BU1002 Lecture Notes - Lecture 2: Legal Personality, Sole Proprietorship, Unlimited Company
14 Jun 2018
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Lecture 2 Notes – Accounting
PASS class Wednesday 11am – 27003
Basic Business Structures
- Sole trader
- Partnership
- Company
- Trust (not included in examinable topics)
Differ in terms of owner liability, equity structure, funding opportunities, decision making
responsibilities and taxation
Sole Trader
- Definition: a sole trader (one person) is an individual who controls and manages a
business
- Features:
o The business is not a separate legal entity
o The owner gets all the profits and is fully liable for all debts
o The general registration requirements involve applying for an ABN (to collect
JST)
o Use accounting software such as MYOB / Quickbooks to assist in record
keeping and preparing of financial reports (mobile technology is developing)
- Advantages
o Quick, inexpensive + easy to establish and inexpensive to wind down / seize
o Not subject to company regulation – listing requirements and assets
requirements etc.
o Owner has total autonomy over business decisions – usiess itself does’t
have external users
o Owner claims the profits of the business and all the after-tax gains if the
business is sold
- Disadvantages:
o Unlimited liability – bears full responsibility for business debts and legal
actions such as negligence (if usiess does’t hae suffiiet assets they
may have to sell personal assets)
o If you do’t hae eough oey – need to go to a financial institution to
borrow money
o Limited by skill, time and investment of owner
o Restrictive structure due to non-legal status of the entity
o Business will cease to exist is owner leaves, retires or dies.
Partnerships
- Definition: an association between two or more persons who
o Carry on a business as partners
o Share profits of losses according to partnership agreement
- Features:
o Enables sharing of ideas, skills and resources
find more resources at oneclass.com
find more resources at oneclass.com
o Easy and cheap to establish
o No separate taxation payable, individual partner lodge personal income tax
return with ATO
o Soe parterships hae ritte agreeet, others do’t
- Advantages:
o Relatively easy and simple to set up
o Informal business structure (no external uses), not bound by accounting
standards
o Ability to share finances, capital, skills, talents, knowledge and workload
between two or more people
- Disadvantages:
o Unlimited liability for business debts and obligations by all partners –
insufficient funds – partners are liable to the full extent.
o Limited life – if one partner dies or withdraws from the business then the
partnership must dissolve
o Mutual agency – each partner is seen as being an agent for the business and
so is bound by any partnership contract. (binds everybody in the partnership
to that legal obligation)
o Many partnership disputes arise from profit sharing and decision making
issues (conflict)
Companies
- Definition: business where the owners, shareholders are separated from the
management of the business
- Features:
o Independent legal entity (a company has the same status as a person) (i.e
separate from people who own, control and manage it)
o Shareholders (owners) have limited liability to the aout that’s upaid o
the shares – for the purchase of price of their shares only (not company
debts)
o A company has unlimited life – not dissolved when owners die or change.
Shareholder can uninvest, border directors can change – company will
continue to trade
- Types:
o Proprietary companies – limited by shares
o Public companies – limited by shares, limited by guarantee, no-liability
company, unlimited company
- Advantages:
o Limited liability for shareholders
o Because the company is a person in its own right - taxation rate (30%) lower
than top personal tax rate – income statement, taxed based on profits made,
company pays dividends – shareholders get benefit
o Business expansion networks made easier due to legal structure
o Can raise additional equity (capital) through public share offerings
o Company continues operation regardless of changes in ownership
- Disadvantages:
o More time consuming and costly to set up
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find more resources at oneclass.com
o Must comply with complex company rules and other legal requirements
(because of external users)
o Taxed from the first dollar of profit
o Limited liability aspect may cause problems
▪ Banks often prefer to have directors personal guarantees payback
instead
o Separation of ownership and control – you can have money invested but no
say in how the company is run
o Publish reports – available for everyone to look out (owners, employees,
potential investors, competition) – upon to the threat of loosing competitor
advantage
o Even more so when issuing shares to the public for the first time
Statement of Profit of Loss
Sole Trader
o Statement of Profit or Loss shows income less expenses
o Business is not taxed, rather the profit is combined with
owners other assessable income and taxed at personal
tax rates
o Service business income title = coaching fees, fees ect.
whereas trading business income title = sales
o Business entity is not taxed
Partnership
o Profit is distributed according to the partnership agreement
o Residual profit is distributed according to the capital contributions
o Partnership is not taxed
find more resources at oneclass.com
find more resources at oneclass.com
