Question

Ross Nicholls retired few years ago at the age of 60. Ross has considered starting his own business. Ross has hired the consulting firm for which your group works to give him a brief tutorial on business and finance. To begin his lesson, Ross has asked you to answer the following questions:

A. What finance entails, and why is it essential to understand finance to run an effective and successful business?

B.WhatarethealternativetypesofbusinessorganisationinAustralia?Whatarethe advantages and disadvantages of each? .

C. Explainwhatdifferencesintaxratesexistbetweendifferentbusinessorganisationsin Australia? .

D.

What does it mean to maximise value? .

E. ExplaintheconcernsthatAustraliancompaniesshouldconsiderbeforemovingthe operation to foreign countries.

Answer 1

A.

Finance is basically the study of money. It involves studying how money is flowing in and outflowing. It is essential for everyone to understand finance because everyone is affected by finance. Most of our daily activities have cost to produce and need price to pay for using or consumption of those activities.

Also, as a general understanding and logical, if other things are equal,

• More monetary value is preferred than less
• the sooner money is received, it is more valuable than later
• Less risky assets are more valuable than more risky assets

These are all essential for efficient and effective running of businesses.

To make proper decisions with respect to these concepts, one must need proper understanding of finance. It is essential to understand at every business process or activity level to avoid wrong decisions which could impact the success of business or to be able to avail best business option.

B.

Following are the alternative types of business organisations in Australia.

1. Sole Trader
2. Partnership
3. Company - Public & Private Companies
4. Trust - Discretionary & Unit Trusts

Advantages & Disadvantages:

Type	Advantages	Disadvantages
Sole Trader	1. Low costs in formation & Minimum legal procedures. 2. Direct Control over the business. 3. More Privacy. 4. Change of Structure is easy. 5. Easy to dissolve.	1. Unlimited Personal liability. Business liabilities can become personal liabilities. 2. Limited life linked to the life of owner. 3. Difficulty in ownership transfer. 4. Difficult in raising big amount of capital
Partnership	1. Easy and inexpensive to form and operate in comparison to companies & trusts. 2. More capital raising capacity compared to sole trader. 3. Possibility of bringing different skill sets to the business. 4. Tax advantages.	1. Liability is unlimited and severe. 2. Each partner is responsible for other partner's share of firm's liability. 3. Raising of largre amount of capital is not possible. 4. Partnership is automatically dissolved in case of death of a partner.
Company	1. Limited liability to the extent of company's assets. 2. Unlimited life. 3. Easy transfer of ownership. Public companies can belisted on stock exchange. 4. ability to procure large amount of capital. 5. Uniformed tax rate.	1. Complicated structre to form and expensive to maintain due to compliance requirements. 2. More legal & financial reporting obligations. 3. Sepation of Ownership & Management.
Trust	1. Facility of holding properties for beneficiaries. 2. Flexibility of income distributions in case of discretionery trusts. 3. Asset protection.	1. Beneficary's obligation to pay personal income tax on distribution from the trust. 2. Separate tax return filing by trust. 3. Difficult to dissolve.

C.

Type	Differences / Tax Rates
Sole Trader	The business income of sole trader is combined with the personal income and taxed at personal income tax rates. He is eligible for the 50% general capital gains tax discount. If annual business turnover is more than $75,000, he must register and pay for GST. Personal income is zero taxed upto 18,200 and marginal rate starting from 19% and reaches highest marginal rate of 45%.. There is additional medical levy of 2%.
Partnership	The share of the partnership income is combined with the personal income and charged at personal income tax rates. If annual business turnover is more than $75,000, it must register and pay for GST.
Company	Profits of large companies are taxed at 30% and companies with turnover less than $50 million are taxed at 27.5%.
Trust	The beneficiary pays the tax on his share of trust income when a trustee distributes trust income to him. If the beneficiary is individual, personal tax rate and if beneficiary is company, company tax rate. Any undistributed trust income is charged at the highest marginal tax rate.

D.

Maximise value means maximising the wealth.

As per Campbell R harvey, Value maximisation means increases in owners' wealth by maximising the value of a firm's common stock.

Maximising value also means maximisation of value for all the stakeholders of the enterprise means leading to enterprise value.

E.

• Market Research
• Cost of moving
• Long Term implications
• Proper business plan, Requirement of finances and sources
• Rules and regulations of the host country
• Culture
• Political and Economic environment