Business Types

 by Tash Hughes of Word Constructions

For anyone who’s considering setting up their own business, there’s a heap of decisions yet to be made. One of the earliest decisions to be made, although it can be changed later with some effort, is the type of business to operate.

 The major types of business ownership are

v     Sole trader

v     Partnership

v     Company

v     Cooperative

v     Government Bodies

v     Clubs, societies and associations

The selection of business type will affect how the business is structured and what rules may apply to the business.

 Sole trader

As the name implies, this business is owned by only one person. The business may employ staff, but there is a single name to the business. Sole traders include many tradesmen and professionals working for themselves, as well as some small retailers.

 Characteristics of a Sole trader are:

v     Relatively easy and cheap to establish

v     Owner has total control

v     Owner receives all profits

v     Owner is personally responsible for all debts and losses

v     Difficult for owner to take time off for holidays or illness

v     Often harder to get financing assistance

v     Business ceases upon owner’s death

v     Reports aren’t required by outside parties unless applying for loans and tax returns

 Partnership

A partnership is any business with between two and twenty owners. A partnership can be formed without any particular legal processes being followed; however, it is usually wise to have a written agreement before commencing business. The agreement can include such things as division of profits/losses, exit procedures and holiday issues.

 Characteristics of a partnership are:

v     Skills and resources of owners are pooled

v     Can reduce tax liabilities within a family

v     Also relatively easy and cheap to establish

v     Financial liabilities shared between owners

v     Potential for conflict between owners is very real

v     Automatically ends with death of one partner in most cases

 Company

A company is a separate entity to its owners and operates under its own names even if the ownership is altered. To establish, or finish, a company or corporation, various legal and legislative processes are required. The owners of a company are called shareholders and the company is managed by Directors.

 There are two categories of company – public and private. A public company is usually traded on the share market and the public is able to buy shares. A minimum of five shareholders is mandatory. Examples are BHP, Coles Myer and Virgin Blue.

 A private company are not usually listed on the stock exchange and have restrictions on who can buy shares. Family companies are frequently private.

 Characteristics of a Company are:

v   Owners and company are separate legal entities, so shareholders aren’t liable for company debts and losses

v     Companies have different tax rates to individuals and this can be an advantage to many businesses

v     Selling shares to the public can raise funds for establishing the company

v     It takes two to four weeks on average to establish a company

v     Setting up a company will cost approximately $1,000 in fees

v     Company law is complex and involved; shareholders may need to pay solicitors, accountants and managers to assist with these issues

v     Ability to sell the company as an entity

v     Ability for changes in ownership without having to establish a new business

 Cooperative

This is similar to a company but is formed by a group of people with a common goal to work together. Profits made by co-operatives are either distributed between the members or used to improve the cooperative in some way.

 Co-operatives are covered by the Co-operatives Act and need to adhere to various rules and regulations under the Justice Department.

 Government Bodies

Some Government departments are set up as entities to carry out certain functions for the community. For instance, the ATO (Australian Tax Office) and Centrelink operate as businesses although they are government owned and controlled.

 Clubs, societies and associations

These are groups of people with related interests establishing a group to cater to that interest without the main intent being profit. Categories include sporting clubs, cultural clubs, charity groups, employer/employee associations, political associations, pastime clubs, support groups and professional associations.

 Many such groups are incorporated which means that they are a company so that the club and members are separate legal entities.

 Members have a limited number of shares they can own and they are entitled to discounts or sole usage of the co-operative’s services/facilities. They have similar reporting requirements to companies and must adhere to strict conditions for tax concessions.

Tash Hughes is the owner of Word Constructions and assists businesses in preparing all written documentation and web site content. Tash also writes parenting and business articles for inclusion in newsletter and web sites.