VCE Business Management

Businesses in Australia are classed by who owns them, how they are set up in law and what they are for. The classes matter because they decide who controls the business, who carries the risk if it fails, how it can raise money and what it has to report to the public. The sections below take the types in turn, from the one-person business to the large listed company, and then look at the two kinds that are run for a wider purpose than private profit.

Sole traders

A sole trader is a business owned and run by one person. In law the owner and the business are the same person, so the owner receives all the profit and is personally responsible for all the debts. This is unlimited liability: if the business cannot pay what it owes, creditors can claim the owner's own savings, car and home.

A sole trader is cheap and quick to set up, usually needing an Australian Business Number and any licences the trade requires. The owner makes every decision without consulting anyone, keeps all the profit, and can close the business easily. The drawbacks follow from the same facts. The business can raise money only from the owner's savings, a bank loan or credit, so growth is slow. One person has to cover every skill the business needs and cannot easily take a long break. The business also ends, in law, if the owner dies or retires, which is called limited continuity.

A hairdresser working from a rented chair, a mobile electrician and a freelance graphic designer are typical examples.

Partnerships

A partnership is a business owned by two or more people, up to a maximum number set by law, who share the profits and carry the risk in the proportions set out in a partnership agreement. Without an agreement, state partnership law presumes the profits and losses are shared equally. Partners in an ordinary partnership have unlimited liability, and each partner is liable for the debts of the whole partnership, not only their own share. This is called joint and several liability. One partner can therefore be made to pay a debt that another partner ran up.

Partners bring more money and a wider range of skills than one person can. The workload and decisions are shared, and a second pair of eyes catches mistakes. Against that, partners can disagree, and each partner can usually commit the whole partnership to a contract. Profits are divided rather than kept. A partnership ends when a partner leaves or dies unless the agreement says otherwise, so its continuity is also limited. Law practices, medical practices and accounting firms are often partnerships, and a small cafe run by two friends is another common example.

Private limited companies

A private limited company (the name ends in Pty Ltd, short for proprietary limited) is a separate legal entity from its owners. It is registered with the Australian Securities and Investments Commission and owned by shareholders, who number at most 50 apart from employees. Its shares cannot be offered to the public or traded on a stock exchange; they are sold by private agreement, usually to family, friends or investors the owners know.

Because the company is a separate legal entity, it owns property, signs contracts and can be sued in its own name. Shareholders have limited liability, meaning the most they can lose is the amount they paid, or agreed to pay, for their shares. Their houses and savings are not at risk if the company fails. The company continues to exist when a shareholder dies or sells, which gives it perpetual succession.

The costs of this protection are registration fees, more paperwork, annual reporting obligations and the duties of directors under the Corporations Act. Shareholders may also be asked by a bank to give personal guarantees for loans, which takes back part of the protection. Many family firms, small manufacturers and franchisees are private companies. The owners of a private company can still run it themselves as directors, so ownership and control often remain with the same people, and control is kept in the hands of a small group.

Public listed companies

A public listed company (the name ends in Ltd) has its shares listed on a stock exchange, in Australia the Australian Securities Exchange, where anyone can buy and sell them. The number of shareholders is unlimited. Like a private company it is a separate legal entity with limited liability for its shareholders.

Listing allows a company to raise very large sums by issuing new shares to the public, which funds expansion, takeovers and large projects. The price of the shares gives the market's ongoing view of the business, and shares are easy for investors to sell. The costs are heavy. A company must publish a prospectus when it first offers shares, meet continuous disclosure rules by telling the market promptly of information that could move the share price, publish audited accounts and hold annual general meetings. Ownership is spread over thousands of shareholders, so the original founders can lose control, and the business is exposed to takeover. Managers can feel pressure to deliver short-term profit to hold up the share price. Large supermarket chains, banks and mining companies are public listed companies.

Ownership is separate from management in most large public companies: shareholders elect a board of directors, the board appoints the senior managers, and the managers run the business day to day.

Social enterprises

A social enterprise is a business that trades in goods or services to meet a social or environmental need, and puts most of its profit back into that purpose instead of paying it out to owners. It competes in the market and earns its own revenue, which separates it from a charity that depends mainly on donations and grants, though many social enterprises also receive grants. Examples include a cafe that trains and employs people who have been long-term unemployed, a recycling business that employs people with disability, and a retailer that gives a fixed share of its profit to a named cause.

A social enterprise can be set up as any legal form, including a company limited by guarantee, a cooperative or an incorporated association, so its structure varies. Its distinctive features are a stated social purpose, trading income as its main source of funds, and profit directed to the purpose. Success is judged by the social outcome and by financial survival together, which can make it hard to balance the two and to attract investors who are looking for a return.

Government business enterprises

A government business enterprise is a business owned by a government (federal, state or local) that operates commercially, selling goods or services and expected to cover its costs and often to return a dividend to the government. It is run at arm's length from the day-to-day control of ministers, usually by a board. Australia Post and many state water authorities are well-known examples.

Such enterprises are established to provide services that private business would not deliver to everyone at a reasonable price, such as mail delivery to remote areas, or to run infrastructure the community relies on. They have access to government backing, which makes lenders more willing to lend, but they can be slow to decide, subject to political pressure and less open to competition-driven efficiency. They also carry community service obligations that a private business could avoid, such as continuing to serve an unprofitable region.

Comparing the types

A business may change type as it grows. A sole trader who hires staff and takes on a partner, or a family company that lists on the stock exchange to fund expansion, changes how it is owned and controlled, who it answers to and how it handles risk. Each change should be judged against the objectives of the owners.