Sole Traders & Partnerships (Cambridge (CIE) IGCSE Business): Revision Note

Sole traders

• When an entrepreneur starts a business, they will often start operating as a sole trader

• This is a business with a single owner, who may choose to hire employees or operate alone

• They are easy to set up and start trading

• Information about their financial performance does not need to be shared outside of the business

• Over time, or if the business requires significant investment, they may change the legal structure of the business

Examples of sole trader businesses

Evaluating sole trader businesses

Partnerships

• A partnership is a formal arrangement by two or more entrepreneurs to manage and operate a business and share its profits

• Partnerships are often formed to gain more funding, increase capacity or increase skills and experience in the business

• Common partnerships include law firms, accountancy businesses and small-scale construction businesses

• Partnerships can often be identified by suffixes such as '& Son' or 'and Partner'

Evaluating partnership businesses

Unlimited liability

• Unlimited liability means that the business owner is personally responsible for all of the business’s debts and losses

  • If the business cannot pay what it owes, the owner’s personal assets (like savings, car, or house) can be used to settle debts

• Sole traders and partners have unlimited liability for any debts incurred by the business

  • They are are also legally responsible for any unlawful acts committed by those connected to the business

Implications of unlimited liability

• There is no legal distinction between the  owners and the business

• As a result, these business owners may have to use their personal assets to pay debts or legal fees

  • For example a sole trader may need to sell their own home to pay creditors if their business fails

• Owners are likely to be cautious, avoiding big decisions that could lead to debt

• It can make it harder to attract investors, as the risk is higher for the owner

• Borrowing money from banks may also be more difficult or require personal guarantees