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Published: Fri, 02 Feb 2018
Advantages of a Sole Trading Business
Owner has full control over the business.
The advantage of having a sole trading business is that the owner has full control over the business. This simply means that the sole trader is acting as an individual when he is dealing with other parties. To add on, the law recognizes the owner; therefore a sole trader is regarded as a legal entity. A sole trader can sign contracts by his own, sue as well as being sued, hold or own property, take out loans and to have bank accounts.
2.1.2 Owner is able to start a business by using the own personal account of a separate business account.
A sole trader can start his business by choosing to pay from his own personal bank account or a separate business account. He can make business purchases, no matter which account he uses. This is actually similar to making private purchases. Besides that, a sole trader does not have to pay establishment costs, which makes it easier to start or do a business. Sole traders do not have to register a business name too. Other than that, sole traders are taxed as an individual, although provisional taxes (Estimated annual or quarterly tax) need to be paid.
2.1.3 Profits from sales do not need to be shared.
Profits earned from sales do not have to be shared with other people, indicating that sole proprietors receive all incomes gained from the business itself. Sole proprietors can then choose to keep the profit or to use them to reinvest. A sole trader does not need to keep financial records. In this case, he can save a lot of time and use them to do something else. Sole traders also can operate their businesses with minimum government restrictions. As a sole proprietor, it is also much easier to fill your own taxes when compared to a corporation.
2.1.4 The start-up costs are low.
The best part of starting a sole trading business is that only low start-up costs are required, unlike corporation which involves higher costs in order to start a business and special forms. Furthermore, it is generally easier for a sole trader to handle the money for the business because no payroll set-up is required. To make it even more easily, a separate bank account is set up to keep the business funds separate and to avoid personal and business activities. To form a sole proprietorship, only minimum legal costs are involved.
2.2 Disadvantages of a Sole Trading Business
2.2.1 A sole trader is liable for all losses and damages incurred by the business.
A sole trader will be personally liable for any damages incurred by the business. He does not have any asset protection as well. Besides, contribution to the business in terms of, capital, resources, skills and knowledge is limited. And of course, a sole trader is required to pay his own tax at his personal tax rate, which has the possibility to be higher than 50%. Income cannot be sheltered for tax purposes too. There is also a disadvantage of working alone, that is other businesses and customers may not take you seriously.
2.2.2 Investors would normally not choose to invest in a sole proprietorship
Investors usually would not choose to invest in a sole proprietorship because it is risky and they have the chance of making a loss. The sole proprietor of the business will be held responsible for the debts as well as obligations of the business. Sometimes sole proprietors will also be held personally as a result of unethical acts done by employees in the company. Sole traders may have difficulties attracting skillful workers into their businesses too.
2.3 Advantages of Partnerships
2.3.1 Partnerships are legal entities which are separated from the partners themselves.
Every partner has equal responsibilities as well as authorities to operate the business. Each partner are able to make decisions on the management and should be involved in the operations of the business day to day. The business can be represented by any partner in the business without the knowledge of the other partners. Furthermore, the actions taken by one partner can actually bind the whole partnership. For example, if one of the partners signs a contract on behalf of the whole partnership, the general partnership and every partner in the partnership will be held responsible for that contract.
2.3.2 Partnerships are easy to set up.
Partnerships are also easy to be set up, like sole trading businesses. Additionally, the ability to raise funds may also increase with more than one owner. This is because two or more partners may be able to supply more funds, as their borrowing capacity may be bigger now. Partnerships have the ability to attract high-caliber employees if they were given the incentives to become one of the partners in the business. A partnership may also gain advantage from the combination of complimentary skills of two or more partners. This enables them to have more ideas to choose from because there is wider pool of knowledge. Each partner in the business specializes in certain aspects of their business, which allows partnerships to be cost-effective as well. Lastly, moral support will be provided by partnerships and allow for more imaginative brainstorming.
2.4 Disadvantages of Partnerships
2.4.1 Business partners are responsible for the actions taken by every other partner.
Business partners are jointly and individually responsible for the actions taken by the other partners. Furthermore, profits gained from the business must be shared with others too. Since decisions are shared among the partners, disagreements may occur sometimes. A partnership is formed for the long term. Unfortunately, expectations and situations may change too, which can lead to traumatic split ups.
2.4.2 Partnerships may have a limited life.
The partnership may perhaps have a limited life; partnership may end upon the withdrawal or when a partner dies. Other than that, a partnership generally has boundaries that keep it from developing into a larger business. A partner has to consult his partner and negotiate more as he cannot make decisions alone. Therefore, a partner has the need to be more flexible.
2.4.3 Owners of partnerships have unlimited liability.
Unlimited liability is a major disadvantage of a partnership. General partners should also be held responsible on the debts contracted and errors done by the partnership. For example, if a partner possess only one percent of the partnership and somehow the business fails, he will be asked to pay one percent of the bills and the other partners will be assessed their 99 percent. However, if his partners are not able to pay, he may be called upon to pay all the remaining debts even if he needs to sell off all his properties in order to do so. This has certainly made partnerships too risky for most of the situations.
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