Week 2 - Business Structures Flashcards
(20 cards)
Are sole traders a separate entity?
All businesses are a separate ACCOUNTING entity. However, sole traders are NOT a separate LEGAL entity. Owner is completely liable for business - however are much easier to set up and less regulated.
How can you tell if a business is a separate legal entity?
If the business pays tax, it is a separate legal entity (sole traders and partnerships do not pay tax).
What are the 5 factors of being a sole trader?
Not a separate legal entity
Limited life - restricted to the period during which the owner continues to operate the business
Unlimited liability - the owner is personally responsible for the debts and obligations of the business
Limited access to funds - restricted to the personal resources of a single owner
Low establishment costs
What is a partnership?
Two or more persons carrying on a business with a view to profit (therefore cannot establish a non-profit organisation). Can be formal, informal or inferred.
What are the 8 factors of being in a partnership?
Not a separate legal entity
Limited life - dissolved in death or withdrawal of one of the partners
Unlimited liability
Mutual agency - each partner is responsible for the actions of the other partners
Co-ownership of assets - assets are owned by partners in aggregate, not individually
Co-ownership of profits - unless there is a written agreement stating otherwise, the PA specifies profits/losses are shared equally
Numbers limited - normally 20 is the maximum, there are some exceptions (e.g. accounting practices)
Must follow the Partnership Act 1891 (no act for sole traders)
What does a partnership agreement entail?
Name of partnership
partner contributions of cash and other assets
profit and loss sharing ratios
Entry and exit information.
You CANNOT use a partnership agreement to contract out of legal liabilities (e.g. liability for partnership debt)
What are the default legal rules of a partnership agreement, expressed in the partnership act? (I.e. if it isn’t addressed in a written agreement)
No entitlement of partners to a salary or wage
Partners not entitled to interest on capital contributed
equal shares of profits and losses
What are the 9 factors of a company?
Independent legal entity
Owners of a company are shareholders
Shareholders have limited liability - Limited to the unpaid purchase price (if any) of their shares. If your shares are fully paid your libility is ZERO!
Unlimited life
Assets are owned by the company in its own right (as a legal person)
Company profits belong to shareholders. Either distributed as dividends or retained in the firm as “retained profits”
Extensive membership
Separation of ownership and management (managers can be shareholders, but often a separate management team exists)
Extensive regulation
Who do companies have to be regulated by?
Legislation (the Corporations act Cwlth), ASIC, ASX, ACCC, RBA, APRA, ATO and other
What are the two types of companies?
Public (ltd) and Proprietary (pty ltd)
What are some things to consider in choosing a business structure?
Tax issues funding issues expertise issues Prefer working by yourself? Risk preference? Support issues
Does the word “company” indicate it’s a company?
No! Company is evidenced by the word Ltd (limited liability)
What do all business structures have in common over financial statements?
Income statement shows revenue less expenses
What do all sole trader financial statements have in common?
No income taxation is shown on the business income statement
Balance sheet has only one capital account
If the firm has a drawings account, this is transferred to capital at period end (subtracted)
Proft (loss) added (subtracted) to (from) capital account
What do all partnership financial statements have in common?
No income taxation is shown on the income statement
Owners equity shown (for each partner)
A capital account and perhaps also,
a current account (showing drawings and share of profits/losses)
Profit or loss is split according to the partnership agreement OR equally if no partnership agreement
What do all company financial statements have in common?
The income statement shows income tax being deducted directly from company profit
The owners equity section of the balance sheet shows: share capital, retained earnings, reserves.
instead of owner’s or partner’s capital accounts.
What is share capital?
The total value of shares issued
What is retained earnings?
The amount of profits that have been retained in the company
What are reserves?
For this course, only need to know that they appear in the owners’ equity section of the balance sheet
What regulations do ALL companies have to comply with?
The Corporations law (CA)
