Nature of Business

Nature of Business Types of Businesses

Types of Businesses • classification of business • size – small to medium enterprises (SMEs), large • local, national, global • industry – primary, secondary, tertiary, quaternary, quinary • legal structure – sole trader, partnership, private company, public company, government enterprise • factors influencing choice of legal structure – size, ownership, finance

SME’s Small to medium enterprises (SMEs) are the most common businesses in Australia. These businesses play a key role in the provision of goods and services for the general public, provide employment, foster innovation and productivity improvements, supply inputs to larger businesses, serve the interests of local communities and facilitate growth in the Australian economy.

Size – small to medium enterprises (SMEs), large According to the ABS in 2001, a small businessis defined as a business that employed less than 20 people, including categories of: 􀀀 non-employing businesses – sole proprietorship and partnership without employees 􀀀 micro businesses– businesses employing less than 5 people, including non-employing businesses 􀀀 other small businesses – businesses employing 5 or more people, but less than 20 people. A medium businessis one that employs more than 20 but less than 200 people. Thus a large businessis one that employs 200 or more people.

Small, Medium and Large Business Characteristics

Small, Medium and Large Business Characteristics cont’d

Local, national, global • A local business is an organisation that operates within one area. • National businesses operate across Australia. • An international business is one whose ownership and production is based in one country; it exports the goods and/or services it produces to other countries. • A transnational businessis a business that operates in many countries. Its goods and services are produced and sold in a number of different countries.

Industry- primary, secondary, tertiary, quaternary, quinary • Primary industrybusinesses are involved in the acquisition of raw materials • The secondary industry consists of businesses that use raw materials, combined with labour and capital equipment, to create finished products. • The tertiary industryis made up of businesses whose prime function is related to providing a service. • The quaternary sector consists of those businesses that provide information services to their customers. • The quinary sectoris concerned with businesses that provide services that are traditionally performed in the home.

Legal structure

Factors influencing choice of legal structure • Size – as a business grows, it is likely it will move from either a sole trader or partnership to a company structure. • Ownership – by altering the legal structure of a business, the original owner is also likely to relinquish his or her full control over the business. • Finance – generally, smaller businesses may find it more difficult to access finance than do their larger counterparts. Business growth is often accompanied by a greater demand for financial resources.

Sole Trader Advantages • Low cost of entry • Simplest form • Complete control • Less costly to operate • No partnership disputes • Owner’s right to keep all profits • Less government regulation • No tax on profits, only personal income Disadvantages • Personal (unlimited) liability for business debts • End of business when owner dies • Difficult to operate if sick • Need to carry all losses • Burden of management • Need to perform a wide variety of tasks • Difficulty in raising finance for expansion

Partnership Advantages • Low start-up costs • Less costly to operate than a company • Shared responsibility and workload • Pooled funds and talent • Minimal government regulation • No tax on profits, only personal income • On death of one partner, business can keep going Disadvantages • Personal unlimited liability • Liability for all debts, including partner’s debts, even before the partnership has begun • Possibility of disputes • Difficulty in finding a suitable partner • Divided loyalty and authority

Companies – Limited Liability Advantages • Easier to attract public finance • Limited liability – separate legal entity • Can transfer ownership easily • Enjoys a long life – perpetual succession • Experienced management – board of directors • Greater spread of risk • Company tax rate lower than personal income tax rate • Growth potential • Recent legislation power allows a company to have only one shareholder and one director Disadvantages • Cost of formation • Double taxation – company and personal • Personal liability for business debts of directors knew at the time that the business was unable to pay loans • Must publish a yearly annual report of audited accounts • Public disclosure – reporting of certain information • Becomes too large resulting in inefficiencies

Nature of Business