Sole Traders & Partnerships

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Types of Business Ownership - Sole Traders

Every business needs a legal structure that defines who owns it. A sole trader is a single person who is the exclusive owner of a business. They can still have employees and the owner is entitled to keep all of the profits after tax, but is also personally liable for the business’ debts.

Advantages

They are the easiest type of business to set up.
The sole trader gets to be their own boss.
The sole trader decides what to do with the profit.
It is easy to change the legal structure if circumstances change.

Disadvantages

Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.
It can be hard to raise finance. Banks often see sole traders as riskier.
All the responsibility for making business decisions is yours. Having someone to share decision making with can improve performance.
It can be harder to retain (keep) good employees as they aren’t necessarily given a share of the profits.

Types of Business Ownership - Partnerships

Partnerships are businesses that are owned by 2 or more partners. Each partner has an equal share of the profits and equal say in the decision making process. Examples of partnerships are doctors’ surgeries, dentists or accountancy firms.

Advantages

More people means more experience and more ideas. Decisions can also be better as the owners can discuss pros and cons with each other.
It is easier to raise money because banks are more likely to lend to a partnership than to a sole trader. More investments means increased access to finance for the firm and this supports quick growth.
Good employees can be made into partners and this means it is easier to retain the best employees.

Disadvantages

The profits are shared, so if a sole trader decides to go into business with another person, they may end up with a lower profit for themselves.
Like sole traders, partnerships have unlimited liability.
Partners may disagree about business decisions and this can be unpleasant, especially if it is a family-based partnership.
Each partner is liable for the actions of the other partners. This may lead to further friction between partners.

Types of Business Ownership - Limited Companies

Limited companies are businesses that are owned by shareholders. There are 2 types of limited company: private and public. Both share key differences from partnerships and sole traders:

Limited company is incorporated

A limited company has a separate legal identity from the owners.
This means that cash, property and debt is in the company’s name and is property (and therefore responsibility) of the company and not the individual shareholders.

Limited liability

Being incorporated means that the shareholders are protected by limited liability. Limited liability means that the shareholders are only legally responsible up to the amount that they have invested.
- E.g. if a shareholder invests £10,000 in the purchase of shares, they won't be liable for any debt if the company fails (£10,000 is the maximum they can lose).

Owned by shareholders

Limited liability companies are owned by shareholders. The shareholders of limited companies can have nothing to do with the day-to-day running of the business.
The more shares a person owns, the more control they are likely to have relative to other shareholders.