There are four types of business in Australia.
- Sole Traders,
- Companies, and
This article explains sole traders, partnerships and companies. An explanation of trusts is not included.
Types of Business: Sole Trader
Sole traders don’t pay tax on profits, and they don’t have to produce audited statements each year. The business owner (the sole trader) pays personal income tax on the business profits.
Disadvantages of being a Sole Trader
- Sole traders are personally responsible for all debt incurred by the business.
- If the business goes bankrupt the sole trader does too. This is because the law, classifies you and your business as one and the same when you are a sole trader.
- Raising capital can also be challenging. As the only owner your income capacity is what the bank will evaluate when assessing your loan application.
Types of Business: Partnership
A partnership is a business with two or more owners. Partnerships are also considered easy to establish. Because all thats required is an ABN, a business name and a partnership agreement. There aren’t very many rules or regulations that apply to partnerships, and they are not required to produce audited statements each year.
Disadvantages of a Partnership
Partnerships have a limited life span because when the business may dissolve when the partnership does. Each partner has unlimited liability, which means each partner is responsible for the entire debt incurred by the business. Each partner is also able to enter into contracts on behalf of the business, with or without the agreement from the other partner/s.
Types of Business: Companies
There are many types of companies, some are private and some are public.
Private companies are either limited or unlimited by shares. Public Companies can be limited by shares, limited by guarantee, unlimited by shares or have ‘no liability’.
Advantages of establishing a company
- Shareholders are liable for the value of their shares.
- Shares are bought and sold while the company trades with no disruption.
- Shareholders can’t enter into contracts that bind the company.
- Professional management structures are in place. Large public companies are managed by a board of directors and a managing director.
- A company has an indefinite life and does not cease to function each time a shareholder sells, goes bankrupt or becomes ill.
- Companies are separate legal entities. So the owners are not held liable to all expenses and debts incurred.
Disadvantages of establishing a company
- Tax is paid on company profits.
- Large companies are required to produce audited financial statements.
- Ownership and operational control is separated.
Types of Companies
Limited by Shares
This type of company can be public or private and can be identified by having ‘pty ltd’ at the end of their business name. The liability of shareholders is limited to the value of the shares they own and the number of shareholders is capped at 50.
Small companies don’t have to produce audited financial statements. The criteria for a ‘small’ proprietary company is:
- Sales of less than $25 million per annum,
- Assets of less than $12.5 million, and
- Less than 50 employees.
In contrast, large companies do have to produce audited financial statements. Companies that meet the following criteria are considered to be ‘large’:
- Sales over $25 million per annum,
- Assets greater than $12.5 million in value, and
- Over 50 employees.
Limited by Guarantee
Limited Guarantee companies are public. Each shareholder provides a guaranteed amount of money in the event of liquidation. Because of this, limited Guarantee companies aren’t generally used for trading, they’re mostly used for sporting clubs and charities. They can be identified by having ‘ltd’ in the company name.
Unlimited liability means that shareholders are liable for all debts. Because of this, they aren’t very common. They are however used to establish mutual funds in some circumstances. Unlimited liability companies can by public or private.
No Liability (NL)
No liability companies are restricted to mining. They can be identified by having ‘NL’ in the company name. Because they are ‘no liability’, shareholders are not liable for debts or unpaid shares if the company is liquidated.