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Published: Fri, 02 Feb 2018
A Business Entity Formation and Structure
To set up a sole trader business, an individual could inform the government agencies of his intentions to go self-employed and he could start trading straight away.
In this case, owner would need to have licenses such as liquor license which is to sell and serve alcohol, or an APRA license which is a license to play pre-recorded music over a sound system. In order to obtain any of the licenses, the owner would have to fulfill certain requirements, fill out certain paperwork annually and pay certain fees on a regular basis. In the case of Australia, the best way to find out which operating licenses a company needs is to visit the Business License Information Service website for each state.
However, some licenses may specify and require that the owner ought to comply with a specified Code of Practice which is a set of standard or guideline that outline certain behavior and performance that is necessary in certain situations in a particular industry. These codes which can be either compulsory or voluntary are often developed in consultation with industry.
In the case of Australia, if the owner wants to operate under an actual business name, he ought to register the business name in the state where the business company will be setting up. If the owner were to operate his business in multiple states, he would have to register his business name in every state where the business would be located. Regardless of whether to run the business using personal name or a registered business name, the owner will need to obtain an Australian Business Number (ABN) and a Tax File Number (TFN). Moreover, if the business’s gross income were to be exceeding $75,000, the owner would have to register for Government and Services Tax (GST).
A sole trader is cheap and easy to start up because it only requires the owner to fill up a few forms. Besides that, the sole trader does not need to set up a bank account nor inform the tax offices to start trading. It is a type of business entity whereby it is owned and run by one individual. The operation can be easily set up and began immediately. Not only that, the owner could rapidly adapt to changes in his business with minimal bureaucratic changes required and the owner has full control over his business and accounting affairs and there is no legal distinction between the owner and business. All income made through the business is counted together with the owner’s own personal individual income.
Besides that, sole trader business contains greater and personal risk compared to a limited liability company. In this case, he is personally liable for any damages incurred by the business such as debts and obligations of the business. Ultimately, a sole is a legal entity because the law recognizes the owner, he can sign contracts, sue and be sued, own property, take out loans and have bank accounts. So, an individual starts a business like as if buying his own business, paying from his personal bank account or a separate business account to make business purchases.
For a sole trader business, in the case that if the owner did not repay his mortgage, the mortgagor could sell his house and then sue for any shortfall because the legal system does not see any difference between the business and the owner’s personal assets. Whereas if the owner passed away, it means that the business have came to an end unless the owner provides for the assets to be passed on in a will. The owner is also not allowed to pass on his shares in the business as he could with the business. Instead, he is only allowed to borrow money against his personal assets.
A partnership exists when two or more people run a business with the same goals which is to make profits and are equally responsible for the decision made on behalf of the business. In the case of banking business, a difference is that the minimum partners are two whereas the maximum number of partners is ten. The partners of the company can choose to operate under their own names or a registered business name. In the case of Australia, the cost of registration is about $200, depending on the location of the registration is made. Regardless of whether to run the business using personal name or a registered business name, the owner will need to obtain an Australian Business Number (ABN). Ultimately, a partnership can be remarkably cheap to set up as well.
For a partnership company to be set up, it is a must to have contractual relation between owners. This means that there must be an agreement between the partners of forming up the partnership company. A written agreement is necessary stating the terms and conditions of conducting the business without harming the interest or any party. It covers issues such as:
The amount of money each partner contributes into the partnership.
Ways of handling disputes
Different roles and responsibilities of each partner.
Consequences of business if sold
Requirements to provide financial reports
How partners can leave the partnership and the consequences
Therefore, all profits and liabilities are shared among partners. In this case, there are also pitfalls in partnership businesses. For instance, partners share joint liability for one another’s actions. In a partnership company, partners’ liability is unlimited as they are shared equally between each and every one of them. If there were to be any damages incurred in the business, for example, the business cannot pay its bills, creditors could turn to the partners’ personal assets to pay up the debts.
Moreover, partners must file a Partnership Return with the tax office which includes a profit and loss statement. For partnership business, tax is paid individually by partners on the profits as part of their personal income tax because they have their own tax file number. Unfortunately, partnership has the chance to minimize tax by allocating the lion’s share of profit to the partner with the lowest marginal tax rate. It is most commonly done by companies set up by a husband and a wife where one of them may also have another job. This may in turn allow the couple to minimize their overall tax bill.
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