Law of Organisations Notes
Types of Business Organisation
Sole Trader:
- Simplest way to set up and run a business;
- Ownership and Control rests with a single individual;
- Inherently risky, as individual not separate from business, therefore sole personal
liability for business, debts, contractual obligations and any claims against;
- Own all assets of the business (can dispose of as they wish);
- May employ staff and trade under a business name;
- Unlikely to be suitable for businesses requiring more than little external investment:
- Being unincorporated limits borrowing; and
- Prevents business raising equity finance by issuing shares.
- Minimal regulation – No requirement for a formal constitution for the business, no
need to register or file accounts and returns with Companies House;
- Treated as self-employed – Must register and make an annual self-assessment tax
return (profits treated as personal income subject to income tax and NI
contributions);
- If running a business where there is a risk of personal injury to third parties, it is vital
you are insured against these risks.
Advantages:
- Control: Sole traders maintain full control of their business;
- Profit Retention: Sole traders retain all profits of their business;
- Private Data: Information about sole traders is kept private;
- Registering: No dues or fees to register
- Cost: Inexpensive to set up.
Disadvantages:
- Liability: Subject to unlimited liability – Risk of losing home, savings etc.;
- Finance: Difficulty raising finance;
- Reverse Economies of Scale: Cannot take advantages of economies of scale like
limited companies and larger corporations;
- Decision Making: No aid in decisions – Success and failure dependent upon
individual;
- Life of Business: Business won’t usually continue in event of sole trader’s
retirement/death
Types of Business Organisation
Sole Trader:
- Simplest way to set up and run a business;
- Ownership and Control rests with a single individual;
- Inherently risky, as individual not separate from business, therefore sole personal
liability for business, debts, contractual obligations and any claims against;
- Own all assets of the business (can dispose of as they wish);
- May employ staff and trade under a business name;
- Unlikely to be suitable for businesses requiring more than little external investment:
- Being unincorporated limits borrowing; and
- Prevents business raising equity finance by issuing shares.
- Minimal regulation – No requirement for a formal constitution for the business, no
need to register or file accounts and returns with Companies House;
- Treated as self-employed – Must register and make an annual self-assessment tax
return (profits treated as personal income subject to income tax and NI
contributions);
- If running a business where there is a risk of personal injury to third parties, it is vital
you are insured against these risks.
Advantages:
- Control: Sole traders maintain full control of their business;
- Profit Retention: Sole traders retain all profits of their business;
- Private Data: Information about sole traders is kept private;
- Registering: No dues or fees to register
- Cost: Inexpensive to set up.
Disadvantages:
- Liability: Subject to unlimited liability – Risk of losing home, savings etc.;
- Finance: Difficulty raising finance;
- Reverse Economies of Scale: Cannot take advantages of economies of scale like
limited companies and larger corporations;
- Decision Making: No aid in decisions – Success and failure dependent upon
individual;
- Life of Business: Business won’t usually continue in event of sole trader’s
retirement/death
