Lecture 5 - Starting a business

Question 1

What are the short-term considerations when starting a business?

Answer 1

1. Statutory requirements
2. Cost of establishment
3. Stamp duty
4. Income tax

Question 2

What are the medium-term considerations when starting a business?

Answer 2

1. Flexibility for change
2. Administrative costs and resourcing
3. Risk management

Question 3

What are the long-term considerations when starting a business?

Answer 3

1. Capital gains tax
2. Succession planning
3. Dissolving structure

Question 4

What are the various structures of businesses?

Answer 4

1. Sole trader
2. Partnership
3. Trading trust
4. Company

Question 5

How does a sole trader work?

Answer 5

it is owned and controlled by one person and approproate where little business experience/ in business for the first time. For someone with limited experience and not expecting to generate a substantial income in initial period

Question 6

What are the advantages of being a sole trader?

Answer 6

it is easy to establish and dissolve as no formal documentation is required. If operated under owner’s name, no business name registration is required and it is also inexpensive

Question 7

What are the disadvantages of being a sole trader?

Answer 7

The owner has unlimited personal liability and is taxed at marginal personal income tax rate. They must also often offer security over their own assets when borrowing money

Question 8

What is a partnership?

Answer 8

At least 2 people in business with a common view to making a profit. It is appropriate where partners have confidence in each other’s abilities, compatibility and loyalty

Question 9

What are the advantages of a partnership?

Answer 9

It is easy and inexpensive to establish and administer, and can be formed by written agreement, verbal agreement or implied from circumstances but written agreement is advisable. Taxation advantage and skills and resources of partners are combined

Question 10

What are the disadvantages of partnership?

Answer 10

There is unlimited personal liability as each partner is jointly liable for partnership debts and obligations. Partner has power to bind the form as an agent

Question 11

What is a trading trust?

Answer 11

It is an entity that holds property or income for the benefit of others and is created under a trust deed

Question 12

What are the advantages of a trading trust?

Answer 12

Risk can be minimised and are taxed in the hands of beneficiaries, may be able to take advantage of lower marginal tax rates

Question 13

What are the disadvantages of trading trust?

Answer 13

It is not a ‘legal entity’ and there is unlimited liability

Question 14

What is a company?

Answer 14

It is a separate legal entity having power of a natural person. It is owned by shareholders and managed by directors and the assets belong to the company and not the members. It is created by incorporation (legal process used to form a corporate entity or company) and company registration documents have to be lodged with and approved by the Australian Securities and Investments Commission (ASIC) with payment of fees. Required information to set up a company include company name, members (shareholders), directors and secretaries

Question 15

What are the advantages of a company?

Answer 15

Limited liability as members are not personally liable. Taxed at a flat rate of 27.5% for small businesses and 30% if turnover rate is $10m or more

Question 16

What are the disadvantages of a company?

Answer 16

Greater administration burden and greater regulatory compliance needed such as accounting records and audits

Question 17

What are the differences between a public and private company?

Answer 17

Public:
“Ltd” or “Limited” suffix, can have unlimited number of shareholders, can be listed on Stock Exchange and can borrow from the public

Private:
“Pty Ltd” or “Proprietary Limited” suffix, minimum of 1 and maximum of 5 shareholders, at least 1 director and have limitations on raising capital

Question 18

What are the various sources of fundings?

Answer 18

Personal
Family and friends
Business angels
Grants 
Financial Institutions/ Banks
Venture capitalists
Public (through a public offering)

Question 19

What are the considerations when running a business?

Answer 19

1. Funding
2. Location
3. Assets
4. Employees
5. Tax and government assistance
6. Advisers