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business entity concept. 

2.3 Sole traders 

This is the oldest and most straightforward structure for a business. Sole traders are people who work for 

themselves. Of course, it doesn't necessarily mean that the business has only one worker. The sole 

trader can employ others to do any or all of the work in the business. A sole trader owns and runs a 

business, contributes the capital to start the enterprise, runs it with or without employees, and earns the 

profits or stands the loss of the venture. Typical sole trading organisations include small local shops, 

hairdressers, plumbers and IT repair services. Sole traders tend to operate in industries where the 

barriers to entry are low and where limited capital is required on start up.  

In law, a sole trader is not legally separate from the business they operate. The owner is legally 

responsible for the business.  

A sole trader must maintain financial records and produce financial accounts. However, there is no legal 

requirement to make these accounts publicly available; they are usually only used to calculate the tax 

due to the tax authorities on the profits of the business. Banks and other financiers may request to see 

the financial accounts of the business when considering applications for loans and overdraft facilities. 

2.3.1 Advantages of being a sole trader 

This type of structure is ideal if the business is not complicated, and especially if it does not require a 

great deal of outside capital. Advantages include: 

(a) 

Limited paperwork and therefore cost in establishing this type of structure 

(b) 

Owner has complete control over the business   

(c) 

Owner is entitled to profits and the ownership of assets  

(d) 

Less stringent reporting obligations compared with other business structures – no requirement to 

make financial accounts publicly available, no audit requirement 

(e) 

Can be highly flexible  

2.3.2 Disadvantages of being a sole trader 

(a) 

Owner is personally liable for all debts (unlimited liability) 

(b) 

Personal property may be vulnerable for debts and other business liabilities 

(c) 

Large sums of capital are less likely to be available to a sole trader, leading to reliance on 

overdrafts and personal savings  

(d) 

May lead to long working hours without the normal employee recreation leave and other benefits 

(e) 

May be issues of continuity of business in the event of death or illness of the owner 

2.4 Partnerships 

Partnerships occur when two or more people decide to run a business together. Examples include an 

accountancy practice, a medical practice and a legal practice. Partnerships are generally formed by 

contract. Partnership agreements are legally binding and are designed to outline the proportionate 

amount of capital invested, allocation of profits between parties, the responsibilities of each of the 

parties, allocation of salary and procedures for dissolving the partnership. Some countries have specific 

legislation for partnerships. In the UK, the provisions of the Partnership Act 1890 apply where no 

partnership agreement exists. 

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CHAPTER 1  

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  INTRODUCTION TO ACCOUNTING