Business ownership has five categories. They are:
- Sole trader
- Private Company
- Public Company
A person may set up in business on his or her own, providing all the capital, accepting all the profits and bearing all the risks and possible losses.
Sole trader must be:
- Multi-skilled (doing all the work of the business as well as cleaning the premises, ordering supplies, keeping the books and paying accounts, attending to customers, answering telephone cal and so on)
- Prepared to work long hours
- Willing to forego holidays and time off for sickness (some sole traders have a small staff)
- Able to accept risks and bear losses, if business fails, personal assets may be sold to meet the commitments of the business
- Capable of making all the decision associated with the business
Many businesses commence this way and then progress to become partnerships or companies. Some people enjoy the control and flexibility of operating as a sole trader. The balancing factors are long working hours, and taking responsibility for the success of the business. If this type of business fails, liability is unlimited. Sole traders may also have difficulty obtaining financial assistance such as bank loans.
A partnership gives access to more capital and expertise than a sole trader enjoys. Profits and losses are shares and management decisions can be discussed.
Under the relevant law, partners are deemed to contribute equal amounts in expertise and capital. They share equally in decision making, contribution of capital, distribution of profits and liabilities for losses.
When the partners do not contribute on an equal basis, Partnership Agreement should be drawn up to set out how profits and liabilities will be shared due to:
- A partner investing more capital than other partners
- A partner working longer hours than other partners
- A partner having more experience and expertise than other partners
The Partnership Agreement may also specify the ways in which the business is controlled. Partners may be restricted from entering into business arrangements without the consent of all other partners.
The death or retirement of a partner usually means the legal end of the partnership. However, if the trading name has been registered, another partner may be brought in. Otherwise, completely new arrangements have to be entered into with the incoming partner(s).
In a risky partnership business, a limited partnership may be formed. There must be at least one general partner with unlimited liability and one or more limited partners.
Limited liability partners come in with extra capital to promote the business enterprise. They do not take any part in the running of the partnership. In the event of the business failing, they only stand to lose the capital already invested. These stakeholders are called “sleeping partners”.
The remaining partners, who have unlimited liability, are responsible to make good any losses.
As mentioned, both sole trader and partnership business have unlimited liability, which means the individuals risk losing personal assets in the event of business failure.
Companies may be set up and registered so that:
- More capital can be brought into the business by shareholders who purchase a part of the company
- Greater expertise can be brought into the business
- The business continues after the death or retirement of a person (partners)
- The business is separate and distinct from its owners/shareholders (because a company is a legal entity)
- The business is managed by directors who are elected by shareholders
- In the event of business failure, shareholders are protected and can lose only the amount invested (or agreed to be invested) in the company (limited liability)
- In accordance with Corporations law, legal protection is given to shareholders
- Formal rules can be drawn up giving details of the company structure and management and the internal controls for running the company.
These are normally identified by the words “Proprietary” or “Pty”. In recent years, the legislation has been altered so that one person may form a company. This means that sole traders can now set up as a company and have the limited liability protections that this offers.
Some conditions applying to private companies are:
- Regulations relating to revenue and gross assets must be complied with
- The number of members must not exceed 50
- A public company must be formed when members exceed 50
- Funds can only be raised from shareholders or bank loans
- The share are not listed on the Stock Exchange; they can only be bought by another shareholders and with the approval of the board of directors
- Annual accounts are not published
These are formed to allow for greater expansion and the investment by the public in the business. There must be a minimum of five shareholders, but there is no upper limit.
The word “Limited” or “Ltd” must be part of the name. Like a private company, a public company has limited liability.
Some conditions applying to public companies are:
- Shares are quoted on the Stock Exchange and they may be bought or sold without the approval of the board of directors
- There is no upper limit to the number of shareholders
- When additional capital is to be raised, a prospectus is issued inviting members of the public to subscribe
- Annual accounts must be published
No liability companies
An exception to the liability requirement has been made for mining companies. These are considered to have a higher degree of risk.
In order to encourage the public to invest in their enterprise, a company may be called a “no liability” company. The initials “NL” are shown as part of the name.
In the event of a business failure, shareholders are not responsible for any balance owing on their partly paid share. If they originally paid 50 cents on each $1 share, they would not be liable for the balance of 50 cents to be [aid at call.
A cooperative is type of limited liability but it is not listed on the Stock Exchange. Cooperatives are formed by common-interest groups to promote better conditions, marketing and other benefits.