Owen Watt began his business, called Bright Spot, and it has been trading continuously ever

since. Bright Spot is a sole proprietorship that sells lamps and light fittings to tradespeople as
well as the general public. Since the 1980s a great deal has changed in the business environment
including an increase in the number of businesses selling similar products. For quite some time,
Owen has been thinking about expanding his business across Illawarra and even online, but his
main issues are the required capital and man power, as he is the only one running his small
business.

He has approached several banks such as the Commonwealth Bank of Australia and National
Bank of Australia, to find out if he is able to borrow money for the expansion of his business
and, unfortunately, he has been unsuccessful. One of Owens old-time friends, Jack Taylor,
has suggested he make an appointment with a financial advisor. Jack said that the financial
advisors would be able to help him in relation to the different types of entities that he could
convert to and the opportunities he would obtain by different business models. Suppose youre
the chosen financial advisor, briefly explain to Owen the different types of profit-making
business entities available to him to expand his business. In your comprehensive explanation,
you are required to provide the following details:

The advantages and disadvantages of the different types of business entities.

For each type of business entity that you are referring to in your answer: you are
required to make reference to at least three (3) different accounting procedures and
practices that would be affected by the change in the type of business. You need to
provide reasons as to why you think his accounting procedure and practices would be
affected.
Owen Watt is currently running a sole trade business, which has a limited scope because of the
limitations of the owner. Since there is only one person invests his funds, so the capital capacity
may certainly be limited. The managerial capacities of the proprietor are also limited. Because
the business scale remains in his personal supervision, he has to take all the decisions himself
and be responsible for all the profits and losses.

As a sole proprietor, Owen has to consider many factors while taking a decision about
expansion. There are two alternatives: to expand his business, Brightspot, as a sole trade and
employ an assistant or to convert his business into a partnership, a LLC or even a corporation.
When it comes to adding partners or employing an assistant, capital and managerial
requirements, state regulations, tax liability, etc. need to be carefully examined as all the
alternatives have pros and cons.

Alternative 1:

Brightspot is regarded as a sole trade company, which happens to be the most common form
of business organization (since it is the easiest and less costly one). The name says it all, in a
sole trade company, the owner is the only boss, making all decisions, entitled to the entire profit
and worth of the business along with liability for all its debt.

The employment of an assistant is one alternative in expanding sole trade business. One person
cannot supervise each and everything. The owners need the help of other person to manage the
business properly. An assistant will share some of the burden and works in the sphere assigned
to him and final authority is retained by the proprietor. However, this alternative does have
some pros and cons.

If Owen agrees to expand his business as a sole proprietorship, there is less legal restrictions,
in specific fewer reports have to be filled with government agencies, as well as no charter
restrictions on operations. As there is only one person controlling the business, taxation is
simple; not to mention, there is no double taxation concern. Nevertheless, it is considered to
be an ease of discontinuance (if any), since the business can be terminated at the will of the
owner.

Let us have a closer look to the advantages of hiring an assistant as he expands his business.
The owner is able to shift some of his responsibilities to his assistant. The assistant will look
after the work assigned to him but still being under the overall control. A fixed salary will be
paid to the assistant so he will not enjoy any share of the companys profits. The secrecy of
business practices, to some extent, is very important. In this case, the owner is able to retain
business secrets because it is not his responsibility to share them with his employer. There
will not be any postpone in decision-making because the owner is the final authority in the
business. The proprietor can take suggestions of his employees but final decisions will remain
with him.

However, doing business as a sole proprietorship can cause a few significant concerns.
Individuals resources are typically less than the pooled resources of partners. Hence, there is
a difficulty in raising capital. The proprietor remains personally liable to the full extent of
his assets for the liabilities of the business. Thus, if the income does manage to grow, it will
not be tax-efficient. Nevertheless, an assistant does not bring any capital to the table; hence,
he does not have much interest in increasing the profitability of the company. A partner, on
the other hand, will share the profits of the business; so certainly he will take keen attention in
the working of the business. There is also a difficulty in finding a suitable person for
employment. If a wrong person is employed, then it will create more problems instead of
solving them.

