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3.5       You are a friend of Lucy Lu who is thinking about starting a business to sell her handmade quilts. Advise Lucy on the four factors that should be considered before deciding on what form of business structure to operate under test bank.

Four factors that one should consider before deciding on what form of business structure to operate under:

(i)         Whether the owner will be the only contributor of capital to the entity;

(ii)        The degree of risk that the owner(s) are willing to take with the entity

(i.e.) whether the entity should have limited or unlimited liability;

(iii)       The potential for growth of the entity in the future for test bank;

(iv)       Issues of taxation i.e. sole trader/partnership forms do not pay tax on the entity’s profits. The owner’s will include their share of the entity profit in their individual taxation returns.

3.6       Explain with examples the major differences between a company limited by shares (such as JB Hi-Fi Ltd) and a proprietary company (such as Haute Hats Pty Ltd) for test bank.

JB Hi-Fi Ltd has the right to sell shares to the public. The two types of shares that it could issue are ordinary shares and preference shares. Limited by shares means that the liability for the shareholders is limited to the subscription price of the shares. JB Hi-Fi Ltd is listed on the Australian Securities Exchange (ASX). Public companies such as JB Hi-Fi Ltd are normally much larger companies compared with private companies. Haute Hats Pty Ltd is typical of a family owned company. They do not have the right to sell shares to the public at large. Because they are smaller in nature than public companies such as JB Hi-Fi Ltd they do not have to follow the same stringent reporting requirements that these companies must comply with.

3.7       What are two major advantages and disadvantages of a company structure? Provide an illustration with textbook solutions a company listed on the ASX (such as JB Hi-Fi Ltd, CSL Ltd, and BHP Billiton Ltd).

Two major advantages of a company structure are:

(i)        access to additional capital;

(ii)       limited liability for the shareholders in relation to the debts of the business.

Two major disadvantages of a company structure are:

(i)         The time and money to establish the company form;

(ii)        The more complex regulatory requirements imposed on the company for textbook solutions.

   

In the sole trader’s Balance Sheet, the capital account in the equity section will reflect the capital contribution of the single owner. For example if Lenny Low commenced a business selling USB sticks, then the capital would reflect Lenny's sole contribution. Also the profit amount will reflect all the profit for the financial period. For a partnership, the capital account will reflect the multiple owners’ contributions to the entity also available for textbook solutions. If Tom, Cherise and Livia all contributed a variety of different assets and liabilities then the capital account would reflect each of the sum of their contributions separately. Undistributed profit will be shown in each partner’s respective current accounts for each of Tom, Cherise and Livia. For a company, such as JB Hi-Fi Ltd the capital account will reflect the contribution of the shareholders of JB Hi-Fi Ltd and undistributed profits for the company will be shown in the retained profits account.

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