Topic 7 - Business Structures

Question 1

Outline the key types of business structure.

Answer 1

Sole Trader, Partnership, Company, Trust

Question 2

What is a sole trader?

Answer 2

A sole trader is an individual who directly owns and operates a business by themselves.

Question 3

What is a partnership?

Answer 3

A partnership occurs when an individual and at least one other person directly own and operate a business together with a view of creating profit.

Question 4

What is a company?

Answer 4

A company is an artificial legal person separate from its owners and able to make contracts, own property and be a party to litigation in its own name.

Question 5

What is a trust?

Answer 5

A trust occurs when an individual or corporation, called the trustee, owns property for the benefit of one or more other people, called beneficiaries.

Question 6

Advantages of a sole trader?

Answer 6

• Few formalities to comply with

- Full ownership where the owner makes all decisions and receives all profits

Question 7

Advantages of a partnership?

Answer 7

• Few formalities which means ease and low cost
• More people to contribute ideas, skill and capital
• Privacy as you’re not required to be government registered

Question 8

Advantages of a company?

Answer 8

• Separate legal entity
• Limited liability
• Perpetual succession (unlimited life)
• More sources of capital
• Expert managers to run the business
• Shares can be transferred

Question 9

Advantages of a trust?

Answer 9

• Tax effective way of conducting a business as all wealth is distributed to beneficiaries
• Doesn’t need to be registered

Question 10

Disadvantages of a sole trader?

Answer 10

• Unlimited liability
• Limited source of capital
• One person may not have the skills to be successful

Question 11

Disadvantages of a partnership?

Answer 11

• Unlimited liability
• Lack total control as an owner
• Mutual agency and unlimited liability increases the importance of trust in partners

Question 12

Disadvantages of a company?

Answer 12

• Cost of establishment and ongoing fees
• Limited rights as owner
• Onerous admin requirements
• Lack of privacy due to disclosure and government reporting requirements
• Legal responsibilities imposed on directors

Question 13

Disadvantages of a trust?

Answer 13

• Not a separate entity

- Terms must be set out in a deed

Question 14

What is unlimited liability?

Answer 14

It is where you are personally liable for business debts.

Question 15

What is limited liability?

Answer 15

It means owner’s aren’t liable for debts or other obligations beyond the subscription price of their shares.

Question 16

What is mutual agency?

Answer 16

It is where each partner is both the principal and agent of the other partner’s. Therefore each partner is liable for the actions, contracts and debts of the other partners.

Question 17

How is the relationship between partners set out?

Answer 17

The relationship is a contractual one set out by:

• a formal written document, or
• partly in writing and partly oral, or
• wholly or partly implied from conduct

Question 18

How is a company created and regulated?

Answer 18

Created through registration by the Australia Securities and Investments Commission (ASIC). Regulated by the Corporations Act 2001 (Cth).

Question 19

How many people need to be present for a company?

Answer 19

Must have at least one owners or shareholder and at least one director, whom can be the same person.

Question 20

What are the two types of companies?

Answer 20

Proprietary (private) company and Public company

Question 21

What are the requirements of a Proprietary company?

Answer 21

• Privately owned
• Cannot sell shares to the public
• Distinguished by Pty Ltd
• Less than 50 non-employee shareholders

Question 22

What are the requirements of a Public company?

Answer 22

• Listed or unlisted on the stock exchange
• Distinguished by Ltd
• Must hold an AGM
• Must have at least three directors

Question 23

What is a settlor?

Answer 23

The person who sets up the trust

Question 24

What is a trustee?

Answer 24

The legal owner of the trust property and has a fiduciary obligation to look after the trust property for the beneficiaries.
- Trustee can be a company and may or may not be a beneficiary

Question 25

What are beneficiaries?

Answer 25

Equitable owners of a trust property.