700005 AIM Tutorial Week 3 Module 2 (Business Structures)

Salam Al-jizani 20173180

 Students, please note that the individual work in this tutorial exercise is marked as part
of the portfolio assessment.
 You cannot receive marks for this component if you are not present in class. You are
marked for effort and completion as per rubric and not simply for attendance.
 This is assessment 1 of 9.
 Each assessment is worth 5 marks giving a total of 45 for nine exercises.
 The total mark will be converted into 20% weighting at the end of term.

Tutor demonstration questions

3.9, 3.11

3.9 Another relatively widespread business structure is a trust. What are the two main forms
of trusts in Australia? What are the tax issues associated with family trusts?
1. family or trust
2. unit trust

One of the tax issues with the family trust is that the ATO is acting forcefully to regulate
on payments from trusts to companies where the money remains trust instead of being
paid.

3.11 What does the term ‘mutual agency’ refer to in the context of partnerships? Provide an
example where 'mutual agency' could be both an advantage and disadvantage for a
partnership.

Mutual agency: means that the liability of partner’s actions is laying on both
partners.
Advantages: 1. Combine skill, resources, knowledge, and time of both partners.
2. easy to establish.

Disadvantages: 1. Unlimited liability.

2. automatic dissolution if one of the partner leaves or dies.
 STUDENT INDIVIDUAL WORK
This is the first assessed tutorial exercise out of nine for the entire term and is worth 5 marks.

3.8 Illustrate with an example the difference in the format of the equity section of the balance
sheet between a sole trader, partnership and company.
The difference is:
Sole trader: the equity is determined by adding the capital with the profit then subtracted by the
drawings.
Capital
+ Profit
- Drawings
-----------------
=Equity.

Partnership: the equity is determined by adding the partner capital with the partner current
account.
Partner Capital
+Partner Current Account
-------------------------------------
=Partner Equity
Company: the equity is determined by adding Share capital or issued capital with retained
earnings, then subtracted by the dividends paid.
Share Capital/ Issued Capital
+Retained Earnings
-Dividends Paid
---------------------
=Shareholders’ Equity

3.15 What do the following terms mean?

a. Unlimited liability

b. Mutual agency

c. Dividend

d. Preference shares

e. Unit trust

a) Unlimited liability: means as the sole trader business is not separated entity, the
owner of the sole trade will be obliged to assume full responsibility for the loss of
the business or being sued, therefore, their personal property might be taken away
from him.
b) Mutual agency: means that the liability of partner’s actions is laying on both
partners.
c) Dividend: is the profit, which can be cash, reward, or otherwise, that the company
distributed to the stakeholders, as determined by the directors’ board of the
company.
d) Preference shares: are shares of a company's stock with dividends which will be
paid out to shareholders prior to common stock dividends are released.
 e) Unit trust: is a relationship between the trustee, which can be individual, party, or
company, and beneficiaries, which is regulated by the trust agreement.

3.16 A business organised as a separate legal entity that is owned by shareholders is a:

a. partnership.

b. company.

c. sole trader.

d. legal partnership.

3.17 The shareholders’ equity section of the balance sheet for a public company includes:

a. share capital (contributed equity).

b. retained earnings.

c. reserves.

d. all of the above.

3.18 Retained earnings represent a part of owner’s equity resulting from profit that:

a. was paid in by the original shareholders.

b. has not been distributed as a dividend.

c. must be paid to the government in the form of GST.

d. must be used when a company makes a call on capital.

3.19 Equity finance for a sole trader comes from:

a. the issue of shares to the public such as an IPO (Initial Public Offering)

b. borrowings from the government.

c. the owner and profit retained in the business.

d. bank loans.

3.20 Partnerships are most common among:

a. doctors.

b. accountants.

c. lawyers.

d. all of the above.

3.21 For a partnership to be legal, the agreement should:

a. be in writing.

b. indicate a sharing of a bank account.

c. indicate how profits and losses are to be shared.

d. have any one or more of the above characteristics.

