Sole Trader Business Overview

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Questions and Answers

There are three legal regulations which must be followed, what are they?

In some industries, the sole trader must observe laws, these include health and safety laws and obtaining a licence to sell alcohol or operate a taxi. (correct)
The owner must register with, and send annual accounts to, the Government Tax Office. (correct)
The name of the business is significant. The name must be registered with the Registrar of Business Names. (correct)

What are three advantages and disadvantages to sole trades of running their own business?

Advantages:

There are few legal regulations when setting up the business.
You are your own boss. Having complete control over your business.
They have the freedom to choose their own holiday's, hour of work prices to be charged and whom to employ
They have close contact with their customers, the personal satisfaction of knowing their regular customers and the ability to respond quickly to their needs and demands.
Incentive to work hard as they are able to keep all of the profits after paying tax.
They do not have to information about their business to anyone else – other than the Tax Office.

Disadvantages:

They have no one to discuss business matters with as they are the sole owner.
They are fully responsible for any debts that the business may have. They have unlimited liability which means if they cannot pay its debts, then the people they owe money to (creditors) can force them to sell all of their own possessions in order to pay them.
If they wish to expand the business, they do not have enough money to do this. The sources of finance for a sole trader are limited to the own's saving, profits made by the business and small bank loans. Banks are often reluctant to lend large amounts to sole trades.
If the sole trader is ill there will be no-one who will take control of the business. Sole trades cannot pass on the business to family members because when they die the business will legally not exist any longer. This is because there is no continuity of the business after the death of the (15) owner.

Mike offered his friend Dave the chance to become a partner in his Taxi business. They prepared a written partnership agreement. What five main points would be important to include in the agreement which would benefit both parties.

The amount of capital invested in the business by each partner.
The tasks to be undertaken by each partner.
The way in which the profits would be shared.
How long the partnership will last.
Arrangements for absence, retirement and how new partners could be admitted.

Name three types of advantages that have become clear to Mike that it had several advantages and disadvantages over being a sole trader.

The responsibilities of running the business were now shared. Dave specialised in the accounts and administration of the business. Mike concentrated on marketing the services of the taxi firm. (A), More Capital could now be invested into the business with the partner's saving as well as his own. (B), Both partners were motivated to work hard because they would both benefit from the profits. In addition, any losses made by the business would now be shared by the partners. (C)

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Name three types of disadvantages that have Dave worried.

The partners do not have limited liability. If the business failed, then creditors could still force the partners to sell their own property to pay business debts. (A), The business does not have a separate legal identity. If one of the partners died, then the partnership would end. (Both sole traders and partnerships are said to be unincorporated businesses because they do not have a separate legal identity from the owners.) (B), Partners can disagree on business decisions and consulting all partners takes time. (C)

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Mike and Dave discuss these points with their solicitor. They agree partnerships were very suitable in certain situations as sole traders, but they both are clear that they want to expand the business further but wanted to reduce personal risk. They would like to protect their own possessions from business creditors in event of failure. The solicitor advised them to consider forming a private limited company. She explains. She explained that this type of business organisation would be very different from a partnership and would have its own benefits and drawbacks. Mike and Dave asked the solicitor to list three benefits of forming a private limited company.

<ol> <li>Shares can be sold to a large number of people. The sale of shares could lead to much larger sums of capital to invest in the business than the two original partners could manage to raise themselves. The business could therefore expand more rapidly.</li> <li>All shareholders have limited liability. This is important advantage. It means that if the company failed with debts owing to creditors, the shareholders could not be forced to sell their possessions to pay the debts. The shareholders could only lose their original investment.</li> <li>The people who start the company – Mike and Dave in our example – are able to keep control of it as long as they do not sell too many shares to other people.</li> </ol>

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The legal adviser and solicitor were keen for Mike and Dave to know exactly what they would be committed to if they formed a private limited company, so they also listed three disadvantages.

There are significant legal matters which have to be dealt with before a company can be formed. In particular, two important forms or documents to be sent to the registrar of Companies. (A), Both of these documents are intended to make sure that companies are correctly run and to reassure shareholders about the purpose and structure of the company. (B), The accounts of a company are less secret than for either a sole trader or a partnership. Each year the latest accounts must be sent to the Registrar of Companies and members of the public can inspect them. (C)

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Define 'laissez-faire leadership style'

A leader who adopts a hands – off approach to management, allowing employees a high level of autonomy and minimal supervision. Intervention only by request or when there is a problem.

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Where does ‘laissez-faire' come from and what does it mean?

The term “laissez – faire” is French and it means “allow to do”.

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Identify two roles of a manager.

<ol> <li>Delegation that allows employees to be primary decision makers.</li> <li>They give their team support, guidance, consultation, and training when it's needed, but trust them to handle the details and execution of their tasks and projects.</li> </ol>

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Outline one external cost and one external benefit Millie's business activities might create.

External Cost: The production of oil can have negative impacts on the environment and local communities such as, environmental damage, oil spills, health risks, injuries and illness. External benefit: Education is an example of a positive externality. Where those who invest in it gain knowledge and production for society as a whole.

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Explain two methods of IT based communication Millie might use with its employees.

<ol> <li>Using two way radios (wireless intercoms) for real – time communication.</li> <li>Satellite Communication for working off shore.</li> </ol>

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Explain three ways a pressure group might try to influence business decisions. Which way do you think is likely to be most effective? Justify your answer.

Boycotting can encourage customers to stop buying a company's product. (A), Many pressure groups try to influence businesses to behave more ethically (B), Pressure groups can use media coverage to create bad publicity for a company. (C)

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Flashcards

What is a sole trader?

A business owned and operated by one person.

What is one legal regulation for sole traders?

The owner must register with the Government Tax Office and send annual accounts.

What is another legal regulation for sole traders?

The business name must be registered with the Registrar of Business Names.

What is a third legal regulation for sole traders?

Sole traders must follow industry-specific laws like health and safety regulations or obtaining licenses.