sole trader +partnership

• what is the definition of a sole trader

  An individual who owns and runs their own business. Sole traders are the most popular form of business in the UK. Registered as self-employed with Her Majesty’s Revenue and Customs (HMRC)
• are sole traders easy to set up ?

  Sole traders are easy to set up; it is just a matter of informing the Inland Revenue that an individual is self-employed and registering for National Insurance contributions
• what are the costs associated with being a sole trader ?

  • Costs are low due to the simplicity of setting up and no legal formalities.
  • No formal audited accounts are required – though it makes good business sense to keep a full set of business records. This means they don’t need to have their financial records reviewed by an independent auditor, just basic records for tax purposes.
  • Profits  are classed as income and are therefore taxable through income tax.
• define unlimited liability?

  Sole traders have unlimited liability……

  • Sole traders do not have a separate legal existence from their owner. 
  • This means owners are personally responsible for all debts and may have to sell personal possessions to pay back the debt.
  • Therefore, their home and all of their assets might be used to pay off any debts that they may incur and are unable to pay
• what is the definition of partnerships?

  A partnership involves the joint ownership of a business where 2 to 20 people share the costs, risks and responsibilities of being in business together.
• what is a deed of partnership

  The Deed of Partnership is an agreement between partners – it is a legal document that sets out the rules under which the partnership will operate

  What rules do you think are agreed in the partnership agreement?

  • Share of profits
  • Roles and responsibilities
  • Voting shares
  • Capital invested
  • Rules for dissolution
• what happens if a dispute arises

  Should a dispute arise without a partnership agreement giving methods of settling the dispute, then the dispute would be settled according to the 1890 Partnership Act. 

  This is best avoided, particularly where unlimited liability is involved, as the act states that each partner is equally responsible for any debts – each partner is ‘jointly and severally’ liable.
• What is one advantage of being a sole trader?

  Independence and being your own boss
• Why does a sole trader have quick decision-making?

  They have full control over decisions
• What motivates a sole trader to start their own business?

  To develop skills and confidence in their field
• What is a natural progression for someone in the building industry?

  Setting up their own business
• What is a personal goal for a sole trader?

  To achieve something for themselves
• Why might a sole trader believe they will earn more money?

  They think they can earn more than as an employee
• What is a privacy advantage of being a sole trader?

  No legal requirement to share business performance
• How does being a sole trader affect decision-making speed compared to other business structures?

  Decision-making is quicker due to full control
• If a sole trader wants to develop their skills, what might they do?

  Start their own business in the building industry
• disadvantages of sole trader

  • unlimited liability
  • more responsibility
  • relies heavily on their own ability to make decisions
  • may work long hours and have limited holidays as there is no one to cover them
  • limited sources of resources
• advantages of partnerships

  • can share resources and ideas
  • can cover for each other (during holidays for example)
  • have more sources of finance
  • have shared responsibility and decision-making
• disadvantages of partnerships

  • unlimited liability
  • loss of control
  • slow decision-making
  • disagreements between partners
  • profits must be shared between partners
• arguments for partnership instead of sole trader ?

  • Potentially more capital – ideal for example if the business needs to find new premises as the current one is becoming too small.
  • A new partner brings new skills
  • Possibility of specialisation
  • More ideas/problems can be shared
  • Share workload – presents an opportunity to reduce working hours/take holidays.
  • Avoids need to employ somebody – a risk – new staff need training – not sure of their capabilities
• arguments for staying as a sole trader instead of partnership?

  • Original sole trader will lose their independence.
  • Will need to share profits – though possible to generate more.
  • Could result in disagreements.
  • Decision making potentially slower – need to consult/less flexibility.
  • By employing a new worker the original sole trader could retain their independence and also reduce their own working hours.
  • If after a short time the new partner finds they want to leave the partnership then the original sole trader is back to square one.
• why move from a sole trader to private limited company ltd

  • potentially a lot more capital available for expansion
  • greater protection for personal assets – benefit of limited liability
  • easier to attract investors/shareholders because of security of limited liability
  • becomes a separate legal entity
  • likely to have greater continuity
  • possibly greater credibility with financial institutions
  • can still keep control
  • shareholders may bring in additional business ideas