Owner Is His/Her Own Boss

A) Sole Traders

As the name suggests, the SOLE TRADER business is owned and operated by a single person. The success of the business generally relies on the skills and effort of the owner. This type of business is usually small because of the limited amount of finance that can be raised by one person.

Advantages:

· Owner is his/her own boss.

· Owner is responsible for all the decisions made which concern the business.

· All profits belong to the owner.

· Owner may offset business losses against other income.

· It is an inexpensive business structure to establish and maintain, with less responsibility to the government.

Disadvantages:

· Owner must bear all the losses of the business.

· Owner needs to wear many hats.

· Owner is personally liable for debts (UNLIMITED LIABILITY), which means personal assets may be at risk.

· Owner is responsible for the business and therefore might not be able to take a holiday because no one else has the expertise.

B) Partnerships

A PARTNERSHIP exists where more than one person carries on a business together, sharing the profits. Partnerships are in many respects similar to sole traders in terms of their legal responsibilities. The partners are responsible for any of the debts of the business and are fully responsible for any of the activities of the business. Nevertheless, there are several advantages of a partnership arrangement:

Advantages

· The responsibility for running the business is shared.

· Establishment costs are low compared with setting up a company.

· Taxation obligations may be minimised.

· Each partner is able to specialize in one area of the business.

· The ability to raise finance for the business is enhanced, by the business being able to take on more partners.

Disadvantages

· The partners have unlimited liability.

· The availability of capital is restricted.

· No one person has complete control.

· Profits are shared amongst more individuals.

· If one partner incurs any debts or dies, the other partners are left with the liabilities.

C) Limited Partnerships

A limited partnership is a variation on the standard partnership arrangement. This allows a person to invest capital into a business venture, without being responsible for the debts of the business or any of its actions. In other words, with a limited partnership the only risk for an investor is that they may lose their investment funds – there are no other legal liabilities.

Limited partnerships are becoming increasingly popular in the areas of real estate developments, mining projects, arts, theatrical and film undertakings, and agricultural schemes. Limited partners do not take any part in the management or decision-making activities of the business.

Incorporated Enterprises

D) Companies

Companies are the preferred structure for most businesses other than very small operations. A COMPANY is an incorporated business for which the owners have limited liability. They are separate legal entities from their owners which means that unless the directors break the law in running the business, they cannot be held liable for any of the acts or debts of the business. The fact that businesses can operate at arms length from individuals is a major reason why even small business owners often form companies.

Other ways in which companies differ from unincorporated businesses include:

· Companies are subject to company tax. (i.e. 30 cents in every dollar of profit)

· Companies raise most of their required funds through equity financing.

· Companies can continue trading when the original owner dies or retires.

· Management in a company is not tied to ownership.

Companies fall into two broad types – PROPRIETARY COMPANIES (i.e. Private companies) and PUBLIC COMPANIES. There are also some slight variations on these two which are companies limited by guarantee and no-liability companies.

i) Proprietary Limited Company

The most common form of company structure in Australia is the Proprietary Limited Company. It has the words ‘Pty Ltd’ after its name, indicating that it is private and the shareholders have limited liability.

Advantages

· Shareholders’ liability is limited to the amount of shares that they own.

· Shares can be sold without disrupting the operations of the company.

· It is easier to increase ownership of the company.

· Perpetual succession means that the business does not need to be wound up in the event of the death or replacement of the directors.

Disadvantages

· Shares can not be offered to the public.

· The company must lodge a return with ASIC for each financial year.

· Establishment costs are high in comparison with sole traders.

· Lenders will often seek personal guarantees from directors before making a loan to the company.

ii) Public Company

A public company is one which is listed on the stock exchange. In order to list on the stock exchange, a business must go through a complex process of offering shares to the public by issuing a prospectus which has been approved by the Australian Securities and Investments Commission. A public company has the word ‘Limited’ (Ltd) after its name, indicating that shareholders have limited liability. For Example: Woolworths Limited.

Other characteristics of public companies include:

· The general public are able to purchase and sell shares easily on the stock exchange.

· The minimum number of shareholders is one and there is no maximum limit.

· The company may borrow additional funds from the public.

· The company is required to make its financial reports available to the public.

· There is a large management structure.

iii) Companies Limited by Guarantee

These companies have members rather than shareholders. They run in order to provide a service to a specific group of people and are not set up to make a profit for their members. Companies limited by guarantee raise their capital through subscription fees, an annual levy or a joining fee. This ensures that the organisation has adequate funds to enable it to operate. Examples include: Professional associations, charitable organisations and sporting clubs.

iv) No Liability Companies

A no liability company (NL) is a form of public company that was introduced in order to attract shareholders to invest in high-risk ventures such as the mining industry or oil exploration.

E) Cooperatives

Cooperatives are incorporated organisations, owned and controlled by their members, which have been set up to provide certain common benefits for those members.

· By pooling their resources, fruit growers in a particular area can set up a common fruit processing and marketing cooperative, with the aim of providing a guaranteed market for growers’ output and increasing profits.

F) Trusts

A tRUST is a type of business where the assets are managed on behalf of beneficiaries. The assets of the trust are usually divided into portions or shares known as units. Most trusts are set up to help people to manage their investments and often minimise tax payments. Some of the most popular types of investment trusts include cash management trusts, mortgage trusts, property trusts, and share trusts.

Trusts have two major financial benefits:

i) Managed trusts pay no tax on behalf of the individual investors.

ii) Liability for any losses made by a unit trust is generally born by the unit holders, with the loss being reflected by a decline in the value of each unit holding.