From: An accountant
Subject: Recommendation on the organisational type
This report is prepared solely for the purpose to inform David of the most suitable organisational form as per his scenario. The other part will look for the essential characteristics that are necessary to characterise asset and liabilities under their respective classification.
a) Normally, there are four broader types of business forms/ types (Business Structures AU, March 17):
1) Sole proprietor – this is when David will be his own boss, he will set up a company under his full control – but will still have unlimited liability
2) Partnership – David can introduce another individual who he trusts in his venture. These two individuals will form synergies and distribute profit and loss evenly or in (predetermined) pro-rata basis – it could be on the basis of capital introduction too, but still has unlimited liability
3) Private Limited Company – this is where a company is incorporated as per Australian standards and shares are only available to family, friends, and relatives. These members fill up a complex documentation for incorporation and are rewarded with limited liability.
4) Public Limited Company – this is like private limited company, except for the shares, those are traded on ASX.
5) Trust – as the name implies, the trustee is responsible to manage the operations of the business.
It is important to comprehend the concept of limited and unlimited liability. Limited liability is when the personal possession of the owner of the company is not responsible for the loss made. This implies that business and owner are separate entity. Unlimited liability is when the owner of the company is liable to pay the debt in terms of their personal possession. The bank loan of $40,000 could be paid (by David personal belongings) even if the company goes insolvent.
If David operates as a sole proprietor as he is doing now, he “solely” will be legally responsible for all aspects of his business, where he will not share profits, like partnership. The biggest disadvantage is that the loss will not be shared either and David will have to face unlimited liability consequences if bank’s loan has not been paid in full (with interest).
For partnership, David can opt limited partnership (where debt repayment is limited to company’s assets and no personal liability is there), general partnership where the unlimited liabilities are distributed on a pro-rata basis. Incorporated Limited Partnership (ILP) is one where partners have limited liability, but one general partner will be responsible for unlimited liability. The benefits are these are quick to set up, with lower reporting arrangements, and a separate TFN is needed with no income tax to be paid. However, it is time consuming and profits have to be shared by David.
David should be incorporated if GST is $75,000 or more. This means David will follow Corporation Act 2001 regulations, filing corporation tax every tax year to the ATO. The AISC status will be updated within 28 days or 4 weeks’ time. David will have to keep updated records and maintain it which is time consuming. The biggest advantage is limited liability because of different status (separate legal identity).
For the best advice, we would require to see David’s GST if an incorporation has to be formed, for now, it is assumed his revenue is below $75,000. A private limited company would mean more laws and shares available to closest knit. If a partnership is formed, the bank debt would be shared too and could be capped by limited liability.
b) Assets – these are future economic benefits that the entity owns and controls as a result of past events or past transactions. So the three characteristics of assets are:
1) Future Probable economic benefits
2) that are controlled by the organisation or an entity,
3) as a result of prior events.
These assets could be either current (for a period of 12 months) or long-term assets based on more than 12 more or a year period.
Liabilities, on the other hand, is a present obligation that has to be fulfilled by the responsible individual or an entity that entails:
1) Probable economic benefits resources outflow embodying economic benefits,
2) Present obligation,
3) as a result of past event.
Similarly, there are current liabilities that are to be settled in 12 months’ period, or long term liabilities that are to be settled based on more than a year.
Business structures. (2020, March 17). Retrieved from https://www.business.gov.au/Planning/Business-structures-and-types/Business-structures
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