Classifying a business: Legal structures, ways in which a business can be classified

Question 1

What is a sole trader

Answer 1

A sole trader is a business that is both owned and operated by one person. The owner can employ other people to work for the business, but the owner/sole trader is the person who provides all the finance, makes all the decisions and takes all the responsibilities of the business. A sole trader is also not regarded as a seperate legal entity, meaning the owner and business are regarded as the same. therefore if the business is sued then the owner is sued.

Question 2

advantages of a soul trader

Answer 2

• low entry cost
• complete control
• lower operation costs
• no partner disputes
• owner’s right to keep all profits
• less government regulation
• no tax on profits, only on personal income

Question 3

disadvantages of a sole trader

Answer 3

• unlimited personal liability for business debts
• end of business when owner dies
• difficult to operate if sick
• need to carry all losses
• burden of management
• need to perform a wide variety of tasks
• difficult in raising finance for expansion

Question 4

What is a partnership?

Answer 4

partnership is a legal business structure that is owned and operated by between two and 20 people with the aim of making a profit.

Question 5

advantages of a partnership:

Answer 5

low start up costs, 
pooled funds and talent, 
less costly than a company,
 shared responsibility and workload, 
no taxes on profits, 
minimal government regulation.
no taxes on business profits - only on personal income 
on death of one partner the business can keep on running

Question 6

disadvantages of a partnership:

Answer 6

unlimited liability, (unlimited liability occurs when the business owner is personally responsible for all the business’s debt.)
liability for all debts,
disputes,
divided loyalty and authority

Question 7

the 4 legal structures are divided into what?

Answer 7

incorporated and unincorporated

Question 8

what structures are incorporated?

Answer 8

public and private companies

Question 9

what structures are unincorporated?

Answer 9

sole traders and partnerships

Question 10

what does incorporated mean?

Answer 10

incorporated refers to the process companies go through to become a separate legal entity from the owner/s. his means the business exists in its own right, its own legal entity. Regardless of what happens to individual owners (shareholders) of the company, the business continues to operate.

Question 11

what does unincorporated mean?

Answer 11

An unincorporated business has no separate legal existence from its owner(s) and will be either a sole trader or partnership. This means the business entity and the owner(s) are one and the same. When the owner dies then so too does the business entity.

Question 12

what is limited liability?

Answer 12

limited liability is a feature of corporate ownership that limits each owner’s financial liability to the amount of money he or she has paid for the business’s shares. In limited liability companies, the most money a shareholder can lose is the amount they paid for their shares. Therefore, if the company goes into liquidation, the shareholders cannot be forced to sell their personal assets to pay for the debts of the business.

Question 13

what is unlimited liability?

Answer 13

unlimited liability occurs when the business owner is personally responsible for all the business’s debt.

Question 14

What is a private company (pty ltd)?

Answer 14

A proprietary (private) company is the most common type of company structure in Australia, and usually has between two and 50 private shareholders.

Question 15

What are the characteristics of a private company

Answer 15

Shareholders are only offered/ invited a share, the company is private
Can only sell shares if the buyer is approved by other shareholders
Limited liability
PTY LTD = proprietary limited

Question 16

What is pty ltd?

Answer 16

A private company must have the words ‘proprietary limited’, abbreviated to ‘Pty Ltd’, after its name

Question 17

What is a public company (ltd)

Answer 17

Listed on the Australian Securities Exchange, the general public can buy and sell shares in these companies. Whereas private companies tend to be small or medium-sized businesses, most public companies are large in size and market a large range of products

Question 18

what are the characteristics of a public company?

Answer 18

at least one shareholder, with no maximum number
no restrictions on the transfer of shares or raising money from the public by offering shares
to issue a prospectus when selling its shares for the first time
a minimum requirement of three directors (two must live in Australia)
the word ‘Limited’ or ‘Ltd’ in its name

Question 19

What is a government enterprise?

Answer 19

government enterprises are government-owned and operated businesses. GBEs are owned and operated by all levels of government: federal, state and local. Examples include Sydney Trains, Essential Energy, Defence Housing Australia, Sydney Water and Australia Post.