Law 11: Business Structures: Sole Proprietorship vs Corporation Report

This report provides a comprehensive comparison between sole proprietorship and corporation business structures. It begins by defining sole proprietorship as a business structure with no separate legal existence from its owner, highlighting its simplicity and cost-effectiveness while also noting the owner's personal liability for business debts. In contrast, the report outlines the corporation as a separate legal entity, managed by directors and offering limited liability to its members. The report explores the advantages and disadvantages of each structure, including ease of setup, control, tax implications, funding options, and liability protection. It emphasizes the suitability of sole proprietorship for initial business stages and corporations for expansion and diversification, particularly in scenarios requiring significant capital and risk mitigation. The report uses case laws to illustrate key concepts like separate legal entity and perpetual existence. Ultimately, the report analyzes the best structure for Penny Grey, recommending a corporate structure for her outdoor fitness business to facilitate expansion and protect personal assets.

Running Head: Law 1
Law

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Executive summary:
Sole proprietorship is the business structure which does not have separate existence from its
owner. Owner is responsible independently for all the aspects related to the business. On the
other hand, Corporation is the structure which has separate legal existence from its members.
This report contains various factors which defines both sole proprietorship and corporation. It
also states the advantages and disadvantages of both the structures, and which structure is
appropriate as per the needs of the Penny Grey.

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Contents
Introduction:....................................................................................................................................4
About sole proprietorship:...............................................................................................................4
Advantages of sole trader:............................................................................................................5
Disadvantages of Sole proprietorship:.........................................................................................6
Corporation:.....................................................................................................................................9
Conclusion:....................................................................................................................................10

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Introduction:
A sole trader is the structure under which individual is responsible to conduct the operations of
the business. For example- sole trader is not able to share debts and losses of the business with
others, and they enjoy all the profits of the business. This business structure is the simplest and
inexpensive form of structure which can be chosen by the individual at the initial stage of the
business. Context related to corporation is completely different from sole proprietorship because
members of the corporation are the owners and business is managed by the directors (Business,
2017).
This report states the advantages, disadvantages, and scope of both the structures that is sole
trader and corporation. This report further states whether sole proprietorship is appropriate for
Penny Grey or not. Lastly, this paper is concluded with brief conclusion.
About sole proprietorship:
Generally, Sole proprietorship is the business structure which has no separate existence from its
owner, and income and losses of this structure are taxed under the personal income tax return of
the individual.
This form of business is simple to operate, and under this structure individual is responsible to
conduct the operations of the business. Usually, sole proprietorship refers to the individual who
is considered as the owner of the business, and such individual is personally liable for the debts
of the business. This form of business is operated under the name of the owner of the business,
and owner can also conduct the business under fictitious name. It must be noted that such
fictitious name does not separate the business from the owner (ALG, n.d.).

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This form of business is popular because of its low cost, less regulations, easy setup, and
simplicity. For the purpose of conducting business under sole proprietorship, individual must
register the name and get local license. There is also one disadvantage of this form that is, sole
trader is personally liable for all the debts of the firm. Therefore, when sole proprietorship faces
financial consequences then creditors file case against the owner of the business. In case
creditors won the case then owner is personally liable towards them (ASIC, n.d.).
It is clear, that sole proprietorship does not have separate legal entity from its owners, and it has
both advantages and disadvantages which are stated below:
Advantages of sole trader:
 It is the simplest form of business, and if individual initiate the operations of the business
with his own name then such individual is not under obligation to register the name of the
business. Therefore, this form of business is more ideal at the initial stage of the business.
 Sole trader is the only owner of the business, and controls the operations of the
business. There is no obligation on sole trader to take permission of others for
taking any decision related to management issue.
 This business is also simple in the context of tax and accounting. In other words,
there is no obligation on business owner to file separate tax return of the business,
because all the income of the business is taxed under the personal return of the
owner. Owner also gets advantage to deduct the cost of operating the business
from the income earned by the business (Business Victoria, n.d.).