Alternative 2:

Let us take the second option into consideration. When a new person is added as partner, the
company becomes a partnership firm with predefined ratio of loss and profit. In partnership,
all the liability lies with the owners. Partners report their share of the partnership's profit on
their personal income tax returns. The key advantages of a partnership are as follows:

As Owens business grows, his need for funding doesnt diminish. Indeed, he will need some
form of capital to hire new employees, expand his facilities, or purchase new equipment and
machinery. The admission of a new partner, in this case, is a perfect solution to his capital
problem. In a sole trade company, the investments are limited to the resources of one person
only. By adding one more person to the firm, more funding is combined, which will remain
permanently in the business. When risks are distributed, temporary source of funding can
also be raised through bank and interest liability of the business will increase as well.

As Owen is doing his business alone, he personally makes every decision and hence, be the
final authority. The expansion of Brightspot might require a sharing of managerial
responsibility. This can be solved by employing a servant but his role is still a limitation since
final decisions have to be taken by the proprietor. Accordingly, the addition of a new partner
is a more convenient choice in this case.

The liability of a sole trader is unlimited. As a result, if Owen builds up his business as a sole
proprietorship, there bound to be a higher scale of risk. As a partnership firm, the risk is shared
by both partners but the harm is still there. In other words, compare to a sole trade concern
alone, a partnership stands a lower level of risk. However, unlike corporation and LLC, owners
of a partnership are still being affected by unlimited liability but no double taxation is included
as it is on corporate profits.
However, scaling up business by adding a partner can also cause a few critical drawbacks.
Undoubtedly, as a partnership firm, business profit will be shared among two persons while
in sole proprietorship, it belongs only to the owner. Not to mention if a partnership firm is
doing good, it is not tax-efficient. The option of employing a manager, on the other hand, does
not provoke such concern. With that being said, the sharing of profits will certainly reduce
interest of the proprietor in his business.
A sole trader can no longer keep all of the business secrets to himself, now that it is his duty to
share them with his partner. It would not be a concern until the relations between them are
strained. The secrets then will have high possibility to be passed out. An assistant, in this case,
is a safer choice since it is not his job to be involved in any critical process or information.
So many men, so many minds they say. When a partner is added into a business, decision-
making process often becomes a time-consuming one. Decisions now have to be taken with
consensus among partners in order to protect the business from being dissolved. In short,
partnership requires more time and effort in taking a particular decision.
Alternative 3 & 4:

A corporation and LLC share quite a lot of similarities with the case of a partnership, except
for the following distinctive attributes:

A corporation is a legal entity, whose scope of activity and name are restricted by its character.
A corporation acts as a legal shield or veil for its owners (aka shareholders), so that they are
generally not liable for the corporation's actions. However, there is double taxation going on
within a corporation, first through taxes on profits and second on taxes on shareholders.

Advantages of a corporation:

The shareholders are only liable up to the amount of their investments.

A publicly-held corporation in particular can raise funds by selling shares or issuing
bonds.
Changing ownership is very easy.
For large income, it can be very efficient for tax purpose.

Disadvantages of a corporation:

Double taxation
Cost of compliance is very high.

A limited liability company (LLC) is a mixture between a partnership and a corporation,

which makes them an ideal entity for many businesses. Owners of an LLC have operational
flexibility and income benefits similar to a partnership but also affected by the limited liability.

Advantages of the LLC:

The liability of owners is limited to the amount of their investments in the LLC.
An LLC can be structured so that the income earned by the business flows directly
through to owners.
An LLC can be run by professional management.
There is no limitation on the number of investors.
LLC can issue multiple classes of stock like corporation.

Disadvantages of the LLC:

Each state has implemented different rules regarding how a LLC is structured and
operated so compliance cost can be high.

The scaling-up of Brightspot will have huge impact on the following three factors in our
accounting procedure and practices

Equity or liability representation

In sole proprietorship or partnership, owner needs to maintain only 2 (two) account: capital
account and withdrawal account in the equity section. Whatever owner takes out from the
partnership/proprietorship goes to withdrawal account while any addition of capital comes in
the capital account. In the case of corporation and LLC, we have a retaining earning section
where earnings that are not distributed to shareholders remain. All the shareholder equities are
present in capital stock account.

Revenue and expense recognition

In partnership and proprietorship, owners sometimes use personal resources for business and
vice versa. Imagine a grocery store owner using his car to bring grocery from the whole-seller
while he went to town for medical check-up. In these two cases, accountant need to decided
what and which expense should go to business otherwise owner will include some of his
expense in the Profit and Loss statement to reduce profit so that he pays less tax. While in
corporation, the management of shareholders profits is far different than that.

Taxation
In partnership and proprietorship owners need to pay only their own income tax. Profit from
the business is added to their personal income. Corporation are treated like a separate legal
entity so it pays all the taxes by itself.