Lesson 2 - Business Types Flashcards
Sole trader
Unincorporated business structure with only one owner who also operates the business
Characteristics:
Own and operated by one person
Unlimited liabilities
Owner has to source all the fundings
Owner retains all profits after personal income tax
May have employees but the owner is the only one responsible for making the decisions for the business
Suitable when:
Small business that the owner works day to day e.g hairdresser
Strengths and limitations of a sole trader
Strengths:
Low cost of set up
Low level of government regulation
Centralised decision making = no conflict for the owner
Owner retains all profit = can decide to reinvest into the business but has all control
Limitations:
Unlimited liabilities = risks for personal assets
Difficult to raise funds - 2 sources = owner investment or loans from banks
High level of responsibility for owner - needs to mange all facets of the organisation
Unincorporated
Business and owner same legal entity
Incorporated
Business separate legal entity from the owner
Unlimited liability
Both the business and owner responsible for debt
Limited liability
Business is only responsible for its debts
Partnerships
Unincorporated business with 2-20 owners
Characteristics:
Partners share responsibility for the organisation
Partners have unlimited liability for all business debts
Partners had to source funding for the business
Partners can divide and retain all profits after personal income tax
Suitable:
Small to medium sized bus e.g dental practice, law firm
Strengths and limitations of a partnership
Strengths:
Low cost of set up
Low level or govt regulation = easy to set up and run
Multiple ownership = knowledge base/quality of decisions - different skill sets and areas of expertise
Limitations:
Unlimited liability - risks of personal assets
Difficult to raise funds = partners investments + loans from banks
Potential for conflict b/w partners
Private limited companies
Incorporated business with at least 1-50 selected shareholders
Characteristics:
Business name must always follow Pty Ltd
Company = separate legal entity
High level of controls retained by shareholders as new shareholders are selected by the board
Overseen by directors ( 1 or a board) = decision makers
Profits subjects to company tax before shareholders receive return on investment. Shareholders are then subject to personal income tax on profit they individual receive
Suitable when:
Protection of incorporation desired but control also desires
Examples; cotton on group, 7-eleven
Strengths and limitations of a private limited company
Strengths:
Incorporations means that liability is limited to the business = protection os shareholders
Directors can be shareholders or can be appointed by shareholders = increased expertise
Revenue can be raised y selling shares in the organisation (not on the ASX)
Company tax rate is lower than personal income tax rate - so tax for business itself is less
Limitations:
Profits are taxed twice - company tax then personal tax
Cost or set up and govt regulation are higher - must have a set of ‘company rules’ + pay registration fee to ASIC + annual fee renewal
Public listed companies
Incorporated business structure that can sell shares in an open ARKit to an unlimited number of shareholders.
Characteristics:
Business name must follow LTD
Separate legal entity
Shares sold on ASX - prices of shared bases on market value
Decisions made by a board of directors
Strictest level of govt regulation - min 3 directors, require public annual report on business’s financial accounts
Suitable:
Large business, move to when want to raise large amount of funds publicly
Examples: Coles, Qantas
Strengths and limitations of a public listed company
Strengths:
Incorporation = limited liability = protection of shareholders
Increased capacity to raise fund through selling shares/ funds = growth of the business
Can provide a prestigious profile
Limitations:
Profits taxed twice
Cost of set up and level of government regulation highest - must have a set of ‘company rules’ + pay registration fee to ASIC + annual renewal fee + reporting requirements
Greater public scrutiny of the company’s financial performance and actions
Shareholders can lack patience of return on investment is not evident and so the business has to become more focused on profit or risk fall in share prices
Share
Represents a price of ownership of a business
Dividends
Is and annual payment made to shareholders, calculated as a percentage of there profits
Share capital
Is the funds that a business raises through selling shares on the ASX
