Sole trader and partnership
Sole trader
A business owned by one person (it can still have workers).
- Pros: easy and cheap to set up; owner keeps all profit; fast decisions; privacy of accounts.
- Cons: unlimited liability; hard to raise money; long hours; no one to share ideas with; business may end if the owner falls ill.
Partnership
A business owned by two or more people (often up to 20). Partners usually sign a partnership agreement (deed) saying how profit is shared, who does what and what happens if someone leaves.
- Pros: more money and skills; work and worries shared.
- Cons: profit shared; partners may disagree; usually unlimited liability; slower decisions.
Limited vs unlimited liability
Liability means being responsible for the business's debts.
Unlimited liability: the owner and the business are legally the same. If the business cannot pay its debts, the owner may have to use personal savings or sell personal things, such as a car or home.
Limited liability: the company is a separate legal person. Owners can lose only the money they invested (their shares), not their personal belongings. This makes people more willing to invest.
Private and public limited companies
A company is owned by shareholders. A share is a small piece of ownership. Shareholders may receive part of the profit called a dividend.
Private limited company (Ltd)
Shares are sold privately, often to family and friends, and cannot be offered to the public. Owners keep control and have limited liability. It costs more to set up than a sole trader and has more paperwork.
Public limited company (plc)
Shares are sold to the public on a stock exchange. It can raise very large amounts of money, but it must publish its accounts, the original owners may lose control, and another firm can buy enough shares to take it over.
Not-for-profit organisations
A not-for-profit organisation, such as a charity, social enterprise, co-operative or club, may sell goods or services, but its main aim is to help a cause or its members. Any surplus (money left after costs) is put back into the cause, not paid to owners. Many get tax benefits and donations, and rely on volunteers.
Choosing a legal structure
Owners think about:
- Size and how much money is needed
- Risk: risky businesses prefer limited liability
- Control: do the owners want to keep all decisions?
- Cost and paperwork of setting up
- Aims: profit or a social cause?
Many businesses change structure as they grow: sole trader → partnership or Ltd → plc.
Key formulas and definitions
- Sole trader: 1 owner, unlimited liability
- Partnership: 2 or more owners, usually unlimited liability, partnership deed
- Ltd: shareholders, limited liability, shares sold privately
- plc: shareholders, limited liability, shares sold to the public on a stock exchange
- Not-for-profit: surplus used for the cause, not paid to owners
Worked examples
1. Arun runs a bike repair shop alone. He wants to buy expensive tools but has little money. Give one problem and one solution.
Problem: sole traders find it hard to raise money and have unlimited liability. Solution: take a partner who brings money and skills, or form a private limited company and sell shares to family.
2. A partnership has profit of 90,000 shared in the ratio 2 : 1. How much does each partner get?
Total parts = 3. One part = 90,000 ÷ 3 = 30,000. Partner A gets 60,000 and partner B gets 30,000.
3. Why might the founders of a successful Ltd company NOT want to become a plc?
As a plc anyone can buy shares, so they could lose control or face a takeover, and they would have to publish their accounts.
Common mistakes
- Thinking a sole trader cannot have employees. "Sole" refers to ownership, not workers.
- Mixing Ltd and plc. Only a plc can sell shares to the general public on a stock exchange.
- Saying shareholders of a limited company can lose their house. They can lose only what they invested.
- Thinking not-for-profit organisations never make a surplus. They can, but it goes back into the cause.