Solutions to questions
2. (a) A sole proprietorship is a business owned by one person. Many small service businesses, retail stores and professional practices are operated as sole proprietorships. Although the owner of a sole proprietorship is legally liable for its debts, the business should be regarded by the proprietor as a separate entity.
(b) A partnership is a business owned by two or more people acting as partners. Partnerships are not separate legal entities, and the partners are therefore personally liable for the debts of the partnership. From the viewpoint of managing the business, however, a partnership is treated as an entity separate from the partners. Many small service businesses, retail stores and professional practices are operated as partnerships.
A company is a separate legal entity formed under the Corporations Act 2001. The owners of a company are called shareholders, because their ownership interests are represented by shares in the company’s capital. Separate legal entity status enables a company to conduct its operations in its own name as a legal entity. Companies vary greatly in size and objectives—the Corporations Act distinguishes between public companies, which may invite members of the public to invest in them, and proprietary companies, which have no such intention.
4. The advantages of a partnership structure include:
(a) A partnership is easy and inexpensive to form, because there are no legal requirements that need to be met. All that is necessary is an agreement, preferably in writing, to avoid future disagreements by those forming the partnership.
(b) A partnership can combine the wealth and talents of several individuals, and employees can be offered the prospect of becoming owners in the future.
There are also important disadvantages of a partnership structure, which include:
(a) Partnerships are not separate legal entities, and the partners are therefore personally...