What is a Sole trader?
The sole trader iis the oldest and most popular type of business. It is a form of business where there is only one owner who manages and controls the business.
A sole proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners.
A sole proprietorship essentially means a person does business in his or her own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.
A sole proprietor may do business with a trade name other than his or her legal name. In some jurisdictions, for example the United States, the sole proprietor is required to register the trade name or "Doing Business As" with a government agency. This also allows the proprietor to open a business account with banking institutions.
Advantages to a Sole Proprietor
An entrepreneur may opt for the sole proprietorship legal structure because no additional work must be done to start the business. In most cases, there are no legal formalities to forming or dissolving a business.
A sole proprietor is not separate from the individual; what the business makes, so does the individual. At the same time, all of the individual's non-protected assets (e.g homestead or qualified retirement accounts) are at risk. There is not necessarily better control or business administration possible with a sole proprietorship, only increased risks. For example, a single member corporation or limited company still only has one owner, who can make decisions quickly without having to consult others, but has the advantage of limited liability.
Furthermore, in most jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. Typically a sole proprietorship reports its income and deductions on the individual's personal tax returns. In comparison, an identical small business operating as a corporation or partnership would be required to prepare and submit a separate tax return.
A sole proprietorship often has the advantage of the least government regulation.
Disadvantages to a Sole Proprietor
A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company.
It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is required for bank financing.
Hiring employees may also be difficult.
This form of business will have unlimited liability, so that if the business is sued, the proprietor is personally liable.
The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.
In countries without universal health care, such as the United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue.
Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a corporation. In the United States, a sole proprietor could also form a limited liability company, or LLC, which would give the protection of limited liability but would still be treated as a sole proprietorship for income tax purposes.
What is a Partnership?
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.
Advantages of Partnership
- Easy to set up
- More capital can be brought into the business.
- Partners bring new skills and ideas to a business
- Decision making can be much easier with more brains to think about a problem.
- Partners share responsibilities and duties of the business.
- Division of labour is possible as partners may have different skills.
Disadvantages of Partnership
- There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings.
- Disagreement among the partners can lead to problems for the business.
- There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.
- There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.
