Analyse the advantages and disadvantages of sole trader, partnership and private limited company status for new small businesses. Under English Law, a small business may be described as having the status of a “sole trader”, a “partnership” or a “private limited company”. In this essay, these three terms will briefly be explained, followed by an analysis of the advantages and disadvantages of each type of business. A “sole trader” business is owned by one single person, although it may have a number of employees. There are no legal requirements for setting up as a sole trader and the owner does not even need to register with a government body. The majority of small businesses fall into this category. A “partnership”, as its name implies, is owned by two or more people and is a popular choice of business for friends and family members who have common interests and complimentary skills or resources. Again, it is fairly easy to establish a partnership business without involving complicated legal processes. A “private limited company” (which must contain the word “Limited” or abbreviation “Ltd” after its name) can be owned by two or more shareholders and its owners are legally separate from the business. Since the company exists as an entity in law, it must therefore be registered as a legal enterprise. A “Director” and “Company Secretary” have to be appointed: the former from one or more of the shareholders and the latter from an individual outside the company, who is not a shareholder, for example the company’s accountant or solicitor. Two legal documents, a “memorandum” and “articles of association”, are also required so that the company has genuine legal status. The main advantage of starting a new small business as a “sole trader” is that, as mentioned above, the process of setting up the business is very easy and does not involve any legal work, so, in effect, anybody can start a sole trader business at any time. In addition, the individual setting up a business of this kind does not need to give up his or her main job; the business venture can be undertaken as an additional or sideline career. Being your own boss is very appealing to many people and the idea of having total control of your own business is a very attractive one, which is another reason why a sole trader business can seem advantageous. The financial obligations of the business are easy to manage, as the owner does not need to
disclose his or her accounts to the public and is taxed as an individual. There may also be some tax advantages in the short term, as an incentive to encourage prospective small business owners. Just as the business is simple to start, it is also easy to close the business in the event of its lack of success, or the owner’s boredom! The main disadvantage of being a sole trader is that it has virtually no legal status in comparison with a limited company and the owner is personally responsible for all business losses and liable for their repayment. In the event of financial loss, the business owner has no protection from creditors who are legally entitled to seize both business and personal property. Moreover, being the boss of your own company may turn out not to be quite as attractive as it first seemed: It can be a lonely and stressful occupation, with many hours of hard work and little profit to show for it. In a partnership business, one advantage is that the responsibility of ownership is shared and therefore, with partners who have compatible interests, goals and expectations, it can be an excellent way of combining skills, knowledge and talent, as well as helping to ease the workload and pressures which the sole owner of a business may experience. Many people who do not have the financial resources to start their own business, go into partnership as a way of acquiring the necessary capital, without having to procure a loan. However, with two or more people owning a business, disagreements can arise which are liable to impede its smooth running. Although it is advisable to negotiate a legal agreement detailing how the business is to operate and how the profits are to be divided, this in itself can create dispute, as to who is responsible for what, how many hours each partner should devote to the business, when to take holidays, etc. Other points of discord may arise in matters as seemingly trivial as the signing of cheques, to the making of more important decisions within the company and settling disputes when things go wrong. With dominating or clashing personalities, partners may find the business relationship deteriorating into continual discord; even friendships or family relationships can be ruined. There are other potential disadvantages to consider: What if one (or more) of the partners suddenly decides to withdraw from the business, or what will happen to the business in the event of a partner’s death?
In financial and legal terms, the greatest disadvantage in this type of business is that all the partners are personally liable for business debts, regardless of how or by whom they have been incurred. Even in the event of an unscrupulous partner absconding with the profits, the other partner(s) are held liable for repayment. Therefore, a business partnership requires a lot of trust between partners, as well as realisation of the personal implications, should that trust be broken. Personal liability and all its pitfalls can be avoided in a private limited company, where the owners / shareholders of a business are legally separate from it and liability to repay debts is limited to the amount each shareholder agreed to contribute to the business in the first place. For the shareholder, this means a greater degree of personal financial and legal protection than in a partnership. The main disadvantage of a private limited company are that it can be very costly to set up, owing to legal fees and furthermore, a business of this kind is subject to more stringent legal requirements and codes of practice. In addition, the company has much less privacy than a sole trader or partnership business, as details of its accounts have to be made available to the Public (which of course includes the company’s competitors!) There are no real tax benefits to the shareholders, as they are considered as employees and taxed under PAYE and finally, despite having a certain amount of personal protection, as outlined above, the directors of the company cannot remain anonymous; they have to be identifiable, accessible and accountable to the public. In conclusion, the three types of small business discussed in this essay each have their own advantages as well as disadvantages and it is advisable that these issues should be considered carefully by anyone intending to start his or her own small business.