Question

Christian’s wife, Sally, is employed by Coopa Pty Ltd as a sales manager. Outside of work she does some ironing for a number of the executives of Coopa Pty Ltd as well as a growing number of personal clients. She is earning about $300 per week from this little side business. Christian and Sally do not have any children and are now too old to have any children. They have considerable assets, including a property which has been valued at $700,000. At a work Christmas party, Sally comes to you and says, "Hey, should I set up this business as a company?"

Answer 1

Sally should compare both explicit and implicit costs when considering setting up her ironing business as a company, taking into account opportunity costs, potential tax benefits, and compliance requirements.

Step-by-step explanation:

When considering whether Sally should set up her ironing business as a company, she should assess both explicit and implicit costs. The explicit costs are straightforward, such as any expenses directly related to the business operation. However, the implicit costs are the opportunity costs of her time and potential income from other sources, much like in the case of Eryn who considers quitting a job with a salary to start her own firm. If Eryn's accounting profit is $115,000, but she has to forego a salary of $125,000, her economic profit would actually indicate a loss of $10,000.

Similarly, Sally needs to take into account the potential loss of earnings or benefits elsewhere if she invests more time into her ironing service. Deciding to structure as a company might bring tax benefits, limited liability, and the ability to bring in investors, but it also involves additional regulatory compliance, paperwork, and potentially higher costs. Ultimately, the final decision should compare the net benefits of both scenarios.