Topic 1: Small Business Ownership, Fundamental Concepts

Question 1

What are some characteristics of a Service Business?

Answer 1

• no physical goods are sold
• they provide a task/service in exchange for a fee
• e.g. hairdresser, uber, mechanic

Question 2

What are some characteristics of a Manufacturing Business?

Answer 2

• purchases resources/materials and converts it to a final product/good
• usually sells to retailers
• e.g. bhp, rio tinto, paper companies

Question 3

What are some characteristics of a Trading or Retail Business?

Answer 3

• purchases already made goods and sells to consumers at a higher price
• e.g. rebel, Woolworths, coles

Question 4

What is the Accounting Equation?

Answer 4

Equity = Assets - Liabilities

Question 5

What is Double Entry Accounting?

Answer 5

Source documents record transactions that have taken place. If a business is using a double entry accounting system, this means that every transaction affects two accounts or two sides of the Ledger by the same dollar amount.

Question 6

How many Owners are there in a Sole Trader?

Answer 6

1

Question 7

How many Owners are there in a Partnership?

Answer 7

2-20 (certain professional partnerships go up to 400)

Question 8

How many Owners are there in a Proprietary Company?

Answer 8

At least 1 shareholder and a maximum of 50 non-employee shareholders.

Question 9

What is the definition of Unlimited Liability?

Answer 9

Owner takes full responsibility for debts and obligations of the business.

Question 10

What is the definition of Limited Liability?

Answer 10

Only liable for the amount of money you have put into the company.

Question 11

What Liability does a Sole Trader have?

Answer 11

Unlimited Liability - personal property can be sold to settle any debts.

Question 12

What Liability does a Partnership have?

Answer 12

Unlimited Liability:
- personal property can be sold to settle any debts
- partners are jointly liable for all business debts
- if one partner cannot afford the debt other partners must cover it
- if there is a partnership agreement, there may be an uneven distribution of liability

Question 13

What Liability does a Proprietary Company have?

Answer 13

Limited Liability - restricted to the amount of shares they own.

Question 14

What are the Restrictions regarding the Transfer of Ownership of a Sole Trader?

Answer 14

Usually transfer without restriction - however certain occupations, e.g. doctors, lawyers can only be transferred to those with suitable qualifications.

Question 15

What are the Restrictions regarding the Transfer of Ownership of a Partnership?

Answer 15

You cannot transfer ownership without the agreement from other partners.

Question 16

What are the Restrictions regarding the Transfer of Ownership of a Proprietary Company?

Answer 16

Difficult - constitution of proprietary companies restricts the right to transfer ownership.

Question 17

What is the ability of a Sole Trader to raise capital or borrow money?

Answer 17

Limited ability to raise capital.

Question 18

What is the ability of a Partnership to raise capital or borrow money?

Answer 18

Limited ability to raise capital.

Question 19

What is the ability of a Proprietary Company to raise capital or borrow money?

Answer 19

Limited ability to raise capital.

Question 20

How does a Sole Trader distribute its profits?

Answer 20

Owner receives all profits.

Question 21

How does a Partnership distribute its profits?

Answer 21

Profit it divided between the partners according to the partnership act or partnership agreement.

Question 22

How does a Proprietary Company distribute its profits?

Answer 22

Profit is distributed in the form of dividends.

Question 23

What is the definition of an Accounting Entity?

Answer 23

Business transactions are recorded separately from private transactions of the owner.

Question 24

What is the definition of a Legal Entity?

Answer 24

The business can pay tax and make legal dealings in their own name.

Question 25

Which entities do a Sole Trader have?

Answer 25

Separate Accounting Entity
Not Separate Legal Entity

Question 26

Which entities do a Partnership have?

Answer 26

Separate Accounting Entity
Not Separate Legal Entity

Question 27

Which entities do a Proprietary Company have?

Answer 27

Separate Accounting Entity
Separate Legal Entity

Question 28

What is the Continuity of Existence of a Sole Trader?

Answer 28

Death or retirement ends the business.

Question 29

What is the Continuity of Existence of a Partnernship?

Answer 29

Death or retirement will end the partnership unless there is a prior agreement that will result in it continuing.

Question 30

What is the Continuity of Existence of a Proprietary Business?

Answer 30

Indefinite life - does not affect company.

Question 31

What are 3 Advantages of a Sole Trader?

Answer 31

• makes all decisions
• receives all profits
• high degree of flexibility

Question 32

What are 3 Disadvantages of a Sole Trader?

Answer 32

• must contribute all funds to start
• unlimited liability
• death or retirement ends the business

Question 33

What are 3 Advantages of a Partnership?

Answer 33

• raises more capital to begin the company
• workload is split between partners
• brings people together with specialized skills

Question 34

What are 3 Disadvantages of a Partnership?

Answer 34

• profit is divided between the partners
• unlimited liability
• you cannot transfer ownership without the agreement from other partners

Question 35

What are 3 Advantages of a Proprietary Company?

Answer 35

• limited liability
• separate legal entity
• indefinite life of company

Question 36

What are 3 Disadvantages of a Proprietary Company?

Answer 36

• difficult to transfer ownership
• potential arguments when decision making
• limited ability to raise capital