Sole Trader Flashcards
Who owns a sole proprietorship?
It is owned and run by one person
and there is no legal distinction between the owner and the business entity.
How are profits distributed in a sole proprietorship?
The owner gets all the profits but are is responsible for all losses as they are the only person running the business
What does unlimited liability mean?
Unlimited liability means that if a business goes bankrupt, the business is liable for all debts incurred.
This means that the owner may have to sell their personal assets (such as their car or even their house) to cover the debts, as she is personally responsible for the activities of the business.
If the debts are not paired they can be taken to court and made bankrupt.
What tax advantages do sole traders have?
They do not have to make the business accounts public, although tax authorities have access
Why are sole traders easy to
- set up
- run
-there are no formal procedures to follow; as long as they have a product/service to sell and a demand for that product, they can begin trading.
It is also cheap to set up as you can run it from a spare room.
-they can grow the business at their own pace + in a way which suits the business objectives.
It’s cheap and convenient because you can run it from your spare room.
you also don’t have to consult with anyone over business decisions which allows close links with customers
What happens to a sole trader business if the owner falls ill or dies?
When the business owner dies, the responsibility of the business is passed the the closest relative, who has the choice to run it or sell it.
However, the business usually dies with the owner due to a lack of continuity.
Why do sole traders often find it difficult to raise money to start a business?
Banks may not be keen to lend money to sole traders due to the risk of failure. Which means they often depend on their own finance.
Why can a lack of specialisation often hinder the success of a sole trader business?
If the owner had a lack of specialisation or experience in a certain area they may make wring decisions which may lead to a negative impact on the business.
No sole trader is specialised in everything.
Advantages of a sole trader?
- Allows owner the freedom to be her own boss and not have to consult with anyone over business decisions. Allows for close links with customers and employees.
- As a sole trader you get all the profits, which could be considerable if the business takes off
- The sole trader can grow the business at his/her own pace and in a way which suits the business objectives—Does not have to make the business accounts public – although tax authorities have access
- More freedom from government regulation than other types of business (few legal requirements when setting up), so the business can be more flexible. Also cheap and easy to set up.
Disadvantages of a sole trader?
- Unlimited liability
- The amount of capital a sole trader can raise is limited
- Banks may not be keen to lend money to sole traders due to the risk of failure
- Owner may need to work long hours and restrict their holidays—The level of expertise within the business is more limited – ‘jack of all trades’
- Opportunities to gain from economies of scale are limited
What does “unincorporated statues” mean?
This means that the business does not have a separate legal identity/existence from the owners – in the eyes of the law, the business and the owners are regarded as the same party. Therefore, if being sued, both the business and the owners are being sued.
Depts incurred in a business can include…
capital borrowed from the bank
money owed to suppliers
employee wages.
If these debts are not repaid, the sole trader can be taken to court and made bankrupt
