Financial Report for Sole Traders and Partnerships Essay

Sole traders: According to Peterson and Plowman : â€Å" As sole proprietorship is a business unit whose ownership and management are vested in one person. This individual assumes all risk of loss and failure of the enterprise and receives all profits from its successful operation†. A sole trader describes any business that is owned and controlled by one person, although they may employ workers, e.g. a newsagent’s shop. Individuals who provide a specialist service like hairdressers, plumbers or photographers, are also sole traders. Sole traders do not have a separate legal existence from their owner. As a result, the owners are personally liable for the firm’s debts, and may have to pay them out of their own pocket. This is called unlimited liability. Advantages * The firms are usually small, and easy to set up. * Generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost. * The wage bill will usually be low, because there a few or no employees. * It is easier to keep overall control, because the owner has a hands-on approach to running the business and can make decisions without consulting anyone else. Disadvantages * The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts. * Sole traders often work long hours and find it difficult to take holidays, or time off if they are ill. * Developing the business is also limited by the amount of capital personally available. * There is also the risk of unlimited liability, where the sole trader can be forced to sell personal assets to cover any business debts. Partnerships: Partnerships are businesses owned by two or more people. A contract called a deed of partnership is normally drawn up. This states the type of partnership it is, how much capital each party has contributed, and how profits and losses will be shared. Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together. They can benefit from shared expertise, but like the sole trader, have unlimited liability. A partnership can also have a sleeping partner who invests in the business but does not have dealings in the day to day running of the enterprise. Advantages * The main advantage of a partnership over a sole trader is shared responsibility. This allows for specialisation, where one partner’s strengths can complement another’s. For example, if a hairdresser were in partnership with someone with a business background, one could concentrate on providing the salon service, and the other on handling the finances. * More people are also contributing capital, which allows for more flexibility in running the business. * There is less time pressure on individual partners. * There is someone to consult over business decisions Disadvantages * The main disadvantage of a partnership comes from shared responsibility. * Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. * The distribution of profits can cause problems. The deed of partnership sets out who should get what, but if one partner feels another is not doing enough, there can be dissatisfaction. * A partnership, like a sole trader, has unlimited liability. Source taken from http://www.bbc.co.uk