Sole Traders & Partnerships
Business: Edexcel IGCSE, topic 1.2.1
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.
Test yourself on Sole Traders & Partnerships
What is the term used to describe the lack of distinction between a sole trader's assets and their business' assets?
Which of the following is a disadvantage of being a sole trader?
Which of the following is not an example of a partnership?
Which type of business finds it easier to retain employees?
Partnerships