CHAPTER 3 Business structures 1113.8 Discuss the advantages and disadvantages of a company.
The main advantages of companies are the limited liability of shareholders for business debts,
and the access to additional capital from the shareholders for business expansion. Their main dis-
advantages are the time and money needed to establish a company, and the complex regulatory
requirements imposed on companies.3.9 Define the term ‘trust’.
A trust is a common form of business structure in Australia. It represents an obligation on a person
to hold property for the benefit of others. Family trusts/discretionary trusts are established for the
benefit of families, and unit trusts are established for the benefit of various parties.3.10 Discuss the advantages and disadvantages of a trust.
The main advantages of trusts are tax benefits and limited liability. The main disadvantage is the
complexity of the law relating to trusts.3.11 Compare and contrast financial statements for different business structures.
Each of the financial statements reflects the business entity’s financial performance and position
separately from those of the owner(s). The main differences in the financial statements for each of
the different business structures occur in the distribution of profit to the respective owners. For a
sole trader, the individual owner has the sole right to any profits. For the partnership, the respective
partners have rights to profits as outlined in the partnership agreement. For the company, the profit
is distributed to its owners (shareholders) in the form of dividends. In the balance sheet, the capital
account in the equity section reflects the capital contributions of the owner(s). For a partnership,
there are multiple owners, and each of their contributions are shown in the balance sheet. For a
company, the share capital account reflects the contributions of the shareholders of the company.
The undistributed profit for a partnership is included in each partner’s current account on the bal-
ance sheet. For a company, undistributed profits sit in retained earnings on the balance sheet.3.12 Explain the term ‘differential reporting’ and discuss the implications for disclosing entities.
In 2010, the AASB modified the reporting entity concept by allowing disclosing entities that are
not publicly accountable (such as unlisted public companies) to apply a reduced disclosure version
of the AASB standards, known as the reduced disclosure regime. All other reporting entities pre-
pare general purpose financial statements. This difference in requirements of reporting is known as
differential reporting.Key terms
Accounting entity concept Business transactions are recorded separately from personal transactions
involving the owner(s) because the business is regarded as a separate legal entity from the owner(s).
Australian Business Number (ABN) Identifier issued by the Australian Taxation Office (ATO) for
certain dealings with the ATO and other government departments and agencies.
Australian Company Number (ACN) A nine-digit number allocated to a company to ensure that it
has adequate identification when transacting business.
Australian Taxation Office (ATO) The federal government’s main revenue-collection agency.
Business activity statement (BAS) A single form used by entities registered for GST to report their
business tax entitlements and obligations to the ATO.
Company Business structure that has a separate legal identity from its shareholders and is taxed on its
taxable income.
Differential reporting A framework under which entities have different financial reporting
requirements.
Dividends Distribution of company profit to shareholders.
Family (or discretionary) trust A business structure usually established for the benefit of one family
and its members.