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Ownership Structure

Jamie Z 2024-02-05

Learning Goals

  • Define a sole trader and describe the advantages and disadvantages
  • Define a partnership and describe its advantages and disadvantages

Commonly used Business Structures

  1. Sole Trader
  2. Partnership
  3. Private Companies
  4. Public Companies

Sole Trader

A person who is the exclusive owner of a business, entitled to keep all the profits but also all the loses

Advantages

  • Low cost of entry and generally cheaper to operate
  • Simplest form of business to set-up
  • The owner has complete controll
  • All profits belong to the owner
  • Less government regulations
  • No tax on profits, only on personal income

Disadvantages

  • Personal (unlimited) liability for business debts
  • Time consuming and lots of work for one owner
  • Owner must have a variety of skills and carries the burden of management
  • Sometimes difficult to raise start-up funds and funds for expansion
  • Often when the owner dies, the business ‘dies’

Partnership

A partnership is a group of people (2 to 20) who carry on a business and distribute income or losses between themselves

Advantages

  • Low start-up costs and less operating costs than a company
  • Share responsibility and workload with partners
  • Pool funds and talents
  • Minimal government regulations
  • No tax on profits, only on personal income

Disadvantages

  • Personal (unlimited liability) for business debts
  • Liable for all debts, including partner’s business debts
  • Possibility of disputes
  • Divided loyalty and authority
  • Profits have to be shared

Private Company

A company that is privately owned. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges (the stock market). Must have Pty Ltd in the company name

Advantages

  • Larger amounts of capital can be raised compared to a partnership or sole trader but not as much as a public company
  • Shareholders have limited liability (they are only liable for the debts for the company up to the face value of their shares)
  • Owning shares is by invitation only
  • Shareholders can only sell their shares to people approved by the directors (could be a disadvantage)

Disadvantages

  • Owners cannot sell their shares to the general public (can limit investment opportunities and be restrictive when owners want to sell shares)
  • More expensive and complicated to set up than sole-traders and partnerships
  • More government regulations to follow
  • More reporting and auditing requirements

Public Company

A company whose shares are traded freely on the stock exchange. The general public may buy and sell shares from a public company. There is a minimum of 5 shareholders but no maximum number. Must have Ltd in the company name.

Advantages

  • Large amounts of capital can be raised
  • Shareholders have limited liability (they are only liable for the debts for the company up to the face value of their shares)
  • Ownership and management are separated

Disadvantages

  • More expensive and complicated to set up than sole traders and partnerships
  • More government regulations to follow
  • More reporting and auditing requirements