U3 AOS 1 Flashcards
Define Sole Trader
A sole trader is an unincorporated business structure with only one owner who also operates the business
Characteristics of a Sole Trader
Owned and operated by a single person
Owners has unlimited liability for all business debts
Owner has to source all funding for the business
Owner retains all profits after personal income tax (not subject to company tax)
May have employees but owner is the only one responsible for making decisions for the business (therefore has to manage a wide variety of tasks)
Advantages of Sole Trader
Low cost of set up
Low level of government regulation (= easy to set up and run)
Centralised decision making = no conflict for owner
Owner retains all profits (can decide to reinvest into business but has control)
Disadvantages of Sole Trader
Unlimited liability = risk for personal assets (e.g. house)
Difficult to raise funds – 2 sources = owner investment or loans from banks
High level of responsibility for owner – needs to manage all facets of the organisation
Define Partnerships
A partnership is an unincorporated business structure owned by two to 20 owners
Characteristics of Partnerships
Partners share responsibility for the organisation
Partners have unlimited liability for all business debts
Partners have to source all funding for the business
Partners and divide and retain all profits after personal income tax (not subject to company tax)
Advantages of Partnerships
Low cost of set up
Low level of government regulation (= easy to set up and run)
Multiple ownership = knowledge base/quality of decisions – different skill sets/areas of expertise
Disadvantages of Partnerships
Unlimited liability = risk for personal assets (e.g. house)
Difficult to raise funds = partner investment + loans from banks
Potential for conflict between partners
Definition of Private Limited Company
: A private limited company is an incorporated business with at least 1 and up to 50 selected shareholders
Characteristics of Private Limited Companies
Business name MUST always followed by Pty LTD
The company is a separate legal entity
High level of control retained by shareholders as new shareholders are selected by the board
Overseen by directors (can be 1 or a board of directors) = decision makers
Profits are subject to company tax before shareholders receive a return on their investment. Shareholders are then subject to personal income tax on profit they individual receive
Advantages of Private Limited Companies
Incorporation means that liability is limited to the business = protection of shareholders
Directors can be shareholders or can be appointed by shareholders = increased expertise
Revenue can be raised by selling shares in the organisation
Company tax rate is lower than personal income tax rate – so tax for business itself is less
Employees can be provided a share in the business
Disadvantages of Private limited Companies
Profits are taxed twice – company tax and then personal income tax
Cost of set up and level of government regulation are higher – must have a set of ‘company rules’ + pay a registration fee to ASIC + annual renewal fee
Define Public Companies
A public listed company is an incorporated business that can sell shares in an open market to an unlimited number of shareholders.
Characteristics of Public Companies
Business name MUST always be followed LTD.
The company is a separate legal entity
Shares are sold on the Australian Securities eXchange (ASX) – price of shares based on market value (not controlled by the business
Shareholders have limited decision making influence but receive a share of profit through dividends
Decisions made by Board of Directors
Strictest level of government regulation – minimum of 3 directors, requirement for a public annual report on business’s financial accounts
Advantages of Public Companies
Incorporation means that liability is limited to the business = protection of shareholders
Increased capacity to raise funds through selling shares funds growth of the business
Opportunity to acquire other businesses by offering shares to company that you are attempting to purchase
Can provide a prestigious profile
Employees can be provided a share in the business
Disadvantages of Public Company
Profits are taxed twice – company tax and then personal income tax
Cost of set up and level of government regulation highest – must have a set of ‘company rules’ + pay a registration fee to ASIC + annual renewal fee + reporting requirements
Potential for loss of control – shareholders are external to the organisation but directors are accountable to them
Financial markets will govern the value of the company through the trading of the company’s shares, and will represent the market’s view of the company’s performance over time
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
Define Social Enterprises
A social enterprise is a business that aims to make a profit and improve the community or environment
Characteristics of a Social Enterprise
Aim to generate a profit IN ORDER to use that profit for a community or environmental cause
Profits are therefore either reinvested into the company or donated to charitable causes there is no return distributed to owners or shareholders
Whether it has limited or unlimited liability depends on whether it is run as a sole trader/partnership OR private limited company
Strengths of Social Enterprises
Funds community benefit by making a profit rather than relying on donations = more sustainable model of making a difference e.g. Who Gives a Crap = sustainable toilet paper w/ profits used to fund sanitary projects in Cambodia
Can attract customers due to use of profit
Operation of business can provide employment for sectors of community they are trying to assist – e.g. STREAT runs cafes, bakeries and catering – staffed by disadvantaged you people who are trained by STREAT – enables them to find employment elsewhere after training
Limitations of Social Enterprises
Set up relies on ‘angel’ investor(s) – people willing to invest without obtaining return on investment OR for people to pay for product before it has been produced
Sometimes can lack efficiencies as profit motive is not front and centre = potential for unnecessary expenses
Definition of Government Business Enterprise
A government business enterprise is a profit driven business that is owned by but managed separately from the government (i.e. own board of directors/management team)
Characteristics of Government Business Enterprise
Fulfils a specific purpose outlined by the government – often a large scale public service – e.g. transport or communication which caters to essential public needs
Remains profitable – therefore is self-funded (does not rely on government funding BUT government may own infrastructure)
Government retains interest in performance and can propose changes in strategic directions
GBEs = accountable to government and public
Profits are reinvested into the business or distributed to the Australian government
Managed by a Board of Directors
Strengths of Government Business Enterprise
Requirement to fund itself improves efficiencies
Provide services where maximisation of profit would be detrimental to the public
Prevents the creation of private monopolies in market segments that are key to public
Limitations of Government Business Enterprise
Difficult to create competitive market –> lack of competition which can lead to inefficiencies within the business
Define Business Objectives
A business objective is a goal which an organisation sets out to achieve in a given time period
Define Key Performance Indicator
criteria that measure how efficient and effective a business is at achieving business objectives
Define efficiency
how productively a business uses its resources when producing a good or service (e.g. how many people do they need, how much time or how much raw material) less resources used for the same number of products = higher efficiency
Define effectiveness
the extent to which the business achieves its business objectives
Define the objective to ‘make a profit’
The goal to generate more revenue than expenses from running a business
Define the objective to ‘increase market share’
grow the proportion of sales of a business within a particular industry (control more of the market)
Define the objective to ‘meet shareholder expectations’
The goal to provide a return on the money they have invested into the business
Define the objective to ‘fulfil a market need’
To goal to provide customers with a good or service that is desired and meets their expectations
Define the objective to ‘fulfil a social need’
The goal to conduct business activities that improve the community and environment
Why do businesses have the objective ‘to make a profit’
- either to return to owners or shareholders
OR - to reinvest into the business - enables growth
All types of business have this objective b/c profit is essential for survival