Non-incorporated Forms of Business

Sole Proprietor

Often but not always, this is a single person in business on their own, running a small operation. Sole proprietors are self-employed yet can employ many staff. They may be:

• trades-people; carpenters, builders, stall holders, management consultants etc
  
• independent retailers; Pizza restaurants, butchers, computer shops etc
  
• craft or cottage workshops; picture frame makers, engine re-conditioning busineses etc

A sole proprietor is the business . They trade under their own name or under a trade name that describes the business or attracts customers. But their own name must appear on invoives and letterheads and in the shop or office - if they have a trade name that is not their own.

The "Business" is not a legal