A sole trader is a person who is in the business on their own.
- The owner has independance and can run the business without others being involved in making decisions.
- In a small business with few employees; the owner is able to give personal service and supervise all areas.
- The business is easy to establish legally - either using the owner's name, or a trading name.
- The owner has unlimited liability for the debts of the business. This means they are responsible for any debts the business owes and can lose their own assets.
- Expansion is limited because it can only be achieved if the owner saving lots of profits or borrowing money from a bank.
- The owner usually has to work long hours and finding time to take holidays may be difficult.
Partnership act of 1890: More than 1 person carrying on a business with the goal of making a profit. Partnerships are usaully betweer 2-20 people.
- Easier to increase capital that is put in.
- Partners may be able to specialise.
- With more people running the business, there is more cover for illness and holidays.
- Decisions may take longer as other partners need to be consulted.
- May be disagreements amongst partners.
- Each partner is liable for the debts of the business.
- The retirement or death of a partner may adversely affect the running of the business.
Partnership agreements- partners can make an agreement where they can earn salaries, how profits get shared out, charge interest for drawings or reveive interest on capital and at what rate.
A limited company is a separate legal entity, owned by shareholders and run by directors.
Why run a business as a limited company?
- Limited liability - shareholders can only lose the amount that they invest. Personal assets are needed to pay the company's debts which means there is less risk for investors.
- Separate legal entity - a limited company is a separtate legal enitity from its owners. Anyone taking legal action proceeds against the company and not the individual shareholders.
- Ability to raise finance - substantial funds can be raised by issuing shares.
- Membership/ Owning shares - Ordinary shareholders have voting rights. This means control of the business is lost.
- Other factors - The company gets a higher status than a sole trader's so it is easier to benefit from economies of scale.
the Companies Act
There are 2 main types of limited company: Public limited company (Plc) and Private limited (Ltd)
Public limited company:
A company may become a public limited company if it has:
- Issues share capital over £50,000
- At least 2 shareholders and at least 2 directors
A public limited company may raise capital from the public on the stock exchange but they don't have to issue shares on the stock market.
Private limited company:
Many private limited companies are small often in family ownership. A Ltd has:
- no minimum requirement for issued share capital
- at least one shareholder and at least one director who may be the same shareholder.
The shares are not traded publicly. The individuals can be chosen to be a shareholder
final accounts of limited companies
The main difference is that limited companies have a statement of changes in equity which shows how profit has been distributed including the dividends to shareholders.
Statement of changes in equity
Retained earnings £
Balance at start of year x
Profit for the year x
Transfers from other reserves x
Dividends paid in the year (x)
Transfers to other reserves (x)
Balance at the end of year x
----- Dividends paid include interim dividends which are paid over half way through the year
Chapter 17 looks at this in more detail.