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Advantages, Disadvantages of Business
Terms in this set (10)
Sole traders are people who operate businesses on their own and may or may not have employees. Sole traders control and manage the business and treat its income as their own. Income tax is assessed on the owner's total income. The owner is personally responsible (liable) for all debts incurred by the business, and the ability to borrow money is limited by the owner's ability to provide security for a loan.
Some examples of businesses that are often owned by sole traders are hairdressers, plumbers, dentists, video stores, takeaway shops and jewellery shops.
When two or more people are in business together it is called a partnership. A partner acting alone in the name of the business binds the other partners to his or her actions. For example, if one partner makes an order for $20 000 worth of goods, all the partners are responsible for the payment of those goods.
The main advantage of a partnership is that two or more people are contributing to the running of the business. Sometimes partnerships begin with one person providing the money and another doing all the work.
Partnerships are not taxed as a business entity. A partner's income from the partnership is added to his or her income from other sources. Tax is paid on the partner's total income.
All partners have unlimited liability for any debts incurred by the business. This means the partners' personal assets can be sold to repay any money owed by the company. Raising finance is easier for a partnership because the assets of all partners can be used as security.
As with the sole trader structure, a partnership is a relatively easy way to organise a business. Examples of professions where businesses are often run as partnerships include architects, accountants, lawyers and doctors.
Unlike partnerships and sole traders, a company exists separately from its owners. Hence, the company itself earns all the profits and is responsible for all the debts. Individuals become owners, or shareholders, of the company by purchasing shares. While they have a share of the company, the profits the company makes can be passed on to the owners through a payment called a dividend. If a shareholder no longer wants to be part of the company the shareholder sells all of his or her shares.
The main advantage of forming a company is that the owners of the company are only responsible for the debts to the extent of the amount they originally paid for their shares. The main disadvantages are the costs and paperwork involved in establishing, and then running, a company.
A private company is limited to 50 shareholders. A board of directors is elected to run the company. If there are only a small number of shareholders they usually take on the role of directors. A private company has 'Pty Ltd' (short for 'proprietary limited') at the end of the company name. This means that liability is limited to the company, and does not extend to its owners. Shares in a private company are not sold to the public.
There is no limit to the number of people who can own shares in a public company. Such companies must be listed on the Australian Stock Exchange and are run by a board of directors elected by the shareholders. The board then appoints executives to manage the daily affairs of the company. A public company usually has 'Ltd' after its name, meaning that the shareholders have limited liability.
Forming an incorporated association allows a small non-profit community-based group an easier and relatively inexpensive means of establishing a legal entity instead of forming a company. An incorporated association may sell goods and services but profits are returned to the association, not passed on to members. An incorporated association is a legal entity that would suit, for example, a sporting or gardening club that wished to trade.
Advantages and Disadvantages of Sole trading
• Sole traders keep any profit
• It is relatively easy to establish
• Sole traders are their own boss
• It provides a sense of personal satisfaction
• Sole traders work the hours they want to
• Sole traders have unlimited liability
• There is imited access to finance to 'grow' the business
• Sole traders pay income tax rather than company tax
• It is difficult to take time off
Advantages and Disadvantages of Partners
• Partners keep all the profit
• Partners share any losses
• There may be more capital to establish the business
• The work is shared between partners, giving each a chance to specialise
• There are more people to make decisions
• It is easier for a partnership to borrow money
• Partners have unlimited liability
• Partners must share the profit
• There is the possibility of disagreements among partners
• All partners are responsible for the actions of any other partners
• If a partner leaves the business, the partnership agreement must be renegotiated
Advantages and Disadvantages of Public Companies
• More capital (supplied by the shareholders) is available
• Borrowing money is easier
• The liability of shareholders is limited
• It is a legal entity
• Specialised people can be employed to run different elements of the business
• Ownership and control can change frequently without a new agreement being entered into (this is referred to as perpetual succession)
• Many government regulations must be taken into account
• Limits are placed on the board of directors
• Owners (shareholders) do not always have control over the decisions made
• It can be expensive to set up, maintain and organise
• It may become too large and inefficient
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