Types of business structures and Sole trader (Business and organisational characteristics)-FS Flashcards
(8 cards)
What are the two main classes of business structures
- Incorporated businesses – separate legal entities from their owners.
- Unincorporated businesses – where the owner and the business are not legally distinct.
What type of business structure is a sole trader and how is it classified legally?
A sole trader is an unincorporated business structure, meaning there is no legal distinction between the individual and the business. The owner is personally responsible for the business’s liabilities.
What are the financial implications of being a sole trader with respect to profit and taxation?
A sole trader is entitled to all profits after tax, but must pay income tax on business earnings. They do not pay corporation tax, as they are not a company.
What is the nature of liability for a sole trader?
A sole trader has unlimited personal liability, meaning their personal assets can be claimed by creditors if the business cannot meet its debts.
Why is unlimited liability considered a significant risk for sole traders?
Because the owner and the business are the same legal entity, creditors may pursue the owner’s personal property to satisfy business debts, which poses a substantial financial risk.
Can a sole trader employ staff, and does that affect their business classification?
Yes, a sole trader can employ others, but the business remains unincorporated, and the owner remains personally responsible for all liabilities, including those related to employees.
What is the legal status of business and personal assets for a sole trader?
They are treated as the same. There is no legal separation between the owner’s assets and the business’s assets in a sole trader structure.
What are the six business structures
- Sole traders
- Partnerships
- Limited partnerships
- Companies
- Limited liability partnerships (LLPs)
- Public limited companies (PLCs)
