Sole trader

A business that is carried on by a sole trader is owned by one person, who also usually runs and manages the business. There may or may not be people working in the business; these are referred to as employees of the business and the owner is the employer. This is the simplest form of ownership and numerically the most common.

The sole trader receives all profits and is legally required to bear and satisfy all losses personally. The sole trader has unlimited liability to repay amounts owing, or debts, of the business.

The total amount of money and other assets brought into the business by the sole trader is the capital that the business owes to the owner and is called the owners equity.

The sole trader is free to run the business as he or she thinks best and is not answerable to a boss. Although such a business is inexpensive and easy to set up and run, additional finance may be difficult to obtain. The business name, if different from the owners own name, must be registered.

Partnership

A business that is carried on by a partnership can generally be owned by between two and 20 people. The partners usually run and manage the business. However, there may be a silent partner who does not take any part in the running of the business even though they have contributed capital to the partnership.

The amount of the capital that each partner brings to the partnership and the proportion in which the profits and losses are to be split amongst the partners is agreed between them and usually written in the Partnership Agreement. If a matter is not covered by the Partnership Agreement, then the position as set out in the partnership Act of the state applies.

The partners share in the profits of the partnership. However, they also must share in the losses and can each be held personally liable for the debts of the partnership.

The partners are able to use their individual skill and specialize in areas for the overall benefit of the partnership and therefore should be able to earn more collectively than would be possible if the operated individually as sole traders.

It is easy and inexpensive to set up a partnership. The business name should be registered and a separate bank account must be used for the partnership.

Corporation

The most common type of corporation or company is one that is limited by shares. The shareholders hold shares in the company and therefore own it. Shareholders have limited liability; that is, their obligation is limited to the amount, if any, unpaid on their shares. Beyond this, the shareholder is not required to contribute to satisfying the debts of the company. The company has a separate legal identity and it can sue and be sued; the shareholders cannot be sued. The name of a company limited by shares must end with ‘Limited’ or its abbreviation ‘Ltd’.

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