TYPES OF

BUSINESS
ENTITY
SOLE TRADER
PARTNERSHIP
LIMITED COMPANY
Learning outcomes

The different types of business entities

The advantages and disadvantages of each type

of business entity.

Sources of finance and funding for these types

of business entities.
 Simplest form of business entity.

Can be set up relatively quickly and

easily
SOLE TRADER
The business is owned and
controlled by one person.

The owner runs the business and

makes all the major decisions.
 Complete control over how the business is
run.

ADVANTAGES Minimum of legal formalities to set up a

business.

of sole
trader The financial results of the business do not
need to be shared publicly.

the profit of the business belong to the sole

trader and not to be shared with anyone
else.
DISADVANTAGES of sole trader

The sole trader has unlimited liability for the

debts of the business. The private assets of
owner may be seized to pay the business’s debt.

Long hours of work, no one to share the

burden of work.

Illness or other reasons for absence may

affect the running of the business
 A partnership is formed when two or more people carry on
business together with the intention of making profit.

It is usual for a partnership to have a written partnership

agreement or a deed of partnership. This will reduce the
possibility of any disputes arising.

PARTNERSHI The agreement covers issues such as:

P •
•
- the duties of individual partners
- the amount of capital to be subscribed by each of the partners.
• - the ways that profit are to be shared
• - the financial arrangements if there are any changes to the
structure of the partnership.
PARTNERSHIP ACT 1890 (UK)

If no partnership agreement, the Act includes the

following provisions:
• - no partner should be entitled to interest on capital
• - no partner is entitled to salary.
• - no partner is to be charged interest on drawings.
• - residual profits or losses are to be shared equally.
• - any loan made to the partnership by a partner will carry interest at

the rate of five per cent per annum.

 ► More capital than sole trader

ADVANTAGES of ► Partners can specialise indifferent aspects of

business management.
partnership ► Illness and holidays can be covered by other
partners if needed.
 Partners still have unlimited liability.

Disagreement may be more frequent if they

do not agree on how the business should be
DISADVANTAGE run.

S of partnership
Profits will be shared between partners

Compared with a limited company, a

partnership may still find it difficult to
borrow money.
LIMITED COMPANY

A separate legal entity whose existence is separate from its owners.

Can be a very small business or a giant multinational business.

Owners of the company => shareholders.

At least one shareholder but no maximum number.

All shareholders have limited lability.

Limited companies pay corporation tax on their profits.

Shareholders delegate the running of the company to the directors.

Directors are elected by shareholders in Annual General Meeting.

 LIMITED LIABILITY vs
UNLIMITED LIABILITY

► Limited liability => the liability of

their shareholders is limited to the
amounts they have paid or agreed
to pay, for their shares.
► For example, a shareholder owning
100 shares of $1 each cannot be
compelled to pay more than $100 if
the company cannot pay its debts.

► Unlimited liability => the liability

of sole trader and partners are
unlimited. The private assets of
them may be seized to pay the
firm’s debts.
TWO TYPES OF LIMITED COMPANY
Partnerships vs. private limited company
► Access more capital, especially if a
public limited company Advantages of
► Limited liability limited
► The business can continue even after company
the founders retire or die.
 More disclosure of financial records(public
limited co.)

More complex to set up.

Disadvantages
of limited Expensive to set up

company
Potential loss of control to other shareholders

Increase media scrutiny.