business structure

You are a friend of Lucy Lu who is thinking about starting a business to sell her handmade quilts. Advise Lucy on the four factors that should be considered before deciding on what form of business structure to operate under.

• (i) Whether the owner will be the only contributor of capital to the entity;

• (ii) The degree of risk that the owner(s) are willing to take with the entity

  i.e. whether the entity should have limited or unlimited liability;

• (iii) The potential for growth of the entity in the future;

• (iv) Issues of taxation

  i.e. sole trader/partnership forms do not pay tax on the entity’s profits. The owner’s will include their share of the entity profit in their individual taxation returns.

What are two major advantages of a company structure?

• access to additional capital

• limited liability for the shareholders in relation to the debts of the business.

• The time and money to establish the company form of business structure;

• The more complex regulatory requirements imposed on the company.

How sole traders and partners are taxed in Australia. How does this compare to Australian company tax?

• The sole trader and partnership form of business do not pay separate income tax; but depend on reported business income or losses on his or her individual income tax return.

• Pay separate income tax. The current rate is 30 per cent.

• The sole trader and partnership form of business pay separate income tax

• Partners would submit their own individual tax returns including their respective shares of the partnership profit.

What does the term ‘mutual agency’ refer to in the context of partnerships?

• Each partner is seen as an agent for the entity and has a right to enter into contracts for the entity which bind the other partners.

• Unknown to the partnership

• Only some can make decisions while some can not (silent partner)

Connor and Ella wish to start an internet business, marketing cosmetics. They are concerned about the legal issues (for example, their personal liabilities) for this business once they start trading., indicate the business form each one is likely to take

• sole trader

• partnership

• company

• trust

Gregory has just commenced a home maintenance business by himself, with the help of $2000 inherited from a rich aunt. He wishes to employ his wife as the bookkeeper, indicate the business form each one is likely to take

• sole trader

• partnership

• company

• trust

As friends at university, Paul, Ingrid and Jasmine studied commerce. They are now setting up a small accounting business specialising in taxation returns and investment advice

• sole trader

• partnership

• company

• trust.

Two married brothers (Will and Sam), who are both trained and practising plumbers, wish to combine their businesses into one so that they can share resources and take more holidays.

• sole trader

• partnership

• company

• trust

Three engineers (Azil, Daniel and Timothy) wish to set up a prospecting business searching for gold, and they want to list their business on the Australian Securities Exchange.

• sole trader

• partnership

• company

• trust

Four members of the Ng family wish to establish an investment business, with the proviso that additional family members can be admitted as they reach the age of 18 years.

• sole trader

• partnership

• company

• trust