lesson 2 (business structures) Flashcards
Unincorporated + unlimited liability vs. incorporated + limited liability
If a business is incorporated (sole trader/partnership) it becomes its own legal entity separate from its owners
WHEREAS an unincorporated (private limited and public listed company) business is when the owner and the business are viewed as a single legal entity
A result of incorporation:
If a business in incorporated liability (responsibility for debts) is limited to the business only (therefore personal assets of shareholders are protected) WHEREAS if a business is unincorporated both the business and the owner are responsible for debt
SOLE-TRADER
A sole trader is an unincorporated business structure with only one owner who also operates the business.
CHARACTERISTICS:
- owned + operated by 1 person
- unlimited liability
- owner sources all funds
- many employees but 1 responsible (owner) + centralised-descision making
SUITABLE: when owner works on daily-bases: Tradies, Hairdressers, Freelances
STRENGTHS of Sole trader
- low set up cost
- little govt. regulations
-centralised decision making
-owner retains all profits
LIMITATIONS of Sole trader
-unlimited liability
-difficult to raise funds
-high level of responsibility for owner
PARTNERSHIP
A partnership is an unincorporated business structure owned by 2-20 owners.
CHARACTERISTICS:
-share responsibilty
-unlimited liabilty for all business debts
-partners source all funding
-divide + retain all profits
SUITABLE:
- medium size business: Law firms, Dental Practice
STRENGTHS of Partnership
-Low cost set up
-low govt. regulations
-multiple ownership - greater knowledge base + quality of decisions
LIMITATIONS of Partnership
-unlimited liability
-difficult to raise funds= partner investment and loans from banks
-potential for conflict between partners
PRIVATE-LIMITED COMPANIES
A private limited company is an incorporated business with atleast 1 and up to 50 selected shareholders
CHARACTERISTICS:
-followed Pty Ltd. (proprietary limited)
-seperate legal entity
-overseen by directors
-profits are subject to company tax
SUITABLE: protection of incorporation is desired but control is also desired eg. 7-eleven
STRENGTHS of Private Limited Companies
-incorporated companies= limited liability = protection of shareholders
-directors can be or appointed shareholders = increase expertise
-revenue raised by selling shares but not on ASX
- company tax rate is lower than personal income tax
LIMITATIONS of Private Limited Companies
-profits taxed twice- company and personal tax
-cost of set up and level of government regulation is higher
PUBLIC-LISTED COMPANIES
A public listed company is an incorporated business that can sell shares in an open market to an unlimited number of shareholders.
CHARACTERISTICS:
- followed LTD.
- seperate legal entity
- shares sold on ASX (Australian Securities eXchange)
- limited decision making influence + share a profit through dividends
- strictest govt. regulation - minimum of 3 directors- public annual report
SUITABLE: large businesses want to raise lage amount of funds publically eg. Coles, Quantas, Westpac
STRENGTHS of Public-Listed Companies
- liabilty is limited= protection of shareholders
-increased capacity to raise funds through selling shares
-prestigious profile
LIMITATIONS of Public-Listed Companies
-Profits are taxed twice - company + personal
-Cost of set up + govt. regulation highest
-Greater public scrutiny
-Shareholders lack patience of return on investment
How do shares work?
-SHARE: represents a piece of ownership
-DIVIDEND: annual pay,ent to shareholders, calculated as a % of their profits
-SHARE CAPITAL: funds that business raises through selling shares on ASX
