BUSN1001 Lecture 2: BUSN1001-Lecture-2
BUSN1001 – Lecture 2 and 3:
Business structures (Chapter 3)
Business transactions (Chapter 4)
1. Forms of business entities:
• The basic forms of business structure available in Australia are:
- Sole Trader
- Partnership
- Company
- Trust
• Many factors must be considered when determining which form of business structure
will best suit the needs of the entity.
• The four different business structures differ in terms of owner liability, equity structure,
funding opportunities, decision making responsibilities and taxation.
1.1. Definition and features of a sole trader:
Definition of a sole trader:
- A Sole trader is an individual who controls and manages a business, and is solely
liable for all the business debts.
Features of a sole trader:
- The business is not a separate legal entity.
- The general registration requirements involve applying for an Australian
Business Number (ABN).
- Usually uses accounting software such as MYOB to prepare financial reports.
Advantages:
- Quick, inexpensive and easy to establish and wind down.
- Not subject to company regulation or accounting standards.
- Owner has total autonomy over business decisions.
- Owner claims all the profits of the business and all the after-tax gains if the business
is sold.
Disadvantages:
- Unlimited liability – bears full responsibility for business debts and legal actions.
- Limited by skill, time and investment of owner.
- Restrictive structure due to non-legal status of the entity.
- Limited life: Business will cease to exist if owner leaves, retires or dies.
1.2. Definition and features of a partnership:
Partnership definition:
- An association between two or more persons who:
▪ Carry on a business as partners
▪ Share profits or losses according to partnership agreement.
Partnership features:
- Enables sharing of ideas, skills and resources.
- Easy and cheap to establish.
- No separate taxation payable but does lodge income tax return with ATO.
- Some partnerships have a written agreement, others don’t.
- If there is no partnership agreement, then the law assumes that all profits or losses
will be shared equally between the partners.
Advantages:
- Relatively easy and simple to set up.
- Informal business structure – not bound by accounting standards.
- Ability to share capital, skills, talents, knowledge and workload between two or more
people.
Disadvantages:
- Unlimited liability for business debts and obligations by all partners.
- Limited life: if one partner dies or withdraws from the business then the partnership
must dissolve.
- Mutual agency: each partner is seen as being an agent for the business and so is
bound by any partnership contract.
1.3. Definition and features of a company:
Company definition:
- A company is a business structure that has a separate legal identity from its
shareholders and is taxed on its taxable income.
Company features:
- 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.
Forming a company:
- More complicated than forming a sole trader business or partnership.
- 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.
Proprietary companies and SMEs:
- A common form of business structure adopted by small and medium-sized entities
(SMEs) in Australia.
- An SME is defined by the International Accounting Standards Board (ISAB) as ‘an
entity that does not have public accountability and does not need to publish general
purpose financial reports for external users’.
Public companies:
- Four types of public company:
▪ 1. Limited by shares
▪ 2. Limited by guarantee
▪ 3. No-liability company
▪ 4. Unlimited company
Advantages:
- Limited liability for shareholders.
- Taxation rate (30%) lower than top personal tax rate.
- Business expansion networks made easier due to legal structure.
- Can raise additional equity (capital) through public share offerings.
Disadvantages:
- More time consuming and costly to set up.
- Must comply with complex company rules and other legal requirements.
- Taxed from the first dollar of profit.
- Limited liability aspect may cause problems:
o Banks often prefer to have director’s personal guarantees instead.
- Separation of ownership and control.
2. Comparison of business reports
Accounting entity concept:
- Business transactions are recorded separately from personal transactions involving
the owner(s) because the business is regarded as a separate accounting entity from
the owner(s).
- Each form of business structure will record and report business transactions
separately from the personal transactions of the owner(s).
If the owner uses the business entities funds for personal use, this will be shown as a
reduction to equity, not an expense.
1. Sole Trader reports:
- The statement of profit or loss shows income less expenses.
- No taxation is shown.
- Balance sheet has only one capital account.
- Profit (or loss) is added (or subtracted) to capital account (in balance sheet).
Document Summary
Business transactions (chapter 4: forms of business entities, the basic forms of business structure available in australia are: A sole trader is an individual who controls and manages a business, and is solely liable for all the business debts. The business is not a separate legal entity. The general registration requirements involve applying for an australian. Usually uses accounting software such as myob to prepare financial reports. Quick, inexpensive and easy to establish and wind down. Not subject to company regulation or accounting standards. Owner has total autonomy over business decisions. Owner claims all the profits of the business and all the after-tax gains if the business is sold. Unlimited liability bears full responsibility for business debts and legal actions. Limited by skill, time and investment of owner. Restrictive structure due to non-legal status of the entity. Limited life: business will cease to exist if owner leaves, retires or dies.
