Sole Traders & Partnerships (Cambridge International IGCSE Business)

Sole traders

Spec point — advantages and disadvantages of different types of business organisation

• When an entrepreneur starts a business, they will often start operating as a sole trader
• This is a business with a single owner, who may choose to hire employees or operate alone
• They are easy to set up and start trading
• Information about their financial performance does not need to be shared outside of the business
• Over time, or if the business requires significant investment, they may change the legal structure of the business

Examples of sole trader businesses

Taxi services, hairdressing, tutoring, as well as handyman & gardening services are often provided by sole traders

Evaluating sole trader businesses

Partnerships

• A partnership is a formal arrangement by two or more entrepreneurs to manage and operate a business and share its profits
• Partnerships are often formed to gain more funding, increase capacity or increase skills and experience in the business
• Common partnerships include law firms, accountancy businesses and small-scale construction businesses
• Partnerships can often be identified by suffixes such as '& Son' or 'and Partner'

Evaluating partnership businesses

Unlimited liability

• Unlimited liability means that the business owner is personally responsible for all of the business’s debts and losses

  • If the business cannot pay what it owes, the owner’s personal assets (like savings, car, or house) can be used to settle debts

• Sole traders and partners have unlimited liability for any debts incurred by the business

  • They are are also legally responsible for any unlawful acts committed by those connected to the business

Implications of unlimited liability

• There is no legal distinction between the owners and the business

• As a result, these business owners may have to use their personal assets to pay debts or legal fees

  • For example a sole trader may need to sell their own home to pay creditors if their business fails

• Owners are likely to be cautious, avoiding big decisions that could lead to debt

• It can make it harder to attract investors, as the risk is higher for the owner

• Borrowing money from banks may also be more difficult or require personal guarantees

Exam Hint Make sure you clearly explain limited liability when comparing sole traders and partnerships with companies. Students often forget this is the key legal difference that protects owners’ personal assets