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 As compared to other form of business, sole proprietorship is less expensive in
nature, and it requires less set up amount.
 Sole proprietor enjoys the freedom of making the business decisions because he is
the only one who is responsible for conducting the operations of the company, and
it results in quick decision making process (ATO, n.d.; ATO, 2016).
Disadvantages of Sole proprietorship, and how corporates are different from
Sole Proprietorship:
There are number of advantages of sole proprietorship which makes this business more
appealing in nature, but there are some disadvantages also which must be kept in mind while
choosing this business. Some of these disadvantages are stated below:
 The most important disadvantage of this business is that business is not a separate legal
entity from its members, which means owner of the business is personally liable for the
debts of the business. There is no separation between business assets and personal assets.
In other words, creditors can file case against the owner of the business for the debts and
liabilities of the business. This disadvantage prevents the owner of the business to take
further risk for the expansion and diversification of the business.
In Corporations, there is clear separation between the personal assets and business assets
of the business, which make the corporation more suitable form of business at the time of
expansion and diversification of the business. Section 1.5.1 of the Corporation Act 2001
states that, companies has separate legal existence from its owners. This can be
understood through case law Peate v Federal Commissioner of Taxation. In this case
Court stated that Company was considered as new legal entity in the eyes of law.

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 As stated, there is no difference between the sole proprietor and its owner, and after the
death of the owner there is no one who conducts the operations of the business, which
means with the end of the owner business also ends. However, in some cases owner make
the future plan and hier representative who continue the operations of the business.
On the other hand in corporations, business enjoys the perpetual existence, which means
that business does not end with the death of the owner. This can be understood through
case law Re Noel Tedman Holdings Pty Ltd. (1967) QdR 561. In this case, both
shareholder and director died but still existence of company is continued.
 Corporations have number of ways to raise money for the purpose of conducting
operations of the business, and the easiest way available to them is to issue shares. This
means corporations offer partial ownership of the company in exchange of money, and
such money can be used to expand the business.
On the other hand, sole trader does not have shares to offer and they are not able to sell
the ownership of the company. Sole proprietorship is able to raise money like other
business structures. It must be noted that there is no separation between the personal
assets and business assets and because of this owner mortgage their personal property for
the purpose of getting loan. In case business of the company fails, and owner does not
have enough money to pay the loan then lender has right to take the personal assets of the
owner (Business, 2017).
In the present case, penny Grey wants to expand her business and expansion of business
required funds. Therefore it is more beneficial for her to choose corporate rather than sole
proprietorship.

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 The other disadvantage of sole proprietorship is less capital, which means that sole trader
is not able to arrange large amount of money for the purpose of conducting the business
operations of the company. Sole proprietorship does not have enough investors who
invest money in the idea of the owner.
On the other hand, corporations can easily raise high amount of capital because there are
number of investors who can raise money for the business. If Penny Grey chooses
corporate as business structure then it becomes simple for her to arrange capital through
investors or by selling the shares of the company.
 Sole trader is the only individual who makes the decisions of the business, but it has some
disadvantages also such as lack of expert’s advice. In this form of business, owner is the
only person who is responsible for all his decisions. For the purpose of expanding the
business, Penny required advice of experts and support for making the decisions. If she
holds sole proprietorship, it is not possible for her to get support in decision making
process.
After considering above advantages and disadvantages, it is clear that sole proprietorship is
better for initial stage of the business, but this structure is not appropriate when preferences of
the owner changed. In case, owner of the business wants to expand the business then they must
consider other options too (SMH, 2007).
Corporation:
There are number of factors which influence various aspects of business, and it includes how
profit and liability are divided, payment related to taxes, and who controls the business. If owner
wants to expand the business, then it is beneficial for owner to choose corporation instead of

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partnership or sole proprietorship. Some factors are stated below which help the owner to decide
the appropriate structure for the purpose of expanding their business.
 Business can be restructured for the purpose of meeting the financial goals and other
objectives also. Owner must choose that structure which improves the profitability and
cash flow of the business and for this purpose corporation is more suitable option.
 Business can be restructured when it becomes necessary to reorganize the internal
functions of the business. For example-sales and marketing, for the purpose of improving
the operations of their business.
 Owner can also restructure their business when they decide to diversify or expand their
business. Such as, when they decide to expand their business overseas or decide to
expand the functions related to products and services. Therefore, this change is necessary
for ensuring growth and for this change corporation is the most suitable form of structure.
As stated in the present case, Penny Grey runs business of outdoor fitness as a sole trader, and
she managed this business with the help of young family members. Now, she wants to expand
her business, and for this purpose she needs advice. As stated above, sole proprietorship is the
structure which suits at the initial stage of the business, but it is not appropriate at the time of
expansion of business. Therefore, it is advisable to Mrs. Penny Grey that she can adopt
corporation structure for conducting the operations of their business.
Shareholders are the owners of the corporation, who get advantage from the profits earned by the
company. On the other hand, sole proprietorship is owned by one person only who gets all the
profits of the business, and also responsible for all the losses of the business. Corporation is

