Business Forms

Question 1

What is a sole trader?

Answer 1

A sole trader is an individual who owns and operates a business alone. They are personally liable for all debts of the business, meaning their personal assets can be used to pay business debts​.

Advantages:
- Simplicity – Minimal formalities; no requirement for company registration.
- Full Control – The owner makes all business decisions.
- No Double Taxation – Unlike corporations, profits are taxed only once as income​.

Disadvantages:
- Unlimited Liability – The owner’s personal assets are at risk if the business cannot pay its debts.
- Limited Funding Options – Banks may be less willing to lend large sums without collateral.
- Business Ends on Death – No separate legal personality means the business does not continue if the owner dies​.

Question 2

What is a partnership?

Answer 2

A partnership exists when two or more individuals operate a business together, sharing profits and losses. It is governed by the Partnership Act 1890 (PA 1890) unless a partnership agreement states otherwise​.

Advantages:
- No Corporate Tax – Partners pay tax individually, avoiding corporate taxation.
- Shared Responsibility – Business risks and management responsibilities are divided.
- Flexibility – Fewer legal formalities compared to companies​.

Disadvantages:
- Unlimited Liability – Each partner is personally liable for all partnership debts.
- Potential Disputes – Decision-making conflicts can arise without a clear partnership agreement.
- Lack of Continuity – A partnership dissolves if a partner leaves or dies (unless an agreement states otherwise)​.

Question 3

What is a Limited Liability Partnership (LLP)?

Answer 3

An LLP is a separate legal entity registered under the Limited Liability Partnerships Act 2000 (LLPA 2000), combining partnership flexibility with corporate limited liability​.

Advantages:
- Limited Liability – Members are not personally liable for LLP debts (except in cases of fraud or wrongful trading).
- Separate Legal Personality – The LLP continues to exist even if members leave or die.
- No Double Taxation – Profits are taxed only as individual income​.

Disadvantages:
- Administrative Requirements – LLPs must register with Companies House and file annual accounts.
- Public Disclosure – Financial records and ownership details are publicly available.
- Complex Setup – Legal agreements defining roles, contributions, and profit sharing are necessary​.

Question 4

What is a limited company?

Answer 4

A limited company is a separate legal entity from its owners, offering limited liability protection. It is governed by the Companies Act 2006​.

Advantages:
- Limited Liability – Shareholders are only liable for the amount they invest.
- Separate Legal Personality – The company can enter contracts and own property.
- Business Continuity – The company continues even if shareholders change​.

Disadvantages:
- Double Taxation – Company profits are taxed, and dividends are also taxed when paid to shareholders.
- Regulatory Requirements –Companies must file annual accounts and abide by corporate governance rules.
- Less Flexibility – More complex structures and decision-making processes compared to partnerships​.