Section 4 - Business legal structure
Section 4 focuses on the business structure of your chosen business (Amy’s Fashion Boutique) .
In this section, you will be required to decide on what type of business structure would be suitable for your business, in terms of your mission and vision statements, as well as your core brand values.
What are the Legal Forms of Businesses in Australia?
Stated below are the legal forms of businesses in Australia. As you know, for a business to operate, it needs to be set up in a way that is in accordance with the law and it has to do certain things such as prepare financial statements (P&L, Balance Sheet, Cash Flow Statements). It also has to meet compliance requirements which vary according to the type of business structure.
Legal Forms of Business:
• Sole proprietor
• Partnerships
• Private company
• Public company
• Cooperatives, Trusts, Non-profit organisations
• Franchising - a form of business operation
Considerations when deciding on the legal structure
Important considerations when deciding what type of business, you wish to open depends on many factors, which include:
• Number and types of owners
• Transferability and succession
• Intended life cycle of the business
• The complexity of the business and the capital and responsibilities attributed to the owners.
• Taxation
Sole Trader
Sole Traders are a common type of business, where it is generally owned and operated by one person. While they work and keep all profits earned by the business, the owner will be liable for all debt incurred. Furthermore, the business will only earn a profit only when the owner is operating the business, which would mean that they will not earn money if they decide to take a day off.
Advantages Disadvantages
Easy and inexpensive to establish Unlimited liability, personal assets are at risk
The owner provides the finance, is free to make independent decisions, takes full responsibility Professional support may be lacking
The owner retains all profit made, and is taxed at personal marginal tax rates Difficult to take time off
There is no restriction on employing people to help or manage in the business Sources of capital may be limited
Partnerships
Partnerships are a business in which there are multiple partners contribute an equal share of capital into the business. As a result, all profits and expenses are distributed as agreed, which will also mean that all responsibilities are shared. This type of business structure is highly effective when multiple types of professions are required in a business.
Advantages Disadvantage
Inexpensive to set up (split between partners) Unlimited liability. Personal assets are at risk
Profits and losses are distributed as agreed and partners are taxed at personal marginal tax rates Losses may not be shared evenly dependent upon private assets. Partners are -Jointly and severally- liable.
Shared responsibility and shared workload It is not possible for one partner to sell unless the other partners agree.
Wider source of advice and professional support Increased possibility of conflict
Tax burden is shared
More sources of capital
There are three different types of partnerships, which include:
General Partnership
All partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.
Limited Partnership
Partner's liability is limited to the amount of money they have contributed to the partnership, as a percentage form. Limited partners are usually passive investors who don't play any role in the everyday management of the business.
Incorporated Limited Partnership
Partners can have limited liability for the debts of the business. However, there must be one partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.
Private Company
A company is a separate legal entity, and can sue or be sued. Furthermore, as it is a separate entity, it can sell, lease or own property, and will live forever (perpetuity).
Specifically, a private company differs from a public company, in that it can only have a maximum of 50 shareholders, and must have -Pty Ltd- after it's name, to indicate that it is a private company.
Advantages Disadvantages
Shareholders have LIMITED LIABILITY Companies are expensive to set up
Greater sources of capital through more owners. Retained earnings can be accumulated Profits shared between more people
Unlimited lifespan Companies are more expensive to maintain
Greater source of management expertise and labour Annual fees and annual reporting and annual returns
Public Companies
As seen on the previous page, private companies are limited to a maximum of 50 shareholders. However, public companies are far more flexible in regards to the number of shareholders. A company can go public, by listing itself on the Australian Stock Exchange (ASX), and will be able to raise capital based on the total number of shareholders and amount invested.
However, in order for a company to be public, it must have a minimum of 5 shareholders, and 3 directors, of which 2 must live in Australia. The word -Limited- or -Ltd- must be in the name of the company.
Advantages Disadvantages
Shareholders have LIMITED LIABILITY Companies are expensive to set up
Greater sources of capital through stock exchange. Retained earnings can be accumulated Profits shared between more people
Unlimited lifespan Companies are more expensive to maintain
Greater source of management expertise and labour Annual fees, annual reporting and annual returns
Dividends can be franked or unfranked Annual reports and financial statements (Balance sheet and Profit and Loss Statements) must be made public
Franchise
A franchise is a type of business structure in which an established brand may decide to branch geographically (different locations). This business structure is effective when the brand reputation must remain consistent across all stores. However, as a result, a franchise may have more strict rules and may not be as flexible in regards to contracts, as well as branching into other products.
Advantages Disadvantages
A vehicle for development and growth Franchisor controls operation
Provides training Threat of termination
Benefit of goodwill Service fee and percentage of profit to franchisor
Risks may be lower Contract may be biased in favour of franchisor
Systems are established Inhibits business freedom and innovation
Advertising with group Goals may not be compatible
Volume buying is possible
Section 5 - Break-even analysis
As part of the marketing plan, you will be required to create a break-even analysis table and chart to show your understanding of the topic, under section 5. Business (Amy’s Fashion Boutique)
Break-even Analysis
Operating a business requires marketing managers to consider the cost to produce the good or service, as well as the volume to identify how the profitability of the good or service. In order to identify the profitability of a product, the use of a profit equation is required, such as the break-even analysis. Break-even analysis is a technique that analyses the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point (BEP) is the quantity at which total revenue and total cost are equal. Profit comes from any units sold beyond the BEP. In simple terms, the purpose of the break-even analysis is to identify how many products a business must sell, in order to turn over a profit.
Break-even point in a table format
The breakeven point formula is an ideal way of identifying how much of a good or service you must sell at that certain price point to break-even. However, the use of the break-even formula extends beyond identifying the break-even point of a given product.
As shown below, the break-even point has been analysed at different quantities. Highlighted yellow is the break-even point, which is the minimum the business must sell of this particular good before they can generate a profit from this good. However, the orange highlight represents the points in quantity sold below the break-even point, which is useful for management to determine the potential loss they may face if they do not reach break-even. This can result in them identifying ways to reduce the impact by either adjusting prices, or simply reducing the cost to produce this good.
In addition to the unit variable and fixed costs which are required to calculate the break-even point in the formula, you are required to identify the total revenue, which is the quantity of the good or service, multiplied by the price you wish to intend to sell the good or service (Price X Quantity).
Break-even point in a chart format
Furthermore, the break-even point can be applied in a form of a chart, which will provide a full picture of what would occur with the specific product. As seen below, the graph shows the fixed and variable costs at specific quantities. The total revenue is also shown, which represents the quantity sold, multiplied by the unit price you wish to intend to sell the good or service for. The break-even is point is the moment the variable cost line intersects with the total revenue line.
Just like the break-even table seen previously, the graph can also show the potential profits that can be made after the break-even, which is represented by the shaded part on the right side of the break-even point. For example, if the business was to double annual picture sales to 800, the store would make a profit of $28,000.
Note: Fixed cost is a flat line, as no matter how many units you sell, you will always pay the same amount for expenses such as rent. Variable cost is angled and started where fixed cost begins, as this represents the added expense to the business. As you produce more goods, your cost to produce will increase, as it represents the increase in labour and materials.
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