Essay on "Advise for Business Structure"

Essay 6 pages (1613 words) Sources: 7 Style: Harvard

[EXCERPT] . . . .

Business Structure

John and Fred are thinking about going into business together. To facilitate this, they need to first figure out how they would like to organize the business. The business is going to be related to their mutual hobby of picture framing. They plan to open a small shop in Surry Hills, where they can handle the retail side of the business. It is expected that the business will focus on providing picture framing services, retailing picture frames, and various related services. The clientele is expected to be primarily retail consumers, but John has the vision of doing some work for institutional clientele like hotels and office buildings, perhaps as a subcontractor for the firm that does the art design.

Important Considerations

There are a number of different factors that need to be considered when organizing a business. The first factor is the nature of the business. As estalbihsed, this will largely be a retail venture, with a small shop. Any institutional business or business growth is at this point sepcualtive as both aprtners are committed to running the shop part-time, and maintaining their far more lucrative day jobs. The breakdown of work and responsibilities must also be taken into consideration. Both John and Fred are skilled in the field of picture framing, and both are expected to paly a role in the service function. There has been some discussion, however, that they might wish to hire a third person to help man the shop while they are performing their day jobs. The partners intend to finance the venture on a 50-50 basis. It is not expected that either will need to withdraw money from the business until it is well profitable, so no decisions have been made with respect to that.

There are several other consideations that need to be made as well. Taxation is one of the main areas of difference btween the different forms of business organization. Fred should be well aware of this. Some forms of organization will see the men taxed as individuals based on their share of the business; other forms will see th business taxed. In those situations, John and Fred would only be taxed at such time as they withdraw money from the business or pay themselves a salary.

Another major consideration is the liability that the company is expected to take. Most retail shops have fairly limited liability concerns. However, as the business is expected to deal with pictures, John and Fred could actually face significant liability concerns. If they are working with a valuable piece of artwork -- and given the gentrification of Surry Hills and the fashion scene there this is entirely possible -- and that artwork could be damaged in the framing process. Thus, substantial liability could arise if any mistakes are made. This is an important concept because liability is a significant difference between the different forms of business organization.

Lastly, there are the costs and bureaucratic headaches ivolved with the different forms of business. Some forms are simple to set up, but more challenging to administer and could give rise to conflict between the two down the road; other forms are more complicated up front but may prove to be simplier to administer down the road . given that the business is likely to exist for some time -- at least that is what John and Fred hope -- they need to perhaps not worry so much about the up-front nuisance and costs, and just choose the form of business organization that works best for them in the long run.

Forms of Business Organization

The different forms of business organization available to Australians is outlined in the Corporations Act of 2001. They ones most likely to be considered by John and Fred include parternship, corporation, joint venture, associates and trust. This report will outline each of these in turn based on the criteria above, before leveling a final recommendation as to what the best course of action might be for John and Fred.

Partnerships

According to the Australian Tax Office, partnerships are "an association of people who carry on business as partners, or who receive income jointly, but does not include a company" (ATO, 2012). Thus, income that is earned by the partners is taxed on the partners' personal tax returns. These two are a lawyer and an accountant, which probably means that they earn a decent wage already. Thus, they are likely to see this income from the partnership taxed at a fairly high rate, certainly higher than the prevailing rate for a company. The amount of income that each of these men would be taxed on will be dependent on how they have decided to split the proceeds of this venture, and will be outlined in the partnership agreement. It is worth noting that if this business is expected to lose money, the taxation scheme means that they would lower their personal tax burdens by taking some of the business' losses on their personal taxes. If the business is set up as a company, this will not be the case. Thus, the partnership structure might be preferred if there are doubts about the profitability of the business.

One of the major issues with the partnership structure is that liability under a partnership in Australian law is on the partners, not on the business. This means that the assets of the partners could be at stake in the event that the business faces legal action (Net Lawman, 2013). In other words, if one of the partners is framing a rare and expensive work of art and an accident occurs to ruin that artwork, both partners would be liable in the ensuring legal action. Also, both men have successful careers and presumably have built up considerable personal assets including real estate and savings -- a partnership would put all of those assets at risk because of the way that Australian law treats liability in partnerships.

Companies

Companies are more complicated to set up than partnerships. They must be registered with the relevant authorities, a process which can be a nuisance and is certainly more costly than some of the other alternatives. In reality, John should be able to handle this process in order to save money, and the paperwork is probably simple copared with what lawyers and accountants normally deal with. The biggest issues again are with respect to taxation and with respect to liability.

Companies are taxed on their income. The shareholders -- John and Fred can divide the company any way they see fit -- are not taxed on this income until the realize it -- by selling shares perhaps. They may be taxed on income if they draw a salary from the company, but if they choose to keep all of the company's profits in the company, then neither will be taxed personally. It is expected that the tax rate for the business will be lower than their personal tax rates. However, if the business is expected to lose money, then it will simply not pay taxes; there will be no benefit to the owners from a loss.

Companies are also distinct legal entities for the purposes of liability. The company will face liability, so if the proverbial expensive artwork is damaged then any ensuring legal decision can only be paid out from company assets. The assets of the shareholders are protected from such action. This is one of the major advantages of having the business set up as a company. Further, with an accountant on the team, the more complicated and separate corporate taxes should not be difficult to figure out.

Joint Ventures

Under Australian law, a joint venture is similar to a company except that each owner would file its own taxes, based on his share of revenues and expenses.… READ MORE

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