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Accounting in Context > Week 2 - Business Structures > Flashcards

Week 2 - Business Structures Flashcards

1
Q

Types of Business Entities

A
  • Most businesses are established to make money (For-Profit) but some businesses are established as Not-For-Profit.
  • Manufacturing entities are involved in converting raw materials into finished goods.
  • Trading entities buy goods (inventory) at ‘cost’ price and sell for a profit at a higher ‘sales’ price.
  • Services entities provided services to people. Services can be equipment based or people based or a mixture.
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2
Q

In what way, do Business Structures differ?

A
  • Owner liability
  • Equity structure
  • Funding opportunities
  • Decision making responsibilities
  • Taxation
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3
Q

What are the THREE types of Business Structures?

A
  1. Sole Trader
  2. Partnership
  3. Company
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4
Q

What is a Sole Trader?

A

A sole trader is an individual who controls and manages a business and is solely liable for all the business debts.

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5
Q

Features of a Sole Trader

A
  • The business is not a separate legal entity.
  • Need to apply for an Australian Business Number (ABN) and GST.
  • Usually uses accounting software such as MYOB to prepare financial reports.
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6
Q

Advantages of a Sole Trader

A
  1. Quick, inexpensive and easy to establish. Inexpensive to wind down.
  2. Not subject to company regulation.
  3. Owner has total autonomy over business decisions.
  4. Owner claims all the profits of the business and all the after-tax gains if the business is sold.
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7
Q

Disadvantages of a Sole Trader

A
  1. Unlimited liability – bears full responsibility for business debts and legal actions such as negligence.
  2. Limited by skill, time and investment of the owner.
  3. Restrictive structure due to non-legal status of the entity.
  4. Business will cease to exist if the owner leaves, retires or dies.
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8
Q

What is a Partnership?

A

A partnership is an association between two or more persons who carry on a business as partners.

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9
Q

Features of a Partnership

A
  • Enables sharing of ideas, skills and resources.
  • Easy and cheap to establish.
  • No separate taxation payable but does lodge income tax return with ATO.
  • Share profits or losses according to partnership agreement.
  • Some partnerships have a written agreement, others don’t.
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10
Q

Advantages of a Partnership

A
  1. Relatively easy and simple to set up.
  2. Informal business structure – not bound by accounting standards.
  3. Ability to share capital, skills, talents, knowledge and workload between two or more people.
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11
Q

Disadvantages of a Partnership

A
  1. Unlimited liability for business debts and obligations by all partners.
  2. Limited life: if one partner dies or withdraws from the business then the partnership must dissolve.
  3. Mutual agency: each partner is seen as being an agent for the business and can enter the partnership into contracts.
  4. Many partnership disputes arise from profit sharing and decision-making issues.
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12
Q

What is a Partnership Agreement?

A

A Partnership agreement should include details of:
- the name of the partnership
- the contributions of cash and other assets to the partnership made by each partner.
- Methods of sharing profits and losses.
- Procedures for adding or subtracting partners
- If there is no partnership agreement, then the law assumes that all profits or losses will be shared equally between the partners.

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13
Q

What is a Company?

A

A distinctively separate legal entity from its owners.
- The individual must apply to the Australian Securities and Investments Commission (ASIC) for registration of the company.
- ASIC will allocate a unique Australian Company Number (ACN).
- Companies will also register for an ABN.

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14
Q

Features of a Company

A
  • Owners of a company are known as shareholders.
  • Independent legal entity (i.e. separate from the people who own, control and manage it).
  • Shareholders have limited liability: for the purchase price of their shares only (not company debts).
  • A company has unlimited life: not dissolved when owners die or change.
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15
Q

Advantages of a Company

A
  1. Limited liability for shareholders.
  2. The company taxation rate is 30% (25% for SMEs); considerably lower than the top personal tax rate.
  3. Business expansion networks are made easier due to legal structure.
  4. Can raise additional equity (capital) through public share offerings.
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16
Q

Disadvantages of a Company

A
  1. More time consuming and costly to set up.
  2. Must comply with complex company rules and other legal requirements.
  3. Taxed from the first dollar of profit.
  4. Limited liability aspect may cause problems:
    (banks often prefer to have director’s personal guarantees instead)
  5. Separation of ownership and control
17
Q

Comparison of Business Structures (Sole Trader)

A

SOLE TRADER
No. of Owners = 1
Liability = Unlimited
Profit = Belongs to owner
Tax = Owner taxed as individual tax payer (profit treated as income of owner)

18
Q

Comparison of Business Structures (Partnership)

A

PARTNERSHIP
No. of Owners = 2-50
Liability = Unlimited
Profit = Distributed to partners as per agreement
Tax = Partners taxed as separate individuals

19
Q

Comparison of Business Structures (Companies)

A

COMPANIES
No. of Owners = At least one. Proprietary companies - no more than 50. Public companies - no limit.
Liability = Limited
Profit = Distributed to shareholders in form of dividends, at discretion of board.
Tax = Company taxed on profits. Shareholders taxed on dividends less tax credit for tax paid by company

20
Q

What is Equity Structure of Sole Traders and Partnerships?

A
  • Capital is raised by the owner/s transferring assets to the business. Each owner’s contribution to capital is recorded separately.
  • Owners working in the business are not employees as there is no separation of owners and business in these structures.
  • Owners include their respective portion of the business profits on their individual tax return, whether it is distributed from the business or not.
  • When the owners take money or assets from the business it is called Drawings. Each owner’s drawings are recorded separately.
21
Q

What is the Equity Structure of a Company?

A
  • Share Capital is raised by companies through the sale of shares.
  • Owners working in the company are employees and paid wages, as the company is a separate legal entity to the owners (shareholders).
  • The company pays tax on company profit at a flat rate.
  • Distributions of profit are made to Shareholders and are called Dividends, as the company pays tax on the profit. Dividends carry a tax credit.
  • Profit not paid as dividends is called Retained Earnings as it is retained by the company.
22
Q

True or False: Sole Proprietors do not need to keep financial records

A

False

23
Q

True or False: A partnership does not pay tax, but does lodge a tax return

A

True

24
Q

True or False: A disadvantage of a partnership structure is mutual agency

A

True

Accounting in Context (3 decks)

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