Business Structures: Mary and Chang - Essay Example

Name Professor Course Date Business Structures: Mary and Chang Case Study Introduction One of the major decisions a businessperson make prior to establishing a business is to select the legal structure appropriate to his/her business. The structure of a given business depends on the form and size of business alongside personal circumstances and how much a businessperson desire to develop the business. The type of business structure selected by a affects tax payment, the amount of formalities needed, personal accountability and capacity to raise capital. Apparently, tax treatments, access to capital, legal liability, ease of information and managerial control and input differ among the diverse business structures. The types of a business structure Mary and Chang will choose to start hold the potential to greatly impact long-term and short-term operations. This essay evaluates various business structures and proposes the most suitable business structure to Mary and Chang. The commonly used business structures in Australia include, sole traders, partnerships, joint ventures, companies and trust. Sole Traders The sole proprietorship is a simple, informal structure usually owned by a single person or a marital community. The sole trader is the simplest and comparatively inexpensive business structure that a businessperson can select when setting up a business. It entails a businessperson operating as individual lawfully accountable for all the business aspects that includes losses and debts (Adams & Adams 21). A sole trader makes all decisions regarding the establishment and running of business. As noted by, Adams, an individual is permitted to operate in a business as a sole trade under the Australian law (2). The sole trader is guided by the ordinary commercial laws in Australia, which include tort, agency, crime, legislation, trust and contract. There are limited taxation concerns that must be considered by a sole trader and the person is personally liable for any losses or debts the business incurs. A sole trade may get ABN (Australian Business Number) from Australian Tax Office and may be needed to make quarterly or annual payments to the government based on the Business Activity Statement. A sole proprietorship business structure represents the most tax effective and efficient manner in which to conduct individual affairs. A person is able to operate under a separate legal entity as one-person, one-director proprietary limited firm. The major benefit of sole proprietorship is that a sole trader holds a lot of flexibility and is in control of the business. The owner is the manager and decision maker. Sole proprietors hold ultimate control over their business affairs and may use business equity for personal non-business purposes (Gibson & Flaser782). All the profits belong to the owner and this business structure is easy and inexpensive to establish and maintain. Sole trader calls for few requirements and the losses can be offset against future earnings or any other income. However, this form of business holds unlimited liability for debts, shortage of skills, little prospect for tax planning and lack of capital for expansion. The business owners assets may be at risk because he/she is personally liable for all the debts ( Berek, DeMarzo & Finch 4). In addition, there is less flexibility of transferring ownership to another person and as such, the business may close with the death, retirement or permanent disablement of the owner. Partnership Establishing a partnership may help in overcoming some of the intricacies linked to sole proprietorship. Partnership is a business structure that entails two or more people but not more than twenty people. A partnership is relatively inexpensive to operate and establish. In Australia, the partnership requires the people involved to register a business name with ASIC (Australian Securities and Investments Commission) unless the business utilises surnames of all the parties involved (Makari 23). Partnership requires agreement amid two or more individuals to jointly own and operate a business. Managerial duties, profits and losses are shared among partners and every partner is personally predisposed for partnership debts. Partnerships do not pay taxes, but are required to file an informational return, and individual partners report their profits and losses shares on their personal returns. When establishing a partnership form of business, it is important to develop a formal written partnership agreement that helps in setting out every partner’s roles and lowers the probability of disputes. Every partner must be involved in the management of the business. Partnerships are comparatively easy to set-up and can be cost-effective when every partner specialise in given aspects of the firm. In partnership, taxation obligations are lowered although the Taxation Office requires all partners to hold bona fide and efficient control over the partnership legal responsibilities and assets. The roles of running the business and the capacity to raise capital are enhanced while skills can be incorporated from different partners (Mattock 124). As regards, tax implications, partnership does not remit income tax on income earned by the business but every partner remits tax based on the net partnership income share. However, the legal responsibility in partnership is unlimited because partners are individually and jointly liable for other partners’ actions in the sense that if a partner dies or absconds, other partners earn the liabilities. Individual parties in a partnership may be personally inclined for contract, crime or tort but partnership cannot be subjected to other liabilities or charged of a crime. In addition, when the partnership is altered or dissolved, difficulties may occur when obtaining acceptable valuation. Partnerships involve sharing of profits and given that decision making involves all partners, disputes may take place. However, unlimited liability is the major cost of partnership. Trust Trust is a responsibility imposed on a person to assets or property for benefit of others. As noted by Seal and Penrith, trusts are not often utilised for sizeable partnerships or joint ventures but more for entirely owned ventures or project with Australian residents (354). Trusts include three entities that are settler, trustee and beneficiaries. Trusts can be expensive to operate and set-up, necessitate a formal trust deed that defines how the trust functions and oblige the trustee to take annual administrative tasks. Some of the main benefits of trust include maintenance of confidentiality, distribution of income to beneficiaries who pay tax on their profits allocation. Trusts do not pay income tax on their profits and limited liability can be attained by the introduction of a trust with a firm acting as a trustee (Seal & Penrith 354). Nevertheless, losses realised from trust are not distributable, hence cannot be offset against the income of the beneficiary. Corporate trustees must comply with the broad requirements of Corporations law while raising capital may be hard because financiers and banks require reassurance from legal representatives that trust has been suitably established. More importantly, trusts are expensive to operate and establish. Companies A company is a separate lawful entity, unlike partnership or sole trade. A company hold akin rights as a natural human being and can be sued, sue or incur debt. Company owners can limit their personal liability and are not liable for the debts of a company (Parrino, Kidwell &Murray 9). However, a company is an intricate business structure with higher administrative and set-up costs given the extra reporting needs. In Australia, companies are registered with ASIC and company directors must comply with lawful obligations under the 2001 Corporation Act. Advantages of a company include limited liability for shareholders, easy to transfer ownership, employment of shareholders, favourable rates of taxation and wider skills and capital base. On the other hand, a company can be expensive to set-up, uphold and operate, reporting requirements can be intricate while the financial affairs of the firm are exposed to public (Parrino, Kidwell &Murray 9). Directors may be held responsible for the firm’s debts if they do not attain their legal requirements while profits distributed to shareholders are taxable. Based on the analysis of the case and evaluation of the various business structures commonly used in Australia, the most suitable business structure for Mary and Chang is Partnership. Apparently, partnership is a comparatively inexpensive business to operate and set-up and requires no formalities like in trust and companies. In addition, partnership is entails two or more people but not more than twenty people. Given that Chang’s brother is interested in joining Chang and Mary, partnership would be the most suitable business structure. More so, the two want to keep their administrative activities as simple and possible. Partnership would allow them to share control, responsibilities, losses and income from the business. Each partner owes a fiduciary duty to the partnership and partners are joined by contract. A partnership business structure will allow the partners to pool their experience and capital to facilitate growth and expansion. In addition, partnerships allow for minimization of tax especially when family members are involved. Conclusion In contemporary technological world, computer science and business are highly valued and essential career paths where graduate can seek for employment or set-up their own businesses. Mary and Chang are Computer Science and Software Engineering graduates who are determined to set up a business that will service, repair or upgrade computers and other electronic devices for small medium size organisations. Despite their considerable knowledge in computers, the two require knowledge on business structures, their benefits and costs as well as their legal implications. Before devotedly venturing into a novel business, Mary and Chang need to seriously consider the most appropriate business structure. Based on the analysis of the four business structures, the most appropriate structure would be partnership. Partnerships are easy and inexpensive to set-up, operate, and allow for sharing of capital, income and losses among partners. General partnerships require less formalities and official procedure. Bibliography Adams, E, Adams, M, Management law, 2001. Adams, M, Essential corporate law, 2nd Ed, 2002. PA1892 Berk, J, DeMarzo, P, Finch, N, Fundamentals of corporate fiancé, 2013. Curtis, M, Getting started in small business, 2013 Gibson, A, Fraser, D, Business law 2014, 2013. Makari, M, How to open a company in Australia, 2011. Mattock, J, Doing business in Australia for China: How to invest in Australia for Chinese, 2014. Parrino, R, Kidwell, D, Murray, J, Fundamentals of corporate finance, Google eBook, 2012. Seal, J & Penrith, D, Live & work in Australia, 2008. Read More