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ACCT 301 Lecture Notes - Sole Proprietorship, Disclose

Course Code
ACCT 301

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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.
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 from its shareholders. Yet, shareholders benefit from what is known as a limited
liability. This means that their liability extends as far as the capital they invested, and
nothing more. Hence the term ‘limited’ in reference to limited companies.
The following table summarizes the advantages and disadvantages of being a sole
trader, having a partnership or a limited company.
Sole Traders Partnerships Limited Companies
sole traders partnerships Limited companies
1. Easier to set up 1. Risks are spread over a large number of partners 1. Limited
2. The owner is the manager of the business.
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