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advantages and Disadvantages of Sole Traders

Essay by review  •  October 4, 2010  •  Research Paper  •  9,668 Words (39 Pages)  •  2,629 Views

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эIf you are operating as a sole trader, the benefits are that it is a simple form of ээbusiness to establish and there are no formal legal restrictions. You can enjoy all the ээprofits and there is no legal requirement to keep accounts other than to inform the tax ээinspector of the tax liability of the business (which will in fact be your personal ээincome tax liability). The Inland Revenue will require acceptable accounts and ээtaxation computation, however, and this will usually mean that you have to pay an ээaccountant to draw up the final accounts and audit the books in order to avoid paying ээtoo much taxation and to satisfy the tax inspector at the Inland Revenue. As a sole ээtrader there is nothing to stop you carrying out this work yourself if you have the ээrequired skills.э

эBeing a sole trader also brings problems - mainly your difficulty in finding the ээnecessary capital to start the business and the requirement on you if you do borrow ээfrom the bank, to put up some form of collateral such as your house and other ээpersonal possessions. Furthermore, you have unlimited liability, which means that if ээthe business goes into receivership you will not only lose all of the money you have ээinvested in the business but could, if the business owes more than its asset value, ээlose your own personal assets. A sole trader could be made personally bankrupt due ээto the failure of the business. You will probably have to work very long, and in many ээcases unsocial hours. If you become ill or want to go on holiday you will have to pay ээsomeone to look after the business. Can you put trust in such hired help? Running ээyour own business can be very stressful.э

эAdvantages and disadvantages of sole tradersэ

эAdvantagesэ

э ээDisadvantages

э They are easy to set up and ээrequire little paperwork. ээ One person takes all the decision-ээmaking responsibility.

э All profits accrue to the sole ээtrader. ээ One person is responsible for ээproviding all the capital.

э Decisions are made quickly. ээ Working long hours is necessary.

э Close contract is kept between ээowner, employees and customers. ээ Unlimited liability for debts.

эPartnershipsэ

эA partnership is a way of sharing the risk, skills and the workload involved in ээrunning a business. Many partnerships tend to be in the retail industries but there is ээalso a high proportion of partnerships in agriculture, catering and the construction ээindustry. Partnerships consist of between two and twenty partners but firms of ээpartners within the various professions can be larger. Indeed, partnerships tend to be ээmost common in the professional services where there is a legal barrier to most of ээthem forming limited companies; examples include firms of solicitors, accountants, ээstockbrokers, doctors and dentists.э

эAlthough oral partnership agreements are legally binding it is necessary to draw up a ээformal partnership agreement. This involves writing out a deed of partnership drawn ээup with the help of a solicitor or an accountant. This document sets out the details of ээthe partnership agreement and includes important items such as the amount each ээpartner has to put into the business, the responsibilities of each partner and how ээprofits and losses are to be distributed between them.э

эPartnerships can trade under their own names or under a business name subject to the ээsame restrictions as sole traders. If the partnership chooses a business name such as ээthe Bradfor Estate Agency, all of the partners must be shown on all business ээstationery.э

эThere are two types of partnership : ordinary and limited. Under the ordinary ээpartnership all partners must have unlimited liability and can take a full part in the ээrunning of the business. Under a limited partnership the sleeping partner can enjoy ээlimited liability but he must not take an active role in the running of the business - ээhence, the name. The sleeping partner can provide the business with a valuable ээinjection of capital, however. This can be particularly important when the business is ээgrowing.э

эThe benefits of running a partnership are that more capital is available than with a ээsole trader and there are relatively few legal restrictions. The provisions of the ээPartnership Act 1894 still apply, however. There is also the opportunity for ээindividual partners to specialize and gain more expertise than would be possible under ээa sole trader - one person cannot be an expert in everything. For example, individual ээpartners in a firm of accountants could specialize in specific areas such as taxation, ээinvestment advice, property, etc. the responsibilities and stress involved in running ээthe business are shared among partners. There is a greater possibility of borrowing ээmore money from the bank because each partner could put up some form of security ээas collateral.э

эThe main problems running a partnership are that each partner must be consulted and ээthere is obvious scope for disagreement which can affect the smooth running of the ээbusiness and can even close the business down. All profits are shared between ээpartners according to their partnership agreement. One partner, however, may not be ээas good or as hard working as the other partners yet receive a similar share of the ээprofits. Even worse, one partner may be dishonest or negligent and cause problems ээin the partnership and all the other partners will then have to share the resulting ээliability. All partners (other than a sleeping partner) have unlimited liability so, if the ээpartnership incurs debts, all partners are liable including their own personal assets.э

эAdvantages and disadvantages of partnershipsэ

эAdvantagesэ

э ээDisadvantages

э The responsibilities are shared. ээ

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