basic business law for the first year student - chapter 14 choice of business st
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basic business law for the first year student - chapter 14 choice of business structure
Short Answer Questions (end of chapter - p 423): 1, 2, 4 and 5 Discuss the main advantages of incorporation under the Corporations Act 2001 (Cth). Make a list of the advantages and disadvantages of the sole trader and the partnership as business structures. What are the essential features of a partnership and a joint venture? What factors or information would you need to know before providing advice to a client as to the most appropriate choice of business structure for them to adopt? Discussion Questions (end of chapter - p 423): 1 In terms of exposure to potential liability, is a director of a company in a better or worse position than a partner in a partnership? Give reasons for your answer.Explanation / Answer
1. Incorporations under the Corporations Act 2001 offer greater scope to companies when compared to incorporated associations. Greater scope here is in the context of activities that companies can take. Incorporations under the Corporations Act increases the scope for raising capital. Private companies can raise capital from a maximum of 50 members and Public companies can raise capital by offering its shares to the public.
2. Advantages of sole trader - A sole trader has a good control over the business as there is no interference from others and the sole trader can shape the business as desired. Another advantage is that all the profits earned by the business belong to the sole trader. Lastly, starting a business and then running it is simple and not expensive for a sole trader. In terms of disadvantages, a sole trader has unlimited liability towards debts and obligations.
Advantages of partnership - A partnership business structure has a higher ability to raise funds and capital than a sole trader. The firm gains from the wider pool of knowledge and skills of the partners. In terms of disadvantage, each partner is liable (jointly and severally) for the actions of other partners.
4. For a partnership there must be at least two or more persons. A contractual relationship should be formed between the partners. The most important feature of partnership is the principle of agency. Each partner is an agent of other partners and also of the firm. For a joint venture, there should be more than one entity to form the venture. Another feature is that joint ventures are generally a temporary partnership formed for achieving a particular purpose. At the end of venture all assets are liquidated and liabilities are paid off.
5. First of all we would like information regarding the scale and size of the client's business. Usually when a firm or a business is started and the scale of operations is small, the business can be conducted as a sole proprietorship. With the growth in the size and scale of operations, the firm should become a partnership and then a company. The second factor is the legal liability that the owner is prepared to take for the business. If the owner of the business wants to be insulated from legal liability, then he should incorporate the business and should not consider sole proprietorship or partnership. Lastly, the goals of the business owner and tax implications should be understood. There are several tax options available to corporations when compared to sole proprietorship or partnership.
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