Studied by 2 people
What are sole traders?
The most common type of business form
They are an individual who owns the business on his/her own
They can also employ people - but these people are not business owners
They own all the business assets and are personally responsible for the business debts. A sole trader has unlimited liability
What are advantages of sole traders?
Quick and easy to set up - business can always be transferred to a limited company once launched
Simple to run - owner has complete control over decision-making
Minimal paperwork
Easy to close/shut down
What are disadvantages of sole traders?
Full personal liability - ‘unlimited liability’
Harder to raise finance- Sole traders often have limited funds of their own security against which to raise loans
The business is the owner-the business suffers if the owner becomes ill, loses interest etc
Can pay a higher tax rate than a company
What are partnerships?
Where a business is started and owned by more than one person
The legal partnership agreement sets out how the partnership is run, covering areas such as:
How profits are to be shared
What the partners have to invest in the business
How decisions are taken
What happens if a partner wants to leave or dies
The partners between them own all the business assets and owe all business liabilities
Partners, therefore, also have unlimited liability
What are the benefits of partnerships?
It is quite simple- certainly the simplest way for two or more people to form a business together
Minimal paperwork once the Partnership agreement is set up
Businesses benefit from the expertise and efforts of more than one owner
Partners can provide specialist skills
Greater potential to raise finance- partners each provide the investment
What are the drawbacks of partnerships?
Full personal liability-’unlimited liability’
A poor decision by a partner damages the interests of the other partners
Harder to raise finances than a company
Partners are bound to honour the decisions of others
Complicated to sell or close
Why is an incorporated business a company?
A company is a separate legal entity
The owners of a company are shareholders
What are limited companies?
They are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued
Companies are owned by their shareholders and run by directors. The shareholders appoint the directors (often the same people) who run the company in the interests of the shareholders
Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company
What are the advantages of operating as a limited company?
Limited liability- protects the shareholders
Easier to raise finance- sale of shares and also easier to raise debt
Stable form of structure- business continues to exist even when shareholders
What are the disadvantages of operating as a limited company?
Greater admin costs
Public disclosure of company information
Directors’ legal duties
