Lecture Week 2 - Week 2 Business Structures, Ethics and...

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1 Week 2 Business Structures, Ethics and Corporate Governance Text: Ch.2 (LO 1-7, 9-10) excl. financial statements Ch.3 (LO 1-7) Lecture Exercises: 3.6, Corporate Governance Self-Study Exercises: 2.3, 2.4, E2.1, E2.4, E2.6, E2.7, E2.8, E2.10, E2.12, 3.10, P3.4, P3.9 Announcements: One more week to form groups Use the Bb learning resources ! Outline Basic Forms of Business Structure Sole Trader Partnership Company Trust Ethics in Business and Accounting Corporate Governance Corporate Social Responsibility The Economic Entity Assumption The activities of an economic entity are measured by business transactions and are kept distinct from the activities of the owner(s) who originally established or invested in the business Different types of economic entities imply different degree of involvement and liability e.g. in case of liquidation, then depending on the type of business structure, the extend of default will be contained within the economic entity or extended to the owner(s) individual assets as well
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2 Basic Forms of Business Structure Sole Trader (e.g. corner shop, beauty saloon, flower shop, a plumber, an individual consultant) Partnership (e.g. as above but with more than one individual). Partnerships are more common for professional services such as accountants, solicitors and doctors Company (private vs. public companies) Trust (an Australian favourite) Sole Trader An individual who decides to open a business: Legal status : not separate legal entity to owner Management : the owner fully controls and manages the business Liability : the owner is fully liable for all debts, and liability extends beyond the business Equity : the sole owner establishes the business and invests all equity Profits/losses : claimed entirely by owner Taxes : pooled in individual tax return Pros of Sole Trader Quick , easy and cheap to establish (with minimal paperwork; apply for registration, get an ABN and a TFN and you are in business) The formal GAAP does not apply to the level of the sole trader ( accounting is much easier ) The owner includes all profits or losses to her/his own individual tax return The owner is the ‘ boss ’ and therefore makes all decisions and she/he claims all profits (and losses)
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3 Cons of Sole Trader Personal liability for all debts, legal actions etc. In another words, she/he has unlimited liability e.g. an electrician is found guilty for installing faulty wiring that caused an electrical fire. If the business assets are not enough to cover the damage, then she/he must liquidate individual assets and take mortgages Sole traders pay more tax due to higher individual marginal tax rates, compared to company rates Limited by skill (limited expansion), and limited by time (sole traders are ‘slaves’ to the business) Limited investment : own pocket (cash), and restricted bank loans (given limited collateral)
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This note was uploaded on 09/06/2011 for the course ECON 1001 at University of Sydney.

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Lecture Week 2 - Week 2 Business Structures, Ethics and...

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