BACC1AMD Accounting for Management Decisions - Questions Answers Assignment Help

QUESTION 2

• Advantages & Disadvantages of Partnership & Sole Trader

Sole trader is the most common form of business entity with several advantages as well as disadvantages that are discussed below. 

• Advantages
  • Quick, easy and inexpensive form of business. 
  • Easier to wind down.
  • Not subject to company regulations like Corporations Act 2001. 
  • Total autonomy over business strategies and policies.
  • Full claim on profits and after-tax gains.

Source: (Birt, Chalmers, Byrne, Brooks, & Oliver, 2012)

• Disadvantages
  • Sole trader has unlimited liability.
  • More tax is paid by sole trader.
  • Limited by skills, time and investment of individual owner. 

Partnership is an extension of sole trader and is not a separate legal entity with following advantages and disadvantages:

• Advantages
  • Profits and losses are shared in agreed proportion.
  • Cheap and easy form of business with minimum legislations.
  • Not required to follow accounting standards to prepare financial statements.
  • Combined skills, talent and knowledge of two or more people.
• Disadvantages
  • Unlimited liability of all partners.
  • Limited life of partnership form.
  • Mutual agency issues can arise. 

Source: (Birt, Chalmers, Byrne, Brooks, & Oliver, 2012)

• Stakeholders’ Interests

1. Owners

Owners need information to assess the overall health of business and the risks associated with the operations of business (Winch, 2010). 

1. Lenders

Lenders are interested in information to assess credit worthiness of businesses and for deciding the credit facilities for businesses  (Winch, 2010). 

1. Investors

Investors need to know how well their investment is performing. They need information to assess profitability, riskiness and valuation of their investment  (Winch, 2010).

1. Tax Authorities

Tax authorities need information to determine tax returns and tax payable of company. Information is also needed to verify the tax amount paid by businesses  (Winch, 2010).

1. Public

General public (journalists, academics, activists, analysts and other individuals) is interested in company’s information due to interest in economic development  (Winch, 2010).