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considered as most complex structure of business and it has number of set-up regulations, but
this form of structure offers high number of rewards as compared to other form of structures.
Protection from liability- the biggest benefit provided by corporation is protection against
liability, which is not offered by other forms of business. Corporation is considered as separate
legal entity, and law separates the business assets and personal assets in this form of structure. In
this, there is no risk on the personal assets of shareholders if company fails to pay the liability of
the creditors. This can be understood through case law Salomon V A Salomon And Co Ltd
[1897] AC 22. In this case, Court stated that corporate was separate legal entity from its owners.
In case of sole proprietorship and partnership, owners of the business are liable for the debts of
the business and their personal assets are also at risk (Business, 2017).
Therefore, Penny can choose this structure because it reduces the risk of liability in case
company incurred losses. Penny can secure her personal assets by choosing corporation structure
and expand her business with less or minimum risk.
Raising funds- as compared to other form of structures, corporations can easily raise the funds
for the purpose of conducting projects and operations. There are number of ways through which
corporations can raise funds such as corporations can sell their ownership in part, raise loans by
mortgaging the assets of the business, other investors, etc.. This can be understood through case
law Trust Company of Australia Ltd v Commissioner of State Revenue [2007] VSC 451.
As stated above, for business expansion Penny required funds on different stages of business,
and for this purpose she can also sell the partly ownership of her company.
In corporations, it is easy to transfer the interest in ownership to the third parties, and it does not
affect the continuance operations of the business. In case of sole proprietorship and partnership it

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is not easy to sell the complete business, because it directly affects the operations of the firm.
Not only assets are transferred but licenses and permits are also transferred which makes this
task more difficult.
Tax Benefits- there are number of benefits in context of tax are available to corporations, but
these benefits are not available to sole proprietorship and partnership. Tax returns of corporations
are not clubbed with the returns of shareholders, both shareholders and corporations files
separate tax returns. Shareholders pay taxes on salaries, dividends, and bonus earned by them
from the corporation (Business, 2017).
Penny is not liable to pay tax on the profits earned by the company, and she is only liable to pay
tax on her income only.
Conclusion:
This report contains detailed discussion related to sole proprietorship and other alternatives for
Penny Grey for the purpose of expanding their business of outdoor fitness. Sole proprietorship is
the structure which suits at the initial stage of the business, but it is not appropriate at the time of
expansion of business.
After considering the comparison between corporation and sole trader, it is clear that corporation
is better for expanding the business almost in every way. Therefore, it is advisable to Mrs. Penny
Grey that she can adopt corporation structure for conducting the operations of their business.

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References:
ALG. Business Structures. Available at: https://www.shopify.in/guides/australia/business-
structures. Available at 17th August 2017.
ASIC. Choosing a business structure. Available at: http://asic.gov.au/for-business/your-
business/your-business-structure/. Available at 17th August 2017.
ATO, (2016). Choosing your business structure. Available at:
https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Choosing-
your-business-structure/. Available at 17th August 2017.
ATO, (2016). Sole Trader. Available at: https://www.ato.gov.au/business/starting-your-own-
business/before-you-get-started/choosing-your-business-structure/sole-trader/. Available at 17th
August 2017.
Business Victoria. Sole trader. Available at: http://www.business.vic.gov.au/setting-up-a-
business/business-structure/sole-trader. Available at 17th August 2017.
Business, (2017). Company. Available at: https://www.business.gov.au/info/plan-and-start/start-
your-business/business-structure/business-structures-and-types/company. Available at 17th
August 2017.
Business, (2017). What are the set-up steps and costs. Available at:
https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/change-
business-structure/sole-trader-to-a-company/difference-between-a-sole-trader-and-a-company/
what-are-the-set-up-steps-and-costs. Available at 17th August 2017.
Business. (2017). Business structure. Available at: https://www.business.gov.au/info/plan-and-
start/start-your-business/business-structure. Available at 17th August 2017.
Peate v Federal Commissioner of Taxation (1964) 111 CLR 44.
Re Noel Tedman Holdings Pty Ltd. (1967) QdR 561
Salomon V A Salomon And Co Ltd [1897] AC 22.
Trust Company of Australia Ltd v Commissioner of State Revenue [2007] VSC 451.
SMH, (2007). Advantages and disadvantages of operating as a sole trader. Available at:
http://www.smh.com.au/small-business/advantages-and-disadvantages-of-operating-as-a-sole-
trader-20090619-cpvm.html. Available at 17th August 2017.