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Shelley been an employed software designer for many years and has decided to start up her own business
Shelley been an employed software designer for many years and has decided to start up her own business. She incorporates a company as she thinks this will help minimise her tax liability and get the benefit of asset protection.
The business commenced on 1 July 2019. Shelley used prior networks to get work as she figured that this would be cheaper than advertising her business. This tactic worked and she had three clients in her first year. The contract from each client was for three months and were each of equal value.
Shelley entered into the same agreement with each of the clients. The agreement provided she would get paid $150 per hour and that she would supply her own laptop with any additional tools to be provided by the client. If the work completed did not meet the client’s expectations, Shelley agreed to only charge $50 per hour to update the software to meet the client’s needs.
Shelley worked from a loft above her home garage. On the lower level in the garage she stored garden tools and parked the family car. While Shelley did all the software design work, she did pay her teenage daughter for completing administrative tasks.
Expert Solution
Advantages of a Sole Proprietorship
- A sole proprietor has complete control and decision-making power over the business.
- Sale or transfer can take place at the discretion of the sole proprietor.
- No corporate tax payments.
- Minimum legal costs to forming a sole proprietorship.
- Few formal business requirements.
(b) Benefits of converting it to a joint stock-
- One of the biggest drawing factors of a joint stock company is the limited liability of its members. Their liability is only limited up to the unpaid amount on their shares. Since their personal wealth is safe, they are encouraged to invest in joint stock companies
- The shares of a company are transferable. Also, in the case of a listed public company they can also be sold in the market and be converted to cash. This ease of ownership is an added benefit.
- Perpetual succession is another advantage of a joint stock company. The death/retirement/insanity/etc does affect the life of a company. The only liquidation under the Companies Act will shut down a company.
- A company hires a board of directors to run all the activities. Very proficient, talented people are elected to the board and this results in effective and efficient management. Also, a company usually has large resources and this allows them to hire the best talent and professionals.
(c) If she plans to go nationwide then she will have to manage her form of business from sole proprietorship to joint stock company.
(d) If she plans to operate as joint stock company, she will have to complete many legal formalities such as:
(i) getting a certificate of incorporation
(ii) getting a certificate of commencement of business if she plans to operate as public ltd. co.
(iii) appoint professional experts, brokers, who charge high fees.
(iv) prepare various documents such as Prospectus, Memorandum of Association, Articles of Association etc.
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