110 Accounting: Business Reporting for Decision Making
Summary of learning objectives
3.1 Understand the different forms that business entities take
Business entities take many shapes and forms. The most common classification of business entity
is the SME (small to medium sized entity). The SME accounts for approximately 96 per cent of all
Australian business entities. The four common types of business entities are sole trader, partnership,
company and trust. Business entities may either be profit oriented (for-profit) or not-for-profit. Not-
for-profit entities include clubs, hospitals, churches, private educational institutions and charities.
These entities are largely classified as associations or companies limited by guarantee. An entity’s
focus will either be manufacture of goods, trade in goods, or provision of a service. Manufacturing
entities’ operations involve the conversion of raw materials into finished goods. Trading entities are
involved in buying inventory and on-selling it. Service entities provide services to customers. The
services provided may be either equipment-based or largely people-based.3.2 Define the term ‘sole trader’ and discuss the main features of a sole trader.
A sole trader is the single owner of a business that is controlled and managed solely by that person.
The sole trader form of business has the following characteristics.- Sole trader businesses have low start-up costs.
- Minimal paperwork is required to commence sole trader operations.
- Sole trader businesses pay no tax. The owner includes business profits or losses in his or her indi-
vidual tax return. - Owners have unlimited liability for the entity’s debts and legal actions against the business.
- Sole traders have total responsibility for all business decisions and for all profits or losses.
- There are no formal guidelines to follow in terms of business reports.
3.3 Discuss the advantages and disadvantages of a sole trader.
The main advantages of a sole trader form of business are that the entity is relatively simple and
cheap to set up, and the owner has total autonomy over any business decisions. The main disadvan-
tage of a sole trader form of business is that the owner is totally responsible for all the debts and
legal actions against the business. This means that the individual’s personal assets are at risk if the
business runs into trouble.3.4 Define the term ‘partnership’ and discuss the main features of a partnership.
A partnership is an association of two or more persons or entities that carry on business as partners
and share profits or losses according to the ownership structures outlined in the partnership agree-
ment. Partnerships are relatively easy to set up, with minimal costs and resources required to com-
mence operations. The individuals should complete a partnership agreement, which includes details
such as the name of the partnership, the contributions of cash and other assets, and the profit and
loss sharing arrangements.3.5 Discuss the advantages and disadvantages of a partnership.
Partnerships have several advantages. Only minimal time and resources are needed to set up the partner-
ship, and the partnership has the benefit of the skills, talent and knowledge of two or more people. Part-
nerships have several disadvantages. They include the unlimited liability of the partners for debts and
legal actions against the partnership; mutual agency; and the automatic dissolution of the partnership if
one of the partners dies or withdraws from the partnership, or if there is an irresolvable dispute.3.6 Define the term ‘company’.
A company is an independent legal entity normally characterised by the limited liability of its
shareholders.3.7 Identify the different types of companies and provide examples of each.
The types of companies are private companies, companies limited by shares, companies limited by
guarantee, no-liability companies and unlimited companies.