Sole Trader Business: Advantages, Disadvantages - Essay Example

?Basic Law Table of Contents Prologue 3 Sole Trader Business: Advantages, Disadvantages, Legal Requirements and Liabilities of the Party 4 Partnership Business: Advantages, Disadvantages, Legal Requirements and Liabilities of the Parties 5 Limited Liability Company: Advantages, Disadvantages, Legal Requirements and Liabilities of the Parties 6 Trust: Advantages, Disadvantages, Legal Requirements and Liabilities of the Parties 7 Consequences of Registering the Business Name as “Lark Travels” 8 Bibliography 9 Prologue This paper is an absolute work of evaluating the pros and cons of starting a new business. The attributes associated with setting up of new business will be discussed in this paper along with various other significant decisions attached with setting up of a new business. The significant decisions comprise of primarily deciding on as to what sort of business would be the most profitable to invest in the Australian market and the second significant decision relates to deciding on the most appropriate type (sole trader, partnership, limited liability company or trust) which can suit the chosen business. The business that has been decided to be set up is that of transport business. This business operation will deal with lending car on rental basis to the tourists’ companies which operates with planning trips for the tourists. Australia is an attractive location for the tourists and thus holds good scope for the business. The cars will be bought new for providing them on rental to the tourists’ companies. The business will operate on the type of “sole trader”. Thus the aim of this paper is to evaluate the advantages and disadvantages of sole trading business along with the other forms for comparing and thus to justify this choice of the business form. The name of the business would be “Lark Travels”. Lark is the name of a songbird. The benefits and the drawbacks of registering names for business will also be evaluated in this paper. Sole Trader Business: Advantages, Disadvantages, Legal Requirements and Liabilities of the Party Sole trader which has been selected as the form of the business is known to be as the most inexpensive and the simplest structure to be set up. The best way to have a business name is to have it by the trader’s own name; otherwise the trader needs to register the business name with Consumer Affairs Victoria. The sole trader holds the entire liability of the business. The liability holding does not vary in case if the business is registered with a name other than his or her name. An income declaration is essential to be included by the sole trader; the income which is earned from the business. A business plan is required in case the sole trader is opting for taking loan from any of the financial institutions. The tax is paid by the sole trader at a rate of personal tax, although he or she may be required to pay provisional tax. The liability of sole trader business is unlimited and can even broaden up to sole trader’s personal assets inclusive of any assets which are owned jointly with another person. The advantage of sole trader business is that it bears low fees of establishment. The entire control over the business lies with the sole trader and he enjoys the entire profit from the business. During low business profits, there exist taxation advantages. There is applicability of less legislation in this business form. The only two legislations applicable are Contract Law and Tax Assessment Act. Despite the advantages, the sole trading business can pose as a risk towards the trader’s personal finances. The capital deems limited by the sole trader’s personal assets and also there prevails limited expertise of the trader. He is subjected to unlimited legal liability and he is solely responsible for all the debts and liabilities. At times, it may become hard to ‘pass on ownership’1. Partnership Business: Advantages, Disadvantages, Legal Requirements and Liabilities of the Parties Partnership businesses are similar to the sole trader business but the difference is that in this case, two or people enjoy the control over the single business incorporated. However, this trait of the partnership business forms the greatest strength as well as the greatest weakness. Unlike the sole trader business, this business is not considered as a separate legal entity. By law, this business forms’ size is not unlimited. A partnership indicates limitation of partners between 2 to 20 with certain exceptions. For example, 400 legal practitioners can be associated with a partnership business according to the Corporations Regulations 2001 (Cth). The liability stays with all the partners of the business. The partnership business holds the advantages that there exists less interference from the governments along with regulations. It holds fewer requirements of hiring lawyers, consultants and accountants. In comparison to the sole trader business, the base of the management is broad signifying wider expertise pool with risk being shared and more capital sources. The strength of the partnership business also becomes its greatest weakness. In case any of the member build up a contract with a third party without the other partners’ knowledge, the other partners automatically gets bound to the contract. If the third party is not a valid party, the entire business comes under risk. The sole trader business can avoid this consequence through holding of sole power of indulging any third party into a contract2. Limited Liability Company: Advantages, Disadvantages, Legal Requirements and Liabilities of the Parties A limited liability company is limited by shares in which the shareholders are provided more security when the company faces high level of liabilities for debts. This set up is basically the most preferred for small businesses. The limited liability company has the power similar to an individual and can either own or dispose of property along with other assets. It can enter into contracts and can sue or be sued. Legally, the limited liability company is required hold its registered office and should maintain registers and lodge annual return every years. The greatest advantage of this form is that the directors and shareholders can be appointed by the company under conditions of normal salary and wage conditions and their income can be taxed at personal rates. The company is taxed at a fixed rate and it is calculated as a percentage amount over the company’s taxable income earned. Unlike the sole trader business, the company is not required to wind up in case any person involved in the business dies. Formation of a Limited Liability Company can include a number of paper works which can turn up to be a complicated task. Pertaining to lengthy procedures, a company can take up to six weeks to be formulated. There prevail high regulations for adhering to the Corporations Act. Along with these complicated requirements, the companies are required to undergo several forms of record keeping. These complexities are not present in case of sole trader business and with respect to these, the sole trader business is better than that of Limited Liability Company3. Trust: Advantages, Disadvantages, Legal Requirements and Liabilities of the Parties In the same way as a company, a trust is not a separate legal entity. It is rather a business structure where the business is carried out by a trustee, generally a company, on behalf of the trust’s members. This business form is set up by a trust deed. The trustee remains responsible for maintaining the ‘financial health’ of the trust and is responsible for making decisions such as distribution of income and taking money on loan. Depending on the current tax laws, there can be advantages on taxation. The trust allows for streaming of income and also limited liability. The disadvantage of a trust is that it holds probable indication of tax on capital gains. There exists tax losses’ distribution and includes high cost for administration and establishment. Pertaining to the disadvantages that would result in complexities for the trustee, sole trader business form can be viewed as a better option for setting up4. Consequences of Registering the Business Name as “Lark Travels” It would be required for the sole trader business to get its name registered with the concerned authority mentioned above. The registration of name would have a “protective effect” for the business. This is because if any other business attempts to register the same name, then the registering authority would have to put regard to the previous registration of company name which is an “Australia wide” phenomenon. Another important benefit of registering the sole trader business name would be that a strong impression would be created of the business’ image over the outside stakeholders. For a start-up business, it is essentially required to have a first-hand impression over the customers. Restriction can arrive from the concerned authority in case if the name registered of the business resembles any other business within the country. The probability of this restriction can be avoided through complete review of the registered name book of all the companies in the country. Registering the name provides the right of using the name for a nominated time period. The process of registration undergoes concise legal requirements and lessens the fear of any adverse situations where a fraud business can take the advantage of the registered business’ name. Moreover, the registration process is carried out separately for different states and territories. Thus, it would be a safe way of initiating the business in the chosen location in terms of creating identity within the market5. Bibliography Allen & Unwin. 2006. How to Organize and Operate a Small Business in Australia. Australia: Southwood Press. Beck, Hillary & Et. Al. 2009. Business Communication and Technologies in a Changing World. Australia: Macmillan Education Aus. Freedman, J., 2000. “Limited Liability: Large Company Theory and Small Firms”. “The Modern Law Review”, Vol. 63, No. 3. Gillies, Peter. 2004. Business Law. Australia: The Federation Press. Ong, Denis S. K. 2007. Trust Law in Australia. Australia: The Federation Press. Read More