Case Study – Comparing the advantages and disadvantages of several different business structure
In order to form a business and run it effectively, a business structure needs to be followed. With business structure, concerns such as the ability to earn money, amount to be paid in taxes, personal liability and paperwork one needs to consider are managed efficiently(Freudenberg & Boccabella, 2014).
The different types of business structure are sole trader or proprietorship, partnership, company, corporation and trust. Through this report, business structures, advantages and disadvantages of the business entities and different form of legal structures, legal problems to the businesses and recommendations to these problems would be evaluated.
Literature review related to the business structures and their rules
Sole trader: Sole trader is the form of the business structure usually deployed when there is a minimum capital investment and the business is small. The sole traders have the entire control of their business, assets, management and the profits or losses(Halabi, et al., 2010).
This provides the highest level of autonomy to the business owner and has very few formalities and regulations to emphasis on, thus making the business relatively less expensive to operate.
In order to operate in Australia, the sole traders need to have ABN, registration of business name and normally taxed as individuals (Business.gov.au, 2019). Sold traders enjoy a tax-free threshold of $ 18,200 in Australia.
Partnership: A partnership is formed when two or more individuals plan to formulate a business(Cole, 2013). These individuals or partners share the management duties and control the business operations with others.
In this business structure, partners have the luxury of sharing the business responsibilities and each partner needs to file the income taxes based on their profits or losses. This form of business structure does not guarantee partners’ asset protection.
The partners in the partnership business structure are liable for any kind of lawsuits filed against their business. In this business structure, ABN and TFN need to be filled in for carrying out the business dealings(Business.gov.au, 2018). The partnership needs to be registered for GST in Australia if their annual income exceeds $ 75,000.
Company: Company is another legal entity which is quite different from the partnership or sole trader structure(Rimmer, et al., 2014). The owners of the company are its shareholders and this business structure can limit theliability of the shareholders and they would not be held responsible for the debts of the company.
This is often considered as the complex business structure as the administrative and set-up costs are higher. For the registration, companies in Australia need to contact with ASIC. The officers and directors of the company need to comply with the regulations of Corporations Act, 2001.
The company needs to be registered for GST if its annual turnover exceeds $ 75,000 and $ 150,000 is the registration limit for the non-profitable companies(Business.gov.au, 2018). The company is also required to lodge the annual company tax return with ATO.
Corporation: Corporation is another business structure which offers its officers, directors and shareholders limited liable protection from the obligations of the company(Deakin, 2011).
The debts of the shareholders do not cross the investment made by them in the firm. This business structure also allows the owners to raise fund for the business by issuing stocks and bonds.
The rules associated with corporations ensure that the firm must file its business tax return with IRS and pay income taxes based on the profit made by the firm at the government tax rate. The shareholders need to pay the charges of income taxes on the dividends when the dividends being distributed to the shareholders.
Trust: It is formed when an individual, group or an organisation is the rightful owner of assets or properties which can benefit others(Miller, 2010). Trust is a business structure which can be costly to operate and set-up.
This form of the business structure needs a formal trust deed which highlights how the trust is being operated(Business.gov.au, 2018). The trustees are required to take up the yearly administrative works and they are often regarded as the legal custodians of the assets or the properties and hold accountable for the benefits provided by the trusts to the beneficiaries.
The trustees are guided by the Trustee Act, 1936 (Sa.gov.au, 2018). The trusts are often categorised as trusts for people, trusts for charitable help and trusts for non-charitable help.
Advantages and disadvantages of the business entities and different form of legal structures
Sole trader: The advantage of sole trader business structure is it is inexpensive and easy to form as the legal costs are only restricted to getting the required permits or license(Halabi, et al., 2010).
Another advantage of sole trader is that it does not allow the business to be taxed separately. The disadvantage of the sole trader business structure is an unlimited personal liability as this business structure is not a legal entity, therefore, the owner is held accountable for all the liabilities and debts.
The other disadvantage is this business entity finds it hard to obtain capital for the business due to lack of credibility.
Partnership: The advantage of this business structure is it is inexpensive and easy to form as the cost is distributed among the partners(Cole, 2013). The financial commitments and the operational activities are being shared by the partners.
The fact that partners are not held accountable for their own actions and also for the debts is one of the major disadvantages of the partnership. Disagreements among partners can create conflicts and lead to disruption of the operation of the firm, this can be viewed as another disadvantage of this business structure.
Company: The advantage offered by this entity is being a separate entity, it limits the financial liabilities of the owners(Rimmer, et al., 2014). The other advantages are it provides tax advantages and enhances the credibility of the business.
The disadvantages are this business entity is minutely regulated. It also requires extensive record and is generally more expensive as compared to other forms of business entities.
