Business ownership has five categories. They are:
- Sole trader
- Partnership
- Private Company
- Public Company
- Cooperative
Sole Trader
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.
Partnership
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).
Limited Partnership
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.
Companies
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.
Private Companies
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
Public companies
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.
Cooperatives
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.