Topic 1: Small Business Ownership, Fundamental Concepts Flashcards
What are some characteristics of a Service Business?
- no physical goods are sold
- they provide a task/service in exchange for a fee
- e.g. hairdresser, uber, mechanic
What are some characteristics of a Manufacturing Business?
- purchases resources/materials and converts it to a final product/good
- usually sells to retailers
- e.g. bhp, rio tinto, paper companies
What are some characteristics of a Trading or Retail Business?
- purchases already made goods and sells to consumers at a higher price
- e.g. rebel, Woolworths, coles
What is the Accounting Equation?
Equity = Assets - Liabilities
What is Double Entry Accounting?
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.
How many Owners are there in a Sole Trader?
1
How many Owners are there in a Partnership?
2-20 (certain professional partnerships go up to 400)
How many Owners are there in a Proprietary Company?
At least 1 shareholder and a maximum of 50 non-employee shareholders.
What is the definition of Unlimited Liability?
Owner takes full responsibility for debts and obligations of the business.
What is the definition of Limited Liability?
Only liable for the amount of money you have put into the company.
What Liability does a Sole Trader have?
Unlimited Liability - personal property can be sold to settle any debts.
What Liability does a Partnership have?
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
What Liability does a Proprietary Company have?
Limited Liability - restricted to the amount of shares they own.
What are the Restrictions regarding the Transfer of Ownership of a Sole Trader?
Usually transfer without restriction - however certain occupations, e.g. doctors, lawyers can only be transferred to those with suitable qualifications.
What are the Restrictions regarding the Transfer of Ownership of a Partnership?
You cannot transfer ownership without the agreement from other partners.
What are the Restrictions regarding the Transfer of Ownership of a Proprietary Company?
Difficult - constitution of proprietary companies restricts the right to transfer ownership.
What is the ability of a Sole Trader to raise capital or borrow money?
Limited ability to raise capital.
What is the ability of a Partnership to raise capital or borrow money?
Limited ability to raise capital.
What is the ability of a Proprietary Company to raise capital or borrow money?
Limited ability to raise capital.
How does a Sole Trader distribute its profits?
Owner receives all profits.
How does a Partnership distribute its profits?
Profit it divided between the partners according to the partnership act or partnership agreement.
How does a Proprietary Company distribute its profits?
Profit is distributed in the form of dividends.
What is the definition of an Accounting Entity?
Business transactions are recorded separately from private transactions of the owner.
What is the definition of a Legal Entity?
The business can pay tax and make legal dealings in their own name.
Which entities do a Sole Trader have?
Separate Accounting Entity
Not Separate Legal Entity
Which entities do a Partnership have?
Separate Accounting Entity
Not Separate Legal Entity
Which entities do a Proprietary Company have?
Separate Accounting Entity
Separate Legal Entity
What is the Continuity of Existence of a Sole Trader?
Death or retirement ends the business.
What is the Continuity of Existence of a Partnernship?
Death or retirement will end the partnership unless there is a prior agreement that will result in it continuing.
What is the Continuity of Existence of a Proprietary Business?
Indefinite life - does not affect company.
What are 3 Advantages of a Sole Trader?
- makes all decisions
- receives all profits
- high degree of flexibility
What are 3 Disadvantages of a Sole Trader?
- must contribute all funds to start
- unlimited liability
- death or retirement ends the business
What are 3 Advantages of a Partnership?
- raises more capital to begin the company
- workload is split between partners
- brings people together with specialized skills
What are 3 Disadvantages of a Partnership?
- profit is divided between the partners
- unlimited liability
- you cannot transfer ownership without the agreement from other partners
What are 3 Advantages of a Proprietary Company?
- limited liability
- separate legal entity
- indefinite life of company
What are 3 Disadvantages of a Proprietary Company?
- difficult to transfer ownership
- potential arguments when decision making
- limited ability to raise capital
