal liability for directors if they knew business was unable to pay loans
- public disclosure
- yearly annual report must be published
What are the characteristics of a private company?
- 2-50 shareholders
- only sell shares to people approved by directors
- must have words ‘proprietary limited’ (PTY LTD) after name
- limited liability
What role do shareholders have in private companies going through liquidation?
- all shareholders must agree to the company closing
- liquidator will manage the process
What are the characteristics of a public company?
- shares listed on the Australian Securities Exchange
- at least one shareholder
- no restrictions on transfer of shares or raising money from public
- must issue a prospectus when selling shares
- min requirement of 3 directors (2 live in Aus)
- ‘Limited’ or ‘Ltd’ in name
- must publish a yearly annual report
What is a government enterprise?
a government owned and operated business
What are some examples of government enterprises?
- NSW Trains
- Medibank Private
- Australia Post
What are examples of community services that government enterprises carry out?
Health, education, roads, welfare
What is privatisation?
The process of transferring the owner of a government business to the private sector
During what decade did a way of privatisation start to occur in more industrialised economies? When did it start happening in Australia?
1980s
1990s (Australia)
What are the factors that often influences an owner’s choice of legal structure? (3)
Size, Ownership, finances
What legal structure do most businesses start out as?
small/micro businesses
- sole trader or partnership
What is a float?
the raising of capital in a company through the sale of shares to the public
What is a prospectus and when does it need to be issued?
a document that is issued when the company begins to sell shares to the public in which the details of the details of the company are stated and the public is invited to buy shares
What legal structure is best if an owner wants to have complete control and ownership?
sole trader
What is the degree of ownership in a private company?
owner still has a large degree of control because owner can request people to be shareholders and there is a maximum of 50
What is the degree of ownership in a public company?
ownership is divided among thousands of shareholders
- degree of ownership is directly correlated with shares owned
- if original owners was to retain ownership, they’d need more than 50% of shares
What is the relationship between business expansion and a business’ financial needs?
when a business expands it needs more money for new equipment, research and development, staff etc.
Why do sole traders and partnerships find it hard to obtain adequate finance?
unlimited liability and few assets make it risky for loans
What is venture capital?
money invested in small and sometimes struggling businesses that have the potential to become very successful
- investors take an equity position and provide supplementary finance
To sell shares what must a business become?
incorporated
Why are individuals more likely to invest in incorporated associations?
limited liability
What are SMEs?
small to medium enterprises
- firms with less than 200 full time employees and/or less than $10 million turnover
Approx. how many people are employed by SMEs?
7.3 million
What are factors that determine a business’s size? (4)
- number of employees
- number of owners
- market share
- legal structure
What is market share?
the proportion of total market sales the business has compared to competitors
What are some qualitative measures that classify a business as small or medium? (5)
- owner makes most management decisions
- owner makes most of the capital
- business has little control within market
- independently owned and operated
- locally based
What are the characteristics of a micro business? (2)
- 88% of small businesses
- employs fewer than 5 people including the owner
What are examples of small businesses?
corner store, hairdressers
What are some characteristics of a small business? (6)
- fewer than 20 employees
- independently owned and operated by 1-2 people
- sole trader/partnership?
- owner makes most decisions
- difficulty in accessing loans therefore equity
- small market share (local area), not dominant in industry
What are some examples of medium-sized businesses?
services club, motel/hotel
What are the characteristics of a medium business? (6)
- 20-199 employees
- owned and operated by a few people/shareholders
- partnership/private company
- owner responsible for most decisions but slower implementation bc directors
- easier access to business loans or personal loans
- medium market share bc of dominance within geographic region
What are some examples of large companies?
Woolworths, Qantas
What are the characteristics of a large business? (6)
- 200 or more employees
- owned by thousands of public shareholders
- public company
- complex decision making (directors, senior and middle management)
- slow implementation bc of management layers
- finance from cash reserves, retained profit, shares, loans
What is geographical spread? What are the three categories?
The presence of a business and the range of its products across a suburb, city, state, country or the globe
- local, national, global
What constitutes a local geographical spread of a business?
- serves surrounding area and is in no position to offer products to other areas
- frequently used by nearby customers
- small or medium in size
What constitutes a business having a national geographical spread?
- operates within one country
- as it expands and increases sales will eventually have to export
What constitutes a business having a global geographical spread?
- multi-national corporation
- conduct a large percentage of business outside home country
- finance, assets, tech, employees, goods etc. all flow freely from one country to the other
What is an industry?
a group of businesses that are involved in similar types of production
What is the primary industry sector?
- businesses involved in the collection of natural resources
- agriculture, mining etc
- provide all food requirements and 60% of exports.
What is the secondary industry sector?
- take the output of firms in the private sector and process it into a finished or semi-finished product
- iron ore into steel to make cars etc.
What is the tertiary industry sector?
- businesses hat provide a service
- 70% of private sector
- 77% of employment
- dentists, mechanic etc.
What is the quaternary industry sector?
- services that involve the transfer and processing of information and knowledge
- telecommunication, education, finance etc.
What is the quinary sector?
- all services that have traditionally been performed in the home
- hospitality, tourism, childcare etc.
Why is growth in employment in service industries expected to increase?
technological and social changes
- ageing population
- more diseases etc.
Why have employment rates in the primary and secondary sectors dropped?
advancements in technology means that machines can do the job of humans
- increased methods of farming and mining
Which industry sector is the largest?
Tertiary
