complete-notes.pdf - 200910​ ​Financing Enterprises 1...

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200910 Financing Enterprises 1. Forms of Ownership 1.1 Define sole trader and explain the six advantages of this ownership model. Sole Trader: is a business which is owned and operated by a single person. Advantages: Simplicity : ABN and registering for goods and services tax (GST) Single layer of taxation: profit goes straight to the sole trader, treated as personal income. Privacy Fewer limitations on personal income: all the after tax profits are kept for the business rather than distributed to shareholders. Personal satisfaction: taking risks and enjoying the rewards. Flexibility and control : makes own decisions, setting own hours. Disadvantages: Financial liability : owner is responsible for any damages or debts incurred by the business (unlimited liability). If the business is not insured then the owner’s personal assets, such as home, car and investments could be lost. Demands on the owner : potential to working hours and inability to discuss business problems with partners. Expertise is required in accounting, marketing, information technology, business law and many other fields. Resource limitations : Inability to obtain additional funds from lenders and investors, hence lack of capital. No employee benefits for the owner : do not get paid vacation time, sick leave, health insurance or any other benefits that many employers are offered. 1.2 Define partnership and explain the six advantages of this ownership model. Partnership : owned by two or more people but is not a corporation. General partnership: all partners have joint authority to make decisions for the firm and joint liability for the firm’s financial obligations. Limited partnership: do not participate in the running of the business, therefore they have limited liability - maximum amount they are liable for is what was invested in the business. Advantages: Simplicity: similar to a sole trader however a partnership agreement is sensible to protect the individuals. Single layer of taxation: profit is split between the partners determining on the percentages agreed on. More resources : amount of money to launch, operate and fewo the business is increased. Cost sharing Broader skill and experience base Disadvantages: Unlimited liability Divided profits and authority 200910 Financing Enterprises [1]
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Potential for conflict Limited life The partnership agreement A carefully written partnership agreement can maximize the advantages of the partnership structure and minimize the potential disadvantages. Partnership agreement should address investment percentages, profit-sharing, percentages, management responsibilities and other expectations of each owner, decision-making, strategies, succession and exit strategies.
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