NATURE OF BUSINESS
Types of Businesses
TYPES OF BUSINESSES classification of business
size ndash small to medium enterprises (SMEs) large
local national global industry ndash primary secondary tertiary
quaternary quinary legal structure ndash sole trader partnership
private company public company government enterprise
factors influencing choice of legal structure ndash size ownership finance
SMErsquoSSmall to medium enterprises (SMEs) are the most common businesses in Australia These businesses play a key role in the provision of goods and services for thegeneral public provide employment foster innovation and productivity improvements supply inputs to larger businesses serve the interests of local communities and facilitate growth in the Australian economy
SIZE ndash SMALL TO MEDIUM ENTERPRISES (SMES) LARGEAccording to the ABS in 2001 a small business is defined as a business that employed less than 20 people including categories of1048576 non-employing businesses ndash sole proprietorship and partnership withoutemployees1048576 micro businesses ndash businesses employing less than 5 people including non-employing businesses1048576 other small businesses ndash businesses employing 5 or more people but less than 20 peopleA medium business is one that employs more than 20 but less than 200 peopleThus a large business is one that employs 200 or more people
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS CONTrsquoD
Local national global A local business is an organisation that
operates within one area National businesses operate across
Australia An international business is one whose
ownership and production is based in one country it exports the goods andor services it produces to other countries
A transnational business is a business that operates in many countries Its goods and services are produced and sold in a number of different countries
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
TYPES OF BUSINESSES classification of business
size ndash small to medium enterprises (SMEs) large
local national global industry ndash primary secondary tertiary
quaternary quinary legal structure ndash sole trader partnership
private company public company government enterprise
factors influencing choice of legal structure ndash size ownership finance
SMErsquoSSmall to medium enterprises (SMEs) are the most common businesses in Australia These businesses play a key role in the provision of goods and services for thegeneral public provide employment foster innovation and productivity improvements supply inputs to larger businesses serve the interests of local communities and facilitate growth in the Australian economy
SIZE ndash SMALL TO MEDIUM ENTERPRISES (SMES) LARGEAccording to the ABS in 2001 a small business is defined as a business that employed less than 20 people including categories of1048576 non-employing businesses ndash sole proprietorship and partnership withoutemployees1048576 micro businesses ndash businesses employing less than 5 people including non-employing businesses1048576 other small businesses ndash businesses employing 5 or more people but less than 20 peopleA medium business is one that employs more than 20 but less than 200 peopleThus a large business is one that employs 200 or more people
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS CONTrsquoD
Local national global A local business is an organisation that
operates within one area National businesses operate across
Australia An international business is one whose
ownership and production is based in one country it exports the goods andor services it produces to other countries
A transnational business is a business that operates in many countries Its goods and services are produced and sold in a number of different countries
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
SMErsquoSSmall to medium enterprises (SMEs) are the most common businesses in Australia These businesses play a key role in the provision of goods and services for thegeneral public provide employment foster innovation and productivity improvements supply inputs to larger businesses serve the interests of local communities and facilitate growth in the Australian economy
SIZE ndash SMALL TO MEDIUM ENTERPRISES (SMES) LARGEAccording to the ABS in 2001 a small business is defined as a business that employed less than 20 people including categories of1048576 non-employing businesses ndash sole proprietorship and partnership withoutemployees1048576 micro businesses ndash businesses employing less than 5 people including non-employing businesses1048576 other small businesses ndash businesses employing 5 or more people but less than 20 peopleA medium business is one that employs more than 20 but less than 200 peopleThus a large business is one that employs 200 or more people
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS CONTrsquoD
Local national global A local business is an organisation that
operates within one area National businesses operate across
Australia An international business is one whose
ownership and production is based in one country it exports the goods andor services it produces to other countries
A transnational business is a business that operates in many countries Its goods and services are produced and sold in a number of different countries
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
SIZE ndash SMALL TO MEDIUM ENTERPRISES (SMES) LARGEAccording to the ABS in 2001 a small business is defined as a business that employed less than 20 people including categories of1048576 non-employing businesses ndash sole proprietorship and partnership withoutemployees1048576 micro businesses ndash businesses employing less than 5 people including non-employing businesses1048576 other small businesses ndash businesses employing 5 or more people but less than 20 peopleA medium business is one that employs more than 20 but less than 200 peopleThus a large business is one that employs 200 or more people
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS CONTrsquoD
Local national global A local business is an organisation that
operates within one area National businesses operate across
Australia An international business is one whose
ownership and production is based in one country it exports the goods andor services it produces to other countries
A transnational business is a business that operates in many countries Its goods and services are produced and sold in a number of different countries
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS CONTrsquoD
Local national global A local business is an organisation that
operates within one area National businesses operate across
Australia An international business is one whose
ownership and production is based in one country it exports the goods andor services it produces to other countries
A transnational business is a business that operates in many countries Its goods and services are produced and sold in a number of different countries
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
SMALL MEDIUM AND LARGE BUSINESS CHARACTERISTICS CONTrsquoD
Local national global A local business is an organisation that
operates within one area National businesses operate across
Australia An international business is one whose
ownership and production is based in one country it exports the goods andor services it produces to other countries
A transnational business is a business that operates in many countries Its goods and services are produced and sold in a number of different countries
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
Local national global A local business is an organisation that
operates within one area National businesses operate across
Australia An international business is one whose
ownership and production is based in one country it exports the goods andor services it produces to other countries
A transnational business is a business that operates in many countries Its goods and services are produced and sold in a number of different countries
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
INDUSTRY - PRIMARY SECONDARY TERTIARY QUATERNARY QUINARY
Primary industry businesses are involved in the acquisition of raw materials
The secondary industry consists of businesses that use raw materials combined with labour and capital equipment to create finished products
The tertiary industry is made up of businesses whose prime function is related to providing a service
The quaternary sector consists of those businesses that provide information services to their customers
The quinary sector is concerned with businesses that provide services that are traditionally performed in the home
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
LEGAL STRUCTURE
Legal Structure
Sole Trader Partnershi
p
Private Company
Public Company
Company Limited by Guarantee
Cooperative
Trust
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE
Size ndash as a business grows it is likely it will move from either a sole trader or partnership to a company structure
Ownership ndash by altering the legal structure of a business the original owner is also likely to relinquish his or her full control over the business
Finance ndash generally smaller businesses may find it more difficult to access finance than do their larger counterparts Business growth is often accompanied by a greater demand for financial resources
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
SOLE TRADERAdvantages Low cost of entry Simplest form Complete control Less costly to operate No partnership disputes Ownerrsquos right to keep all
profits Less government
regulation No tax on profits only
personal incomeDisadvantages
Personal (unlimited) liability for business debts
End of business when owner dies
Difficult to operate if sick
Need to carry all losses Burden of management Need to perform a wide
variety of tasks Difficulty in raising
finance for expansion
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
PARTNERSHIPAdvantages Low start-up costs Less costly to operate
than a company Shared responsibility
and workload Pooled funds and talent Minimal government
regulation No tax on profits only
personal income On death of one partner
business can keep going
Disadvantages Personal unlimited
liability Liability for all debts
including partnerrsquos debts even before the partnership has begun
Possibility of disputes Difficulty in finding a
suitable partner Divided loyalty and
authority
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies
COMPANIES ndash LIMITED LIABILITY
Advantages Easier to attract public finance Limited liability ndash separate legal
entity Can transfer ownership easily Enjoys a long life ndash perpetual
succession Experienced management ndash board of
directors Greater spread of risk Company tax rate lower than
personal income tax rate Growth potential Recent legislation power allows a
company to have only one shareholder and one director
Disadvantages Cost of formation Double taxation ndash company and
personal Personal liability for business debts
of directors knew at the time that the business was unable to pay loans
Must publish a yearly annual report of audited accounts
Public disclosure ndash reporting of certain information
Becomes too large resulting in inefficiencies