Sole Trader, Partnership or Limited Company?

Sole Trader

Advantages:

  • Decision making faster, sole trader only person responsible 
  • Feeling of independence + control
  • Straightforward to set up. Few legal requirements
  • Profits made all belong to sole trader - can be Drawings

Disadvantages:

  • Owner has unlimited liability for debts of business.  If it becomes bankrupt, owner's personal assets may be sold to pay trade payables.
  • Expansion limited - can only be achieved by owner ploughing back profits, or borrowing from lender e.g. bank
  • Owner usually has to work long hours and may be difficlt to take holidays.  If owner should become ill, business could become slow or stop altogether.
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Partnership

Advantages:

  • Partners may be able to specialise in particular areas
  • Cheap and easy to set up
  • Possibility of increased capital
  • With more people running business, more cover for illness and holidays

Disadvantages:

  • Decisions may take longer - other partners may need to be consulted
  • May be disagreements between partners
  • Each partner liable in law for dealings and business debts of whole firm (unless is a Limited Liability Partnership (LLP) set up under the Limited Liability Partnerships Act 2000)
  • Retirement or death of one partner may adversely affect the running of the business.
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Limited Company

Advantages:

  • Shareholders have protection of 'Limited Liability' - if company failed, shareholders would only lose initial investment (or any promised investment).  Unlike sole trader or partnership, cannot lose private posessions.
  • Limited Companies can raise larger amounts of money (capital). Unlike Sole traders (1 person) or partnerships (up to 20 people), companies have unlimited amount of shareholders raise funds from
  • Limited company - seperate legal identity owners, can continue to operate irrespective of changes in ownership.

Disadvantages:

  • Limited Companies subject to many legal requirements:
    • Formation-
      • Memorandum of association - details external dealings with the company
      • Articles of association - details internal regulation of the company
      • Both filed at Companies House - Cardiff - Registrar
    • Directors required to send the annual accounts to registrar for public inspection
  • Possibility that over a period of time ownership of business can change. therefore control can change - can be bad for the original owners
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