TYPES OF PRIVATE SECTOR BUSINESSes
Sole traders
A
sole trader
is an individual who owns and runs a business alone. There is little legal distinction between the individual and their business, and this form of organisation is fairly easy to set up. Another advantage of this type of ownership is that sole traders are able to run the business as they see fit and keep all the profits. They can choose whether to reinvest profits in the business, or use them to meet their own financial needs.
Examples of sole trader businesses include people who are self-employed, restaurant owners, freelance workers, fashion designers, tailors and interior decorators. Sole traders can work alone or can employ people to work for them. Often, these are small family businesses started with little capital investment. Personal savings are often used to start this type of business.
In a sole trader business, the success or failure of the business is the responsibility of the sole trader. They are responsible for debts they take on and any losses they suffer. If the business is unable to pay its debts, creditors (such as suppliers and banks, for example) can seize the owner’s personal possessions, including their home. Sole traders may hire employees to help them, but these employees have no ownership interest in the business.
Another potential disadvantage of operating as a sole trader is the lack of distinction between the owner and the business. If the owner dies or is unable to work, for example, the future of the business itself may be uncertain. The business of a sole trader, in this case, may end operations, since the business does not have a separate legal identity from the owner. Sole trader businesses cannot be inherited and continued. They need to be unregistered in the event of the owner's death.
Some well-known companies operating currently were started as sole trader businesses. The luxury fashion house Chanel was started by Coco Chanel in 1910 and has become one of the most famous global brands today.
Advantages | Disadvantages |
|---|---|
Easy to set up. There are few legal formalities, regulations and paperwork. | Unlimited liability . The sole trader is legally responsible for the debts of the business. They may have to give up personal assets such as their own property to settle debts. |
Profits. All profits go to the sole trader as the owner of the business. | Difficult to finance. Many sole traders have to use personal savings to finance the business. Expansion and growth of the business might be slower. |
Fast decision-making. Sole traders do not need to consult with other owners. | High risk of failure. The business may face strong competition from larger, better funded businesses. |
Personal service. The small size of the business can help the sole trader to cater to individual customer needs. | High workload. The sole trader must manage their own accounts, human resources and marketing. |
Financial records remain private. | Lack of continuity. If the sole trader dies, the business is likely to cease trading. |
| Possible higher taxes. The owner may have to pay income tax, often higher rates, instead of corporate tax. |
Table 1. Advantages and disadvantages of a sole trader.
Partnerships
A
partnership
involves the creation of a business by two or more individuals, or partners. Partnerships are governed by partnership agreements, which define the ownership interests of the different partners, as well as how major decisions will be made by the partnership. Two partners may set up a business where ownership and control are split equally between the partners, or they may determine another arrangement that suits the purposes of the business. Some common examples of partnership are medical practices and law firms.
A partnership agreement will likely include the following:
the amount of money put in by each partner
the sharing of profits and losses by each partner
the roles and responsibilities of each partner
the rules around accepting new partners or withdrawal of existing partners
the procedures for ending the partnership
Advantages | Disadvantages |
|---|---|
Easy to set up. There are few legal formalities or regulations to set up a partnership of two or more partners. | Unlimited liability. Partners are legally responsible for all debts if the business fails. They may have to give up their own personal property to settle debts. |
Greater access to finance. There is more than one person (partner) to invest in the business. | Lengthier decision-making and potential for disagreement. Partners have to consult each other, so decision-making about the business may take time, and partners may disagree. |
Greater efficiency and productivity. As partners specialise in different skills, productivity increases and helps reduce costs. | Legal and financial responsibility. Mistakes made by one partner can reduce profits for all partners. |
Financial records remain private. | Lack of continuity. If one partner dies, the deed of partnership (legal agreement) becomes invalid and will have to be made again (depending on laws of the country). |
Sole traders are individuals who own and run their own businesses. They have full control over their business and keep all profits but also face unlimited liability for debts. If the business fails, creditors can take personal assets. This business type is often started with personal savings and is common among self-employed people, freelancers, and small family businesses. If a sole trader dies or cannot work, the business cannot continue.
Examples: Freelancers, restaurant owners, and Coco Chanel started as a sole trader.
A partnership involves two or more people who share ownership. Partnerships have agreements that outline each partner's contributions, profit-sharing, roles, and procedures for adding or removing partners. Common forms include law and medical practices.
Partnerships allow shared responsibility but also require trust and agreement on decisions.