3.22 In Australia, a trust:

 a. is an obligation on a person to hold property for the benefit of beneficiaries.

b. pays income tax on profit.

c. has unlimited liability.

d. has all of the above characteristics.

3.23 An advantage of a trust as a form of business structure is that it:

a. is simple to set up, just like a sole trader or partnership.

b. is generally tax effective.

c. possesses limited liability.

d. has all of the above characteristics.

3.24 Under a discretionary trust, a trustee can distribute income and assets:

a. according to government acts.

b. using wide discretionary powers.

c. according to specific items in the Corporations Act.

d. as advised by the principal beneficiary.

3.25 A sole trader in Australia is taxed at:

a. the company tax rate of 30 per cent.

b. the same as the rate of capital gains tax for the owner.

c. the owner’s marginal tax rate.

d. both the rates in (b) and (c) above.

3.27 From the six scenarios described below, indicate (giving your reasons) the business form
each one is likely to take — sole trader, partnership, company or trust.

a. Connor and Ella wish to start an internet business, marketing cosmetics. They are concerned
about the legal issues (for example, their personal liabilities) for this business once they start
trading.

Partnership, as they are just two individuals want to establish an internet business.
1. Easy and inexpensive to establish.
2. Combines the skills, resources, and knowledge of each partner.

b. Gregory has just commenced a home maintenance business by himself, with the help of
$2000 inherited from a rich aunt. He wishes to employ his wife as the bookkeeper.

Sole trader, as he controls the business and hiring a employee is legal for sole trader.

c. As friends at university, Paul, Ingrid and Jasmine studied commerce. They are now setting up
a small accounting business specialising in taxation returns and investment advice.
 Partnership, as there are just three individuals want to establish the accounting business. The
partnership will the more convenient to them as establishing company is expensive and
consuming time to run.

d. Two married brothers (Will and Sam), who are both trained and practising plumbers, wish to
combine their businesses into one so that they can share resources and take more holidays.

Partnership, as there are just two individuals want to combine their business. Partnership
business will be providing skills, resources, knowledge, and time for each partner. Besides, it is
easy to establish and does not consume plenty of time to run.

e. Three engineers (Azil, Daniel and Timothy) wish to set up a prospecting business searching for
gold, and they want to list their business on the Australian Securities Exchange.

Establish public company is the choice for them, as they want to list their business in the
Australian Securities Exchange; besides, the company is providing easiness of raising capital, and
limited liability.

f. Four members of the Ng family wish to establish an investment business, with the proviso
that additional family members can be admitted as they reach the age of 18 years.

[family trust, as the other family members would like to join when they turn 18 years old.
3.45 Refer to the Balance Sheets for Advantage Tennis Coaching (p.104) and Coconut
Plantations Pty Ltd (p.107).

Required:

a. Summarise the differences in the ownership structure of the two business entities.

The differences are: for sole trader there is just owner’s equity, while, for private company
there is stakeholders’ equity besides retained earnings.

b. What are the relative advantages and disadvantages of each form of ownership
structure?

Sole trader:
Advantages:
1. Inexpensive to establish.
2. Less regulation over how business is performed.
Disadvantages:
1. Unlimited liability.
2. Limited resources.

Company
Advantages:
1. Limited liability.
2. Easy to increase the capital.
Disadvantages:
1. Expensive to establish and run.
2. Must follow the Corporation Act.

c. What are the advantages of the JB Hi-Fi Ltd (p.108-9) form of ownership compared to
Coconut Plantations Pty Ltd (p.107)? Discuss.
1. Hi-Fi is public company; therefore, they can rise capital through offering their share in the
Australian Shares Exchange.
2. Easy to get bank loan because they are public company. They are more trusted.
3. The public company usually is bigger in size; therefore, they can get more sales than the
private company.

END OF DOCUMENT

Do not forget to complete the online homework component for this week as well.

Homework 2 is due by 5.00pm on Monday of Week 4.