Saturday, 25 May 2013

Types of Business Entity: Australia Corporations Act 2001

Sole Proprietorship
A Sole Proprietorship represents a form of business that has a single owner (called the proprietorship). From a legal perspective there is no distinction between the owner and the business. However, from an accounting perspective we distinguish clearly between the owner and the business.

The main features are:

  • No separate legal entity.
  • Limited life.
  • Unlimited liability.
  • Minimum reporting regulations (compared to other entities).
  • Limited access to funds.
  • Low establishment costs.
  • It is easy to organize and needs only a small amount of capital.
  • Minimal financial reporting requirements.
  • Quick decision making.
  • Combination of ownership and management.
  • Unlimited liability, in credit actions. 
  • Personal property may be tied in the debt if creditors recall. 
  • On the death of the owner, continuation is difficult. 
  • Limited resources. 
A partnership may be described as the relationship existing between two or more persons carrying on a business with the aim of generating financial profit. The relationship may be established by a formal partnership agreement or an informal arrangement between the parties, or it may be inferred by the actions of two or more individuals. 

The partnership maintains records of each individual partners transactions according to resource contribution, resource withdrawals, or share of undistributed profits. 

The main features are:
  • No separate legal entity.
  • Limited life.
  • Unlimited liability. 
  • Mutual agency. 
  • Co-ownership of assets and profits. 
  • Limited memberships (the number of partners).
  • Increased Regulation (Partnerships Acts). 
Partnership agreements are in place and have a detailed and formal agreement so that most potential problems can be avoided. Issues not covered by the agreement are generally covered by law. Such legal rules are equal shares, and no entitlement of a partner to a salary or wage. 

A company is an association or collection of individuals people or "warm-bodies" or else contrived "legal persons" (or a mixture of both). Company members share a common purpose and unite in order to focus their various talents and organize their collectively availableskills or resources to achieve specific, declared goals.

Ownership interest is broken down into 'shares' hence 'shareholders' to describe the owners who have invested. 

The main features are:

  • Separate legal entity.
  • Unlimited life.
  • Limited liability. 
  • Company ownership of assets.
  • Profits belong to shareholders.
  • Extensive membership (think Telstra shareholders).
  • Separation of ownership and management. 
  • Extensive regulation. 
Company advantages:
  • Separation of ownership and management. 
  • Perpetual existence.
  • Separate legal entity. 
  • Limited liability of the owners. 
  • Greater access to ownership funding. 
  • Potentially greater access to debt funding. 
  • Potential tax advantages. 
  • Potential increases in share values when listed on the ASX.
Company disadvantages:
  • Extensive regulation. 
  • Higher establishment costs. 
  • Subject to more public scrutiny. 
  • Owners not able to watch everything.
  • Pressure for short term performance. 
  • Loss or dilution of original ownership. 
  • Income tax paid on every dollar earned. No tax-free threshold. 

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