Revision NotesPast Papers
IGCSEAccountingEdexcelIntroduction to Bookkeeping & AccountingRevision NotesThe Accounting EnvironmentTypes of Business OrganisationSole Traders & Partnerships

Sole Traders & Partnerships (Edexcel IGCSE Accounting): Revision Note

Exam code: 4AC1

Donna Simpson

Written by: Donna Simpson

Reviewed by: Dan Finlay

Updated on

Sole traders

  • A sole trader is someone who owns and controls a business on their own

  • This type of business business is easier to set up than other types of businesses as there are no legal requirements

  • The sole trader may employ others to help them in running the business but the sole trader is the only owner of the business

What are the advantages and disadvantages of operating as a sole trader?

Advantages

Disadvantages

  • The sole trader gets to keep all the profits made by the business

  • It is quite easy for the sole trader to make decisions as they do not need to consult with anyone else

  • The financial statements prepared by the sole trader are kept private and do not need to be shared with the public

  • Bookkeeping and accounting functions are much easier to perform than for a limited company

  • The sole trader can choose their own hours and place of work

  • The owner has unlimited liability

    • This means the owner bears personal responsibility for any losses made by the business

  • As the sole trader is the only owner, there is no one else to share the workload or decisions of the business with

  • Sourcing finance may be difficult as the sole trader may have limited funds to invest and banks might be unwilling to lend money to a risky business

  • If the owner is on holiday or becomes sick, they may not make any money and the business may suffer

Worked Example

Which of the following is not an advantage of operating as a sole trader?

A

Decisions can be made quickly by the sole trader as there is no need to consult with anyone else

B

The sole trader does not have to share any of the profit made

C

The financial statements of a sole trader are published to the public

D

Book-keeping and accounting of the records of a sole trader are simpler

Answer

The correct answer is C. The financial statements of a sole trader do not need to be published to the public. They can be kept private.

Partnerships

What is a partnership?

  • A partnership is a business jointly owned by two or more people

  • A partnership usually consists of between two to twenty partners 

  • Sometimes a partnership is formed when a sole trader wishes to expand or grow their business

    • Two or more sole traders may decide to combine their resources to form a new business

What is a deed of partnership?

  • A deed of partnership is a document that sets out the terms of how the partnership should operate

    • It is also known as a partnership agreement

  • Its purpose is to help partners avoid disagreements in the future

    • If a partnership does not have a deed of partnership then it follows the rules set out in the Partnership Act 1890

  • It contains information about:

    • The money each partner initially invests

    • The interest that each partner is allowed on their capital

    • The interest that is charged to each partner for taking drawings

    • The interest that a partner is allowed if they loan the business extra money

    • The distribution of the profits or losses

    • The salaries (if any) given to each partner

What are the advantages and disadvantages of operating as a partnership?

Advantages

Disadvantages

  • Forming a partnership is relatively easy as formal permission is not required to set it up

  • Partners have access to additional finance because all partners contribute to raising the capital of the business

  • Partners have access to each other's skills and expertise

    • For example, a makeup artist might partner up with a hairstylist

  • Partners share the risks of operating the business

  • Partners can cover each other for sickness and holidays 

  • Profits are shared among all partners

    • Unlike a sole trader who keeps all the profits, partners will share it  

  • Partners may disagree over key decisions or have different aims for the business

  • Partners may take longer to come to decisions about the operating activities of the business due to them having different opinions

  • All partners are responsible for business debts

    • Even if the debt was only created by one of the partners

Limited partnerships & limited liability partnerships (LLP)

What is a limited partnership?

  • A limited partnership is similar to a general partnership

  • The main difference is that some partners will have limited liability

    • In this type of partnership, at least one partner has unlimited liability

    • Partners with unlimited liability are the ones who manage the business

  • There are usually restrictions on the limited partners

    • They are often thought of as investors or silent partners

What is a limited liability partnership (LLP)?

  • A limited liability partnership is different to a general partnership

  • All partners have limited liability

    • Each partner is only liable for the amount of money they invest

  • The business is a separate legal entity

    • This means that its owners and the business are entirely distinct in law

    • Its owners cannot usually be held responsible for any financial or legal problems the business may face

  • All partners are usually involved in the management of the business

You've read 0 of your 5 free revision notes this week

Unlock more, it's free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

    Previous:Private & Public Sector OrganisationsNext:Limited Companies
    Author
    Reviewer
    Donna Simpson

    Author: Donna Simpson

    Expertise: Accounting Content Creator

    Donna is a classroom practitioner with over 25 years experience in teaching accounting and business studies at GCSE A-Levels and undergraduate levels, both in the UK and abroad. She currently works for a Multi-Academy Trust (MAT) as a teacher, instructional coach and mentor to other teachers. Donna is also an AQA A Level Accounting examiner as well as the content creator of resources used by all accounting teachers across the Trust. She enjoys designing and creating resources that provides students with deeper understanding of the subject content. Donna has a Bachelor of Science Degree in Business Administration with major in Accounting and Finance (BSc Hons) and ACCA certified to Level 2.

    Dan Finlay

    Reviewer: Dan Finlay

    Expertise: Maths Subject Lead

    Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.