Week Two Flashcards
Define the term ‘sole trader’ and discuss the main features of a sole trader.
A sole trader is the single owner of a business that is controlled and managed solely by that person. The sole trader form of business has the following characteristics.
•Sole trader businesses have low start-up costs.
•Minimal paperwork is required to commence sole trader operations.
•Sole trader businesses pay no tax. The owner includes business profits or losses in his or her individual tax return.
•Owners have unlimited liability for the debts and legal actions against the business.
•Sole traders have total responsibility for all business decisions, and for all profits or losses.
•There are no formal guidelines to follow in terms of business reports.
Discuss the advantages and disadvantages of a sole trader.
The main advantages of a sole trader form of business are that the entity is relatively simple and cheap to set up, and the owner has total autonomy for any business decisions.
The main disadvantage of a sole trader form of business is that the owner is totally responsible for all the debts and legal actions against the business. This means that the individual’s personal assets are at risk if the business runs into trouble.
Discuss the advantages and disadvantages of a partnership.
Partnerships have several advantages. Only minimal time and resources are needed to set up the partnership, and the partnership has the benefit of the skills, talent and knowledge of two or more people.
Partnerships have several disadvantages. They include the unlimited liability of the partners for debts and legal actions against the partnership; mutual agency; and the automatic dissolution of the partnership if one of the partners dies or withdraws from the partnership, or if there is an irresolvable dispute
Define the term ‘company’.
A company is an independent legal entity normally characterised by the limited liability of its shareholders. The most common forms of companies are private (or propriety) companies and public companies limited by shares.
COMPANY
business structure that has a separate legal identity from it shareholders and is taxed on its taxable income.
SHAREHOLDERS
part-owners of a company
LEGAL ENTITY
entity that is separate from its owners and recognised at law
DIVIDENDS
distribution of company profit to shareholders
Identify the different types of companies and provide examples of each.
The types of companies are:
- private companies: private companies. cant offer shares to the public hence called pty ltd. have at least one shareholder but no more than 50 and may have one or more directors
- companies limited by shares: shares can be classified under two headings, ordinary/common share or preference shares. ordinary shares are the most commonly traded type of shares in Australia. holders of ordinary shares are part-owners of a company and may receive payments in cash ((call dividends)) this class of shares has no preferencial rights to dividends or capital on winding up. Preference shares that rank before ordinary shares in the event of liquidation of the issuing company and usually receive a fixed rate of return).
- companies limited by guarantee: owners can guarantee to contribute an agreed amount of cash or other assets to the company in the event of the company winding up
- no-liability companies: shareholders who have no liability for the outstanding debts of the company, due to the risky nature of the companies operations. shareholders are attracted to this type of company as there is the possibility of obtaining a good return on their investment
- unlimited companies.: companies characterised by members who have no limit placed on their liability and usually restricted to investment type entities.
Discuss the advantages and disadvantages of a company.
The main advantages of companies are the limited liability of shareholders for business debts, and the access to additional capital from the shareholders for business expansion.
Their main disadvantages are the time and money needed to establish a company, and the complex regulatory requirements imposed on companies
Compare and contrast financial statements for different business structures.
Each of the financial statements reflects the business entity’s financial performance and position separately from those of the owner(s). The main differences in the financial statements for each of the different business structures occur in the distribution of profit to the respective owners.
For a sole trader, the individual owner has the sole right to any profits. For the partnership, the respective partners have rights to profits as outlined in the partnership agreement, and for the company, the profit is distributed to its owners (shareholders) in the form of dividends.
In the balance sheet, the capital account in the equity section will reflect the capital contributions of the owner(s). For a partnership, there will be multiple owners, and each of their contributions will be shown in the balance sheet. For a company, the share capital account will reflect the contributions of the shareholders of the company.
The undistributed profit for a partnership is included in each partner’s current account on the balance sheet. For a company, undistributed profits sit in retained earnings on the balance sheet.
THE DISADVANTAGES OF A COMPANY GOING PUBLIC OR FLOATING
- increased disclosure: increases othe number of people who have access to its financial records
- costs of ipos: are not cheap
- potential loss of control
- separation of ownership and control
- meeting investor expectations
