Lecture notes
Forms of Business - Partnerships
- Institution
- CCEA
A look at the advantages and disadvantages of operating as a partnerships and sole trader.
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Forms of Business PartnershipSole Trader:
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is
owned and run by one individual and in which there is no legal distinction between the owner and the business.
Some examples include: hairdressers, plumbers or photographers.
Advantages Disadvantages
Control - Sole traders maintain full control of their business. Running it Liability – sole traders are not seen as a separate entity by the law.
how they please without the interference of others. This also means that Therefore, they are subject to unlimited liability. This means if the
they can operate the business on their choosing and make all the business gets into debt, the business owner is liable. In the worst case, this
important decisions without the interference with others. may mean a person risks their home, personal savings and any other assets
they have both in and outside of the business.
Specialist – Often a small business, sole traders can offer a more Finance – sole traders often find it difficult to raise finance to fund their
personal service with local roots and ties. This can be more appealing to business. They may struggle with expansion in the future as there is only
potential customers in the local community. This also means the business one person that is available to provide the finance for the company thus
knows the needs and wants of the customer and can tailor their service there is a lack of capital available within the business.
towards that specific need.
Private data – Information about sole traders is kept private, unlike
Has limited resources: Banks are reluctant to grant loans to single
that of limited companies which is necessarily made public after
registration with Companies House. Thus, competitors won’t gain a proprietorship considering its small assets and high mortality rate.
valuable insight into how well or adversely the business is operating at.
As there is only one owner this means that all profits are kept by the
A sole trader business lacks continuity. This means the company will end
sole owner thus they enjoy all the profits from the business success.
They reap the awards from the hard labour that they put into the automatically if a sole trader dies, retires or decides to sell the business.
business to make it a success. This lack of continuity makes it difficult for a sole trader to attract
investors. Sole traders may have to rely on their personal assets and
business loans to secure financing to operate. A sole trader may have
difficulty securing business loans for fear that the owner will die or become
disabled.
Partnership:
Business owned by two or more persons but not exceeding 20 persons. A business organisation in which two or more
individuals manage and operate the business. Both owners are equally and personally liable for the debts from the
business.
Advantages Disadvantages
Capital – Due to the nature of the business, the partners will fund Disagreements – One of the most obvious disadvantages of partnership is the
the business with start up capital. This means that the more danger of disagreements between the partners. Obviously people are likely to
partners there are, the more money they can put into the business, have different ideas on how the business should be run, who should be doing what
which will allow better flexibility and more potential for growth. It and what the best interests of the business are. This can lead to disagreements
also means more potential profit, which will be equally shared and disputes which might not only harm the business, but also the relationship of
between the partners. those involved. This is why it is always advisable to draft a deed of partnership
during the formation period to ensure that everyone is aware of what procedures
will be in place in case of disagreement and what will happen if the partnership is
dissolved.
Shared Responsibility – Partners can share the responsibility of Unlimited Liability: A type of business where owners share joint and several
the running of the business. This will allow them to make the most responsibility for the entire amount of debt and other liabilities amassed by the
of their abilities. Rather than splitting the management and taking business. Unlimited liability is not capped at a maximum amount and exists
an equal share of each business task, they might well split the work regardless of the amount of investment each owner has personally made. If the
according to their skills. So if one partner is good with figures, business is unable to meet any financial obligations or settle any outstanding
they might deal with the book keeping and accounts, while the liabilities, the owner's personal assets can be seized to satisfy the debts.
other partner might have a flare for sales and therefore be the
main sales person for the business.
Decision Making – Partners share the decision making and can help Profit Sharing – Partners share the profits equally. This can lead to inconsistency
each other out when they need to. More partners means more where one or more partners aren’t putting a fair share of effort into the running
brains that can be picked for business ideas and for the solving of or management of the business, but still reaping the rewards.
problems that the business encounters.
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