Accounting for Partnership Business

Topics: Balance sheet, Cash flow, Partnership Pages: 9 (2569 words) Published: May 26, 2013
Table of Contents

Sole trader1
Registration Process3
Financial Report5

Christina Adams and David Ng recently completed their professional accounting qualifications, registered as tax agents and obtained all the necessary individual licenses as well as professional registrations required to operate as individuals. To start a new business, it is crucial to choose an appropriate business structure and facilitate the efficient operation and management (Pendieton & Vickery, 2005). Through the comparison of the different business structures, Christina and David will choose the partnership as the form of business entity to commerce their new business. This report will discuss the reasons of choosing the partnership and then point out the advantages and disadvantages of different business structures. It will also explain the registration process and agencies that are involved in the form of partnership entity. Finally, based on the partnership agreement, some implications and financial reports will be given in the report. Sole trader

The three main options are sole trader, partnership and company. Each has advantages and disadvantages, depending on various circumstances. Running a new business as a sole trader is the easiest approach, since getting started costs very little and is simple. The sole trader does not pay separate income tax and is not subject to company regulation such as the Corporations Act (Birt, Chalmers, Byrne, Brooks & Oliver, 2012). Also, the owner can retain full control, have rights to make decisions and get all the profits, if the business underperforms, he can offset losses against other income. However, the individual has unlimited liability since it is not a separate legal entity. That is to say, the owner is personally responsible for all the debts incurred by the business. If it goes bad, he may be forced to sell other assets and the personal assets could be at risk. The tax disadvantage is that a person may be liable to pay income tax up to the top marginal tax rate (Pendieton & Vickery, 2005). Moreover, this form is limited by skill, time and investment of the individual owner (Harris, Hargovan & Adams, 2009).

Partnership, as a form of business structure, involves a group of two or more people carrying on the business in common with a view to profit (Harris, Hargovan & Adams, 2009). The partners will share the profits, losses and risks based on the ownership structures described in the partnership agreement (Birt et al., 2012). The use of partnerships and its attractions can be attributed to several reasons. First and foremost, as is the case with sole trader, partnership is easy to set up with minimal costs and resources. Individuals are not required to prepare additional paperwork to form an ordinary partnership (Harris, Hargovan & Adams, 2009). However, they must fulfill the same registration requirements as other new business. Meanwhile, as with sole traders, although many partnerships use MYOB or QuickBooks to assist in report preparation, there are no formal requirements for partnership financial statements on the basis of accounting standards (Birt et al., 2012). In other words, there is not bound by accounting standards and it is easy to create without many formalities due to lighter government regulation compared to companies. In the second place, the partnership does not pay separate taxation on the income and profits they earned and has the ability to split tax and share the responsibility for running the business. Although the partnership will present an annual partnership income tax return to the Australian Taxation Office (ATO) in order to maintain the partnership’s income and deductions for the period, they do not need to obey as much government regulation as companies (Birt et al., 2012). Furthermore, the pooling of capital and resources is a...
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