4.1b Sole Traders & Partners

Question 1

Sole Trader

Answer 1

Sole trader- A type of unincorporated business that is owned by just one person.

Question 2

Partnership

Answer 2

Partnership- A business that is owned by a group of two or more people who share the financial risk, the decision making and the profits.

Question 3

Incorporated Business

Answer 3

Incorporated business- A business that is registered as a company, so the business and the owners are separate in the eyes of the law.

Question 4

Unincorporated business

Answer 4

Unincorporated business- A business that is not registered as a company, so the owners and the business are the same body in the eyes of the law.

Question 5

Deed of partnership

Answer 5

Deed of partnership- A legal document that defines the terms of a partnership.

Question 6

Advantages of Partnerships

Answer 6

1) Owners May have wider expertise and can share ideas and decision-making.
2) Owners can share the risk.
3) Could be easier to raise finance to establish and grow the business.

Question 7

Disadvantages of Partnerships

Answer 7

1) Decisions made by one partner can affect all partners.
2) No longer exists if one partner leaves.
3) Profits are shared.
4) Partners May disagree which can negatively affect the business.

Question 8

Advantages of Sole trader

Answer 8

1) Sole trader makes all of the decisions.
2) Quick and easy to set up.
3) Sole trader keeps all of the profits.
4) Financial information is kept private.

Question 9

Disadvantages of Sole Trader

Answer 9

1) Unlimited liability.
2) Harder to raise money to start or grow the business.
3) A lot of pressure on one person to grow the business.
4) No one to cover when Sole trader is ill or takes time off.

Question 10

Worked Example-

Explain one reason why a business owner may want to set up a partnership. (3 Marks)

Answer 10

One reason why a business owner might want to set up a business as a partnership is because they can share the responsibility for running the business with someone else. This will reduce the risk of running the business and make it easier for the business to succeed in the long term.

Question 11

What is a sole trader?

Answer 11

Is an unincorporated business and therefore has unlimited liability.

Question 12

What is a private limited company?

Answer 12

A private limited company (PLC) is an incorporated business that is owned by shareholders

Question 13

What is special about shareholders in a PLC?

Answer 13

Shareholders in a private limited company must be known to the entrepreneur, so they would usually be family, friends or business contacts.

Question 14

Name three advantages of a Private Limited Company

Answer 14

1) The term limited after the business’s name may make it appear to be a bigger or more long-established business.
2) It can be easier to raise finance to establish or grow the business.
3) The business continues to trade even if shareholders change.

Question 15

Name three disadvantages of a Private Limited Company

Answer 15

1) It is more complex to set up than a sole trader or partnership
2) There may be disagreements between shareholders
3) More requirements to report information to organisations such as HMRC and Companies House

Question 16

What are shareholders?

Answer 16

Shareholders are investors who are part-owners of a company. They invest in the business in return for a share of the profits and voting rights at the AGM.

Question 17

What is limited liability?

Answer 17

It is the level of risk is limited to the amount of money that has been invested in the business or promised as an investment.

Question 18

What are assets?

Answer 18

Property, such as a house or a car

Question 19

What is unlimited liability?

Answer 19

It is the level of risk that goes beyond the amount invested, so the personal assets of the business owner can be used to pay off the business’s debts.

Question 20

What is a deed of partnership used for?

Answer 20

This legal document outlines who the partners are, the amount invested by each partner, how profits will be shared, the voting rights of each partner and also the actions to be taken if a partner wishes to leave or they want to bring in a new partner.