Business Organisations

Question 1

What is a sole trader?
Type of liability

Answer 1

A sole trader is one person who owns and runs the business.
• Easy to set up
• Keeps all profits
• Makes all decisions
BUT:
• Has unlimited liability — personal assets at risk
• Harder to raise money
• Business ends if owner dies

Question 2

What is a partnership?

Answer 2

A partnership is when 2+ people own a business together.
• Share workload and skills
• More capital than sole trader
BUT:
• Still unlimited liability (unless LLP)
• Risk of conflict between partners
• Profits are shared

Question 3

What is a company (corporation)?

Answer 3

A company is a separate legal entity from its owners (shareholders).
• Limited liability — personal assets protected
• Can raise large amounts of money (e.g. via shares)
• Continues even if owners change
BUT:
• Must follow more rules and regulations
• Directors may not always act in shareholders’ best interest (agency problem)
• Profits are taxed twice (corporate and personal)

Question 4

Why does structure matter?

Answer 4

The business type affects:
• Liability (who is legally responsible)
• Access to finance (how much capital you can raise)
• Control (who runs the business)
• Taxation and legal complexity
Companies give protection but are more complex; sole traders have control but more personal risk.