Sole-Traders-And-Partnerships

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Exam code:J204

An introduction to business ownership

When an entrepreneur starts a business, they need to consider what kind of legal structure they want for their business
Their decision will depend upon a range of factors
- The level of personal risk they are willing to take
- The advice they receive
- The level of privacy they would prefer in running the business

Sole traders

A sole trader is a business with a single owner who makes all the decisions and gets to keep all of the profit

Examples of sole trader businesses

Illustrations of various services: taxi driving, hairdressing, gardening, tutoring, and handyman work, each labelled with text describing the service. — **Taxi services, hairdressing, tutoring, as well as handyman and gardening services are often provided by sole traders**

They can start trading immediately

Operating as a sole trader is the simplest way to start trading immediately
- Sole trader businesses are often very small, with one owner who runs the business on their own (although they may employ people to work in the business)
- Sole traders are the most common form of business ownership in the UK
  - They are concentrated in the tertiary sector, offering services such as tutoring, home improvements or taxi driving

They have complete control

Sole traders are in complete control of their business, and get to keep all of the profit it generates
- The owner can keep all of its financial performance data private, though they must pay tax on their income

They have unlimited liability

However, sole traders have unlimited liability
- This means that they are personally responsible for all business debts
  - If the business fails, any money owed must be paid by the sole trader to avoid bankruptcy

Advantages and disadvantages of setting up as a sole trader

Advantages	Disadvantages
Easy and inexpensive to set up The owner has complete control over the business and can make all decisions All profit belongs to the owner Simple tax arrangements Can provide a flexible, personal service that meets customer needs	The owner is personally responsible for debts the business incurs Limited access to finance as lenders consider them risky Limited skillset of the owner/entrepreneur may limit business growth Long hours, hard work and lots of responsibility for the owner There is no business continuity as the business usually dies with its owner

Examiner Tips and Tricks

A common misconception is that sole traders have to do everything themselves. While sole traders often work alone, they can employ or subcontract others to complete tasks.

Partnerships

A partnership involves two or more people joining together to own a business
- They are relatively easy to set up, with relatively few legal formalities
- Partners may choose to draw up a deed of partnership, which states the formal rights of each partner, including
  - The amount of capital contributed by each partner
  - How profits or losses are shared amongst partners
  - The procedures for dissolving the partnership and taking on new partners
  - The level of control each partner has in relation to setting objectives and making decisions
Owners (partners) share unlimited liability, meaning their personal assets are at risk should the business get into financial difficulty
Examples of business that commonly operate as partnerships include lawyers, accountants and doctors
Partnership businesses often have names that include ‘& Son’, ‘& Co.’

Advantages and disadvantages of setting up as a partnership

Advantages	Disadvantages
Easy and inexpensive to set up and run as there are few legal formalities Shared responsibilities and decision-making More skills and knowledge mean partners can specialise in their area of expertise Increased access to finance as partners invest capital and lenders consider partnerships less risky	Partners have unlimited liability for debts incurred by the business In some countries, it is possible to set up as a limited liability partnership, which removes this risk Partners’ decisions are legally binding on all owners There is potential for disputes between partners Profits are often shared equally regardless of a partner’s contribution

Business GCES OCR