Before a decision is made to venture into a new business there are a number of factors which are put into consideration. These factors are essential in the sense that they determine the structure which the new business would adopt. This has to be adequately addressed in the business planning stage. This paper explores the various forms of business in terms of merits, demerits and financial reporting before deciding to start the new business in Australia.
The choice of business is a very important aspect of entrepreneurship process.
The choice of business form would be dependent on a number of factors among which there is the number of people involved and the amount of capital available for starting the business.
Common business structures in Australia
In Australia there are various business structures that can be explored first in terms of advantages and disadvantages before making the right business decision.
This is a single ownership business structure. The sole proprietor is the owner of the business. Based on this type of ownership there are advantages and disadvantages that are associated with this form of business. (Trotman et al 2005)
Merits of sole proprietorship
This is a very simple and easy to start business that requires no formal documents. Only registration at the municipality is necessary and it is very simple to register. With this form of business decision making is fast because there are no other parties involved in the starting and running of the business. Therefore the owner makes sole decision and moves ahead. This makes the business very easy to start and indeed in Australia there are many people who are sole proprietors. (Trotman et al 2005)
The sole proprietor enjoys full control and management of the business. There are no procedures and systems in the management process. The owner runs the business under his or her own rules. Things like board meetings do not exist in this business structure. Closing or deciding to relocate the business is a very simple process as it only depends on the sole owner. Issues like policies, customer services and related issues are very easy to change with the ever changing market structure.
Demerits of sole proprietorship
The owners of such forms of business are normally liable to all obligations and debts of the business. The owner cannot enjoy benefits that are associated with other business entities like corporations. The owner limits the life of the business to his own life. The business would survive only if the owner is alive.
This form of business would not attract qualified and trained personnel like managers who are capable of achieving increased profits than the owner.
Sole proprietorship would lack the corporate business environment. This means that employees also lack the environment and it becomes hard for the owner to stop them from moving to other business forms.
In this type of structure, it is very hard to expand and exercise same control of the business. Expanding this business to other sectors like the government is not good.
Most investors are not attracted to sole proprietorship because of lack of the expansion capacity which is very important to them.
There is a lot of competition among sole proprietors in Australia. This is because most of them deal with similar products or services. Some sole proprietors cannot survive this competition because they lack adequate funds to get into advertisement.
Sole proprietorship does not have the capacity to reach very high levels of business and attain monopoly that is characterized by very high profit margins. Based on these demerits the risk of venturing into sole proprietorship in Australia is very high and hence it is not advisable to get into the high risk.
This refers to a shared ownership business structure. The owners can be two or more partners.
Partnerships are easy to establish structures and care should be taken when drafting and signing the agreement. With this structure taxing is the same as that of a sole proprietorship and the partners have to include tax returns to their personal income. It is easy to raise the capital required to start the business since all the partners in the business have to contribute. The profits that are accrued from the business are all channeled to the partners. This business can attract employees who may end up becoming partners in the business. All the partners who have skills that complement one another benefit so much from the business because all their energies and efforts are directed towards the same course. Liability of the business for instance losses is distributed evenly within the members of a partnership.
Disadvantages of partnerships
In a partnership business structure there is joint liability to the actions of others. This means that if an individual engages in risky behavior all the rest are responsible for his or her actions.
It is unfortunate that in this business structure that profits have to be shared equally between the partners. This is unlike the case of a sole proprietor who enjoys all the profits alone.
There is a problem of delayed decision making in this structure. An individual can be having a viable idea but it can end up being criticized and thrown away by the rest of the group. This has often led to disagreements that threaten the life of the partnership.
Employees can benefits from the business in terms of salaries but it important to note that this is not subject to tax returns which remains the responsibility of the partners. This tends to put the burden of taxes on the owners while the beneficiaries are many. (Birt et al 2008)
Limited liability Company
In this Structure, the owner would be able to separate business affairs from his or her personal life. Matters concerning the business would remain distinct from the daily life of the ownership. It would therefore be more professional in the eyes of customers and suppliers.
Matters concerning running and management of the business would be separated from the personal life of the owner. Thus the business would not directly affect the life of the owner. Although the board of Directors has some authority, there is no threat of loosing power to them.
Membership in a limited liability company is protected from the liability that results from their action and further the debts that the company might get into in the course of its operations. It is the company itself that would be liable for the debts in the business and the owner is exempted from such liability.
As a business entity a limited liability company does not experience double taxation. Members are taxed at individual level leaving the company untaxed.
Limited liability companies are strong entities that go beyond just an individual. They therefore cannot just end incase the owner dies. This form of business is therefore capable of having a very long span of life as long as it is well managed. If the owner dies there is a possibility of transferring ownership to other parties. In a limited liability company, it is a common thing that members have some interests. These interests can be a high possibility of separating the interests and assigning them. Economic benefits that accrue form the interests come in terms of profits and can be distributed without the necessity of transferring titles to the interests of the members.
Disadvantages of limited liability companies
It is not easy to form and establish a limited liability company. This is because of the complex nature of the process of registering the company as a legal entity. This makes the cost of venturing into Limited Liability Company a bit high compared to partnership and sole proprietorship.
The shareholders in a limited liability are at high risk of loosing control over their investments in the company. With a limited liability structure there are many titles that are associated with operation s in the business for in stance Director, manager, operations manager, general manager. The implications of these titles are that it will be difficult to determine the exact person who will have authority to enter into contract on behalf of the business.
In terms of management, it is vital to note that it is not an easy task to manage a limited liability company. This is because it might not be easy to understand the management structure of a limited liability company. Therefore it is not advisable for new entrepreneurs to venture into limited liability because of the complicated nature of management structure.
With a limited liability company it can prove to be a very difficult task to generate the required financial capital to start the business. This is because investors might be exploring other options like IPO’s or mergers instead of new business. Therefore it will not be a good idea for a new entrepreneur to consider a limited liability company bearing in mind the complicated management structure, the higher operational costs amongst other risks that are associated with a limited liability company. (Hoggett 2009)
The idea of venturing into a new form of business in Australia should be undertaken with a lot of caution while exploring the various options that have already been mentioned.
Good decision making for a new business in Australia would be based on the available resources necessary for the right choice of business structure. Considering the available financial resources the entrepreneur has, it would be wise to explore options of a partnership or company. This can help to preserve capital that can be utilized later in operating and expanding the business, other than putting all the financial resources into sole proprietorship. A partnership or company would further provide opportunities for the business to expand with increased profits if it gets good managers. (Stolze et al 1994)With time the company or partnership can lead to the formation of a corporation because it will be having the necessary capacity to forge a head.
Based on the capital base ($300000), it would be advisable to venture into a limited liability company. The owner would have to appoint a manager and board of directors for the business. It would be important to separate matters concerning the business with the personal life of the owner. The owner would not be liable for any debt in the business and he would be able to avoid double taxation unlike in a partnership.
With this capital the owner has a potential of starting a business that would last for a very long time even in the coming generations. Though it would take a bit long to start, it is worth the investment than just a sole proprietorship which can die off if an unfortunate incident occurs to the owner. In fact it would attract more qualified managers who will take the business very far.
The entrepreneur must take a bold move and think big with his capital to ensure that it is not wasted.
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