ACCG101 Accounting 1B
Report on Types of Business Ownership
By Regina Nunag
Introduction
In this report, I will be outlining different types of ownership, different sources of finance and the factors considered if you want to borrow money from the bank.
Types of Ownership
There are three different kinds of ownership and they are Sole Trader, Partnership and Proprietary Company.
A. Sole Trader
Sole Trader means only one man or woman owns the business. Being a sole trader means that you give up most of your money or other assets such as motor vehicles or land in order to start a business. The owners risk-take, stand to make a profit and take most of the responsibilities in the business. An example of a sole trader in Armadale is Han’s Café.
Law, licence and qualifications also limit sole traders. Firstly, according to the law, sole traders are not allowed to operate a bank or insurance firm. Secondly, businesses such as hotels and taxis need licences to operate. Lastly, you need to have professional qualifications if you want to operate as a doctor, dentist or accountant.
Advantages
Sole Traders have all the control over the business.
This kind of business is easy to build, with no restrictions or formalities. Also, business dealings do not have to be shown to the public, except those reports needed by the government.
Disadvantages
Although Sole Traders receive all the profits, they are liable for the business’ debts. The owner’s assets can be sold to pay off debts. The success of the business depends on the owner’s wealth, abilities and talents. Sole Traders will find it difficult to take annual holidays or sick leave because it will be hard for them to find replacement. The business will be terminated if the owner dies or has a serious illness.
B. Partnership
Partnership is composed of 2 – 20 people who signed an agreement to be in a partnership. A partnership agreement includes the aims of the partnership, sharing ratio of profit or loss and procedures to be followed if the partner died or retired. To some extent, some partnership like accountancy composes of up to 100 people. Under the Business Names Act, if the name of the business does not contain all the names of the partners, it must be registered. An example of a partnership in my area is MKG Partners led by Paul Masiello, David Kapilar and Melissa Gan.
Advantages
Partnership is an ideal type of ownership because you have someone to help you with your finance and running of the business. The workload is also shared.
Your partner’s abilities and special skills can also help your business grow. This type of business is easy to build and not as expensive as a Proprietorship Company. Business dealings don’t have to be shared to the public except those needed by the government. If one partner is sick or on holidays, the other partner takes over the business.
Disadvantages
If the partnership is in debt, you both have to pay for the liabilities. If one of your partners can’t pay for it, you have to pay for him. For example, H.J & M.D Partners owes the bank $115,000 but H.J only have $15, 000 on his bank account. M.D has to pay $100,000 or else the business will be bankrupt and may be forced to close down. If your partner dies or retires, your business will end unless there is an agreement that it will continue. Partners can have misunderstandings, making the partnership unworkable.
C. Proprietary Company
Proprietary Company is a private company that is composed of one shareholder and a maximum of 50 non-employee shareholders. It is recommended for people who want to protect their assets. These types if businesses must have the word ‘Proprietary’ or ‘Pty’ in the company name. The word ‘Limited’ or ‘Ltd’ is included in the name to signify that the company has limited liability. An example of a Proprietary company in my area is Dick Smith Electronics Pty Limited.
Advantages
Proprietary Company has indefinite life. It will only be closed down if the shareholders want to or by an order of a court of a law or by Australian Securities and Investments Commission. Shareholders have a limited liabilities meaning if the company is in debt, you only have to pay the amount of shares you owe.
Disadvantages
Proprietary Company is very expensive and time-consuming compared to Sole Trader and Partnership. This type of business is also subject to many government regulations.
Sources of Finance
There are a number of options available to a person to pay for the resources needed to start a business. These options are listed below.
a) Capital
Capital is also known as the ‘Owner’s Money’. Owners usually contribute a lot of money in order to start a business.
b) Business Angels
Business angels are people who agreed to invest money to the business in exchange for a share in ownership. These angels may be a friend, acquaintance or an independent investor.
c) Loan from friends and family
Some people may borrow money from their friends or family. The length of the loan or any interest rates depends on the agreement of both parties.
d) Credit card
Credit card is a short-term source of finance and should be paid back within a period of few months.
e) Bank Overdraft
Bank overdraft is a loan made by the bank that allows you to withdraw up to $10,000 more than what is deposited in your bank account. It is a short-term source of finance and must be paid as soon as possible.
f) Factoring
Factoring is when someone buys off the debts from you for a lower price. For example, five people each owes you $200 but you need the money right away. Someone may give you $800 in exchange of the five persons’ debts.
g) Lease Finance
Lease finance is an agreement for renting an item of plant and equipment for a number of months or years. There are two types of leases. Finance lease means that you can buy the item after the end of the lease agreement while Operating lease means that the item must be returned at the end of the lease agreement.
h) Term Loans
Term loan is a source of finance from the bank. It must be repaid over a number of years. The bank has a number of factors to consider whether or not it will approve the loan to the small business owner.
Factors Considered When Approving Finance
As stated from above, the bank has a number of factors to consider deciding to grant the loan to a person. These factors are listed below.
Business Plan
Having a business plan is essential when starting a new business. Business plan sets out in detail how the future of the business will run, identifies the demand market of the business and how this business will fit in the market.
Collateral Available
Collateral is also known as assets. It is a form of security that a person can provide to repay the loans in case the business fails.
Ability to repay the loan
The bank will look at the cash inflows and cash outflows of the business to see if they will meet the regular loan repayments.
Conclusion
By the end of this report, I hope you now understand that there are three different kinds of businesses and they are Sole Trader, Partnership and Proprietary Company each having its own advantages and disadvantages. There are also a number of sources of finance available to a person wishing to start a new business. However, there are factors considered whether or not the bank will approve the loan you’re wishing to have.
By Regina Nunag
Introduction
In this report, I will be outlining different types of ownership, different sources of finance and the factors considered if you want to borrow money from the bank.
Types of Ownership
There are three different kinds of ownership and they are Sole Trader, Partnership and Proprietary Company.
A. Sole Trader
Sole Trader means only one man or woman owns the business. Being a sole trader means that you give up most of your money or other assets such as motor vehicles or land in order to start a business. The owners risk-take, stand to make a profit and take most of the responsibilities in the business. An example of a sole trader in Armadale is Han’s Café.
Law, licence and qualifications also limit sole traders. Firstly, according to the law, sole traders are not allowed to operate a bank or insurance firm. Secondly, businesses such as hotels and taxis need licences to operate. Lastly, you need to have professional qualifications if you want to operate as a doctor, dentist or accountant.
Advantages
Sole Traders have all the control over the business.
This kind of business is easy to build, with no restrictions or formalities. Also, business dealings do not have to be shown to the public, except those reports needed by the government.
Disadvantages
Although Sole Traders receive all the profits, they are liable for the business’ debts. The owner’s assets can be sold to pay off debts. The success of the business depends on the owner’s wealth, abilities and talents. Sole Traders will find it difficult to take annual holidays or sick leave because it will be hard for them to find replacement. The business will be terminated if the owner dies or has a serious illness.
B. Partnership
Partnership is composed of 2 – 20 people who signed an agreement to be in a partnership. A partnership agreement includes the aims of the partnership, sharing ratio of profit or loss and procedures to be followed if the partner died or retired. To some extent, some partnership like accountancy composes of up to 100 people. Under the Business Names Act, if the name of the business does not contain all the names of the partners, it must be registered. An example of a partnership in my area is MKG Partners led by Paul Masiello, David Kapilar and Melissa Gan.
Advantages
Partnership is an ideal type of ownership because you have someone to help you with your finance and running of the business. The workload is also shared.
Your partner’s abilities and special skills can also help your business grow. This type of business is easy to build and not as expensive as a Proprietorship Company. Business dealings don’t have to be shared to the public except those needed by the government. If one partner is sick or on holidays, the other partner takes over the business.
Disadvantages
If the partnership is in debt, you both have to pay for the liabilities. If one of your partners can’t pay for it, you have to pay for him. For example, H.J & M.D Partners owes the bank $115,000 but H.J only have $15, 000 on his bank account. M.D has to pay $100,000 or else the business will be bankrupt and may be forced to close down. If your partner dies or retires, your business will end unless there is an agreement that it will continue. Partners can have misunderstandings, making the partnership unworkable.
C. Proprietary Company
Proprietary Company is a private company that is composed of one shareholder and a maximum of 50 non-employee shareholders. It is recommended for people who want to protect their assets. These types if businesses must have the word ‘Proprietary’ or ‘Pty’ in the company name. The word ‘Limited’ or ‘Ltd’ is included in the name to signify that the company has limited liability. An example of a Proprietary company in my area is Dick Smith Electronics Pty Limited.
Advantages
Proprietary Company has indefinite life. It will only be closed down if the shareholders want to or by an order of a court of a law or by Australian Securities and Investments Commission. Shareholders have a limited liabilities meaning if the company is in debt, you only have to pay the amount of shares you owe.
Disadvantages
Proprietary Company is very expensive and time-consuming compared to Sole Trader and Partnership. This type of business is also subject to many government regulations.
Sources of Finance
There are a number of options available to a person to pay for the resources needed to start a business. These options are listed below.
a) Capital
Capital is also known as the ‘Owner’s Money’. Owners usually contribute a lot of money in order to start a business.
b) Business Angels
Business angels are people who agreed to invest money to the business in exchange for a share in ownership. These angels may be a friend, acquaintance or an independent investor.
c) Loan from friends and family
Some people may borrow money from their friends or family. The length of the loan or any interest rates depends on the agreement of both parties.
d) Credit card
Credit card is a short-term source of finance and should be paid back within a period of few months.
e) Bank Overdraft
Bank overdraft is a loan made by the bank that allows you to withdraw up to $10,000 more than what is deposited in your bank account. It is a short-term source of finance and must be paid as soon as possible.
f) Factoring
Factoring is when someone buys off the debts from you for a lower price. For example, five people each owes you $200 but you need the money right away. Someone may give you $800 in exchange of the five persons’ debts.
g) Lease Finance
Lease finance is an agreement for renting an item of plant and equipment for a number of months or years. There are two types of leases. Finance lease means that you can buy the item after the end of the lease agreement while Operating lease means that the item must be returned at the end of the lease agreement.
h) Term Loans
Term loan is a source of finance from the bank. It must be repaid over a number of years. The bank has a number of factors to consider whether or not it will approve the loan to the small business owner.
Factors Considered When Approving Finance
As stated from above, the bank has a number of factors to consider deciding to grant the loan to a person. These factors are listed below.
Business Plan
Having a business plan is essential when starting a new business. Business plan sets out in detail how the future of the business will run, identifies the demand market of the business and how this business will fit in the market.
Collateral Available
Collateral is also known as assets. It is a form of security that a person can provide to repay the loans in case the business fails.
Ability to repay the loan
The bank will look at the cash inflows and cash outflows of the business to see if they will meet the regular loan repayments.
Conclusion
By the end of this report, I hope you now understand that there are three different kinds of businesses and they are Sole Trader, Partnership and Proprietary Company each having its own advantages and disadvantages. There are also a number of sources of finance available to a person wishing to start a new business. However, there are factors considered whether or not the bank will approve the loan you’re wishing to have.
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