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chapter 25.docx

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University of Calgary
ACCT 301

Chapter 25 Sole traders vs. Partnerships vs. Limited Companies Sole traders whoever opens up a business is a sole trader as long as he is the single owner of the business. Legally, the business and the owner are not separate entities; they are one and the same. However, accounting views the business as a separate entity to be distinguished from its owner. Nevertheless, the sole trader is still personally liable for the debts of the business. Partnership A partnership is an unincorporated business that is owned by two or more persons known as partners. A partnership is governed by the Partnership Act 1890, and it is formally established by means of a partnership agreement, which specifies such matters as the distribution of profits, salaries, etc. As with sole traders, accounting views the partnership as a separate business entity to be distinguished from its owners. Similarly, each partner is responsible for the debts of the business. This means that each partner has what is called an unlimited liability. Limited Companies Limited companies are governed by the Companies Act 1986, and the owners of a limited company are its members or shareholders. There are two classes of a limited company, which are: - Private Companies, they are owned by members and they cannot invite members of the public to invest in their equity (ownership). - Public Companies, they are owned by shareholders, who may purchase further shares or sell the ones they own to the general public on a Stock Exchange. As with Sole Traders and Partnerships, a limited company is also viewed as a separate entity
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