Chapter 6 - Types of trade Flashcards
What is a sole trader?
A sole trader is a person who owns and runs a business, provides the capital, earns the profits, and suffers the losses. They may employ others, but the business is not a separate legal entity from the owner.
What are the advantages of being a sole trader? (4)
No formal setup process is required (except for tax notifications or regulated industries).
Independence and privacy.
Direct personal supervision.
All profits accrue to the sole trader.
What are the disadvantages of being a sole trader? (5)
Unlimited liability for business losses.
Reliance on the individual often results in long working hours.
Succession issues if the owner is unavailable.
Business success is dependent on the skill of the trader.
Often small-scale businesses struggle with funding, expansion, and diversification.
Which of the following is NOT a feature of a sole trader?
A) Unlimited liability.
B) Sharing profits with investors.
C) No separate legal entity from the owner.
D) Independent decision-making.
B) Sharing profits with investors.
Define a partnership.
A partnership is “the relation which subsists between persons carrying on a business in common with a view of profit” (Partnership Act 1890, Section 1).
What are the key features of a partnership? (4)
- No separate legal personality: A partnership is a relationship between persons, not a distinct legal entity.
2, At least two partners: “Persons” can include companies. - Carrying on a business: Partnerships include all trades, occupations, and professions, but the business must involve some activity (e.g., not just holding property).
- Common intention: Partners must intend to share profits, even if they incur losses.
Can a single transaction constitute a partnership?
Yes, if the transaction involves partners acting together with the intention of carrying out business (often referred to as a “joint venture”).
When does a partnership begin?
A partnership starts when partners agree to conduct business together, even if the business has not yet started trading. For example, leasing premises and opening a bank account could establish a partnership.
Can a partnership exist without profit?
Yes. If the intention is to make a profit but the venture incurs a loss, it is still a partnership. However, if the aim is solely to gain experience (e.g., not profit), then it is not considered a partnership.
Which of the following would NOT qualify as a partnership?
A) Two people running a business to make a profit.
B) A group pooling funds to lease equipment for a business.
C) People jointly holding property for investment.
D) Individuals working together to gain experience in a trade.
D) Individuals working together to gain experience in a trade.
INTERACTIVE QUESTION 10: PARTNERSHIPS
Identify whether the following statements are true or false in relation to an ordinary partnership.
TRUE OR FALSE
A In England and Wales, an unlimited partnership has no existence distinct from the partners
B Partners share equally in the venture’s profits
A TRUE
B TRUE (subject to any contrary agreement)
How are partnerships typically formed?
Partnerships are often established through a formal partnership deed outlining the terms of the agreement. However, no formality is required, and the basic rights and duties in the Partnership Act 1890 apply if there is no express agreement.
What happens if a partnership agreement specifies profit-sharing but not loss-sharing?
Losses are shared in the same proportions as profits in the absence of specific provisions.
Define Fiduciary duties
Fiduciary duties are legal obligations of loyalty and trust that one party owes to another. These duties typically arise in relationships where one person places special trust, confidence, or reliance on another, who has a corresponding duty to act in the best interest of the first party.
What fiduciary duties do partners owe to the partnership? (4)
Act in good faith.
Avoid exercising legal rights (e.g., expelling a partner) for improper motives.
Share profits derived from the partnership with consent from all partners.
Avoid conflicts of interest without full disclosure.
What are the consequences of breaching fiduciary duties in a partnership?
The partner may be held responsible for accounting for any monies received or compensating for any losses caused to the partnership.
How are profits and losses shared under the Partnership Act 1890?
Profits and losses are shared equally unless the partnership agreement specifies otherwise.
How is a capital deficiency managed in a partnership?
Any unpaid capital (a partnership debt that cannot be repaid) is shared proportionally among partners based on their original contributions.
Who is entitled to manage the partnership business?
Answer: Every partner is entitled to participate in the management, with ordinary management decisions made by a majority of partners.
Every partner is entitled to participate in the management, with ordinary management decisions made by a majority of partners.
What decisions require unanimous consent among partners?
Changing the nature of the partnership’s business.
Introducing new partners.
Varying the partnership agreement.
Are partners entitled to remuneration for their involvement in the business?
No, partners are not entitled to remuneration unless explicitly agreed upon.
Which of the following requires unanimous consent in a partnership?
A) Allocating profits unequally.
B) Hiring new employees.
C) Changing the business focus.
D) Buying new equipment.
C) Changing the business focus.
Are partners entitled to interest on their capital contributions?
No interest is paid on capital unless agreed upon. However, partners are entitled to 5% interest on advances beyond their original capital contributions.
