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Afx9003: Accounting Assignment 1

2352 words - 10 pages

AFX9003: Accounting Assignment 1
PART A
There are three options for Christina and David in terms of selecting a business structure. These are sole proprietor, partnership and company.
Option 1: Sole proprietor
A sole propriety is an option for the start-up whereby one individual of the pair would control and manage the business. For example, David starts up, controls and manages the business and Christina is merely employed by David. The registration requirements of a sole proprietor would include David as the owner applying for an Australian Business Number and for a Tax File Number (Birt et al. 2012). David will need a TFN as and income he earns as a sole trader will be treated as his ...view middle of the document...

2012).
* David might pay more tax as a sole trader than he would as a shareholder of a company.
* David does not have the benefit of running and managing the company with Christina’s expertise and input.
* David does not have the benefit of Christina’s capital contributions.
* David may be restricted in his business opportunities- government agencies for example can be reluctant to enter into contracts with sole traders because of their non-legal status.
* The business ends with David- it cannot continue without him (Birt et al. 2012).
Option 2: Partnership
A partnership is an option for the start-up whereby both individuals would control and manage the business. David and Christine would share profits and losses under this structure according to their partnership agreement (Birt et al. 2012). This type of business structure is particularly good for small and medium sized businesses such as law and accounting firms. Like a sole trader a partnership needs to comply with registration requirements of applying for an ABN and a TFN (Birt et al. 2012). They also will need to register the business name.
Furthermore a partnership differs from a sole trader in that they lodge a separate tax return with the ATO (although they do not pay separate tax) and the profits are shared among the partners- each partner’s individual share must be reported in his or her individual tax return and they must both take on responsibility for paying tax on the business income (Birt et al. 2012). The partnership agreement is extremely important in this business structure in order to establish the individual contributions and the division of profits and losses between David and Christina. If there is no partnership agreement the law will assume a 50:50 sharing.
Advantages:
* Similarly to the sole-trader advantages, David and Christina will have minimal costs and paperwork to start-up and wind-down the business (when compared to a company).
* David and Christina will have complete autonomy over the running of their business and will not need to consider shareholders as is the case with public companies.
* David and Christina will not be bound by accounting standards and legal regulations.
* David and Christina can use accounting packages to report financial position of company- easier to use (Birt et al. 2012).
* Tax on the income earned in the partnership will not need to be paid by the partnership itself- rather David and Christina will file their tax returns separately.
* David and Christina will have the benefit of each other’s skills and combined capital.
* Liability will be shared with each person’s partner (Birt et al. 2012).
Disadvantages:
* David and Christina will have unlimited liability for all business debts. The extent of liability will not change with their individual involvement with the entity.
* The partnership will automatically dissolve if David or Christina withdraws dies or if...

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