Corporation:The advantages of this business structure are a limited liability, the capability to obtain capital and corporate tax treatment(Deakin, 2011). With limited liability in corporation, the personal assets of the shareholders are protected in circumstances of business debts.
The sale of stocks helps the business to raise the capital. Taxes are being paid by the owners of corporations only on the corporate profits made by them. The disadvantages of this business entity are double taxation, additional paperwork and limited protection.
The corporations are taxed double, first on the corporate tax rate based on the net profit made and second, taxes on the individuals or shareholders tax returns. The corporation would not be able to give its shareholders limited protection until it is being capitalised.
The corporation needs to follow a legal structure and pay tax return each year which requires additional paperwork.
Trust: The advantages of trust entity are income can be distributed discreetly to its beneficiaries, lowest marginal tax rates and more privacy as compared to other forms of entity(Miller, 2010).
The disadvantages of trusts are highly expensive, complex to form, issues might occur when an attempt to alter or dissolve the running trust is made, restriction of powers of trustees by deeds and required distribution of profits to its beneficiaries on yearly basis.
Recognition of different legal problems to the businesses and suggestion related to the recommended course of action
Sole Trader: Legal issue such as personal assets are under risks if things do not go according to the plan as the sole trader entity has unlimited liability(Business.gov.au, 2018).
As the sole trader or proprietorship has only one owner, it is most likely to face this issue. Therefore, in this case, the credibility of the owner needs to be strong enough so that banks or investors can be approached to for loans or it can be changed to other forms of business structure such as partnerships or company where there are many owners and the liabilities are also distributed equally among them.
Another legal issue faced by the sole trader business entity is the difficulty to change ownership when considering selling the business as valuable assets like goodwill cannot be separated from the individual. It can be managed by changing the business entity to other forms.
Partnership: Legal issue due to conflicts among partners can disrupt the operations of the business. A well-written partnership agreement which underlines the protocols of the business might avoid disputes and conflicts among the partners.
This partnership agreement comprises of name and address of each individual who is a partner and their contribution such as property, services and cash to the organisation.
Legal issue such as each partner is held responsible for the debts of the business and this issue can be mitigated by the proper financial management of the firm. If the firm has an annual turnover of more than $ 75,000 and does not register for GST then it might also lead to legal issue (Business.gov.au, 2018).
This problem can be solved by registering for GST. If the firm has not been lodging partnership tax return with ATO then it also might result in a legal issue and this can be solved by lodging the partnership tax return with Australian Taxation office every year.
Company: Legal issue would occur if the company fails to obey and comply with the protocols stated under the Corporations Act, 2001. This issue can be sorted out by following the protocols mentioned in the Corporations Act.
If the company has not been lodging company tax return with Australian Taxation office then it also might result in a legal issue and this can be solved by lodging the annual company tax return with ATO every year (Business.gov.au, 2018).
If the company has an annual turnover of more than $ 75,000 and does not register for GST then it might also lead to the legal issue. This problem can be managed by effectively enrolling itself under GST.
Corporation: Legal issue such as the wrong form of business structure, not having business licenses, late payments, frauds in taxes, violation of rights of employees and violation of contracts.
Wrong form of business structure leads to many problems such as an error in taxes, liabilities and obligations of the owners or partners cannot be clearly stated.
This can be mitigated by selecting the right business structure. Not having business licenses is a legal offense, therefore, it is highly significant that corporations acquire proper licenses before starting to operate their businesses(Drutman, 2015).
Late payments to vendors or employees can also lead to legal problems, therefore, it is required to be eradicated by following a proper framework where each individual gets their payment within due time. Frauds in taxes is also a legal crime and therefore taxes are needed to be paid according to GST and in consultation with taxation office.
Violation of contracts and rights of employees are also legal offense and this needs to be handled carefully by following the government and corporation protocols related to the rights of the employees.
Trust: Legal issue such as non-compliance with the trust deed might become a massive problem for the trust(Business.vic.gov.au, 2019). Not having a TBN or ABN might also lead to legal problems and hence, the trust needs to have its own TBN and ABN.
Legal issue might occur if the interest of the beneficiaries mentioned in the trust deed is not looked after. The trustees need to ensure the interest of beneficiaries is well taken care of.
This report highlights the different business structures such as sole trader, trust, partnership, corporation and company.
Each of the stated business structures has their advantages and disadvantages and it depends on the owner on which form of business entity they would like to stick to after evaluating the pros and cons and the legal issues it might offer. Sole trader and partnership are inexpensive and easy to form whereas trust, corporation and company require substantial capital to form.
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[Accessed 29 July 2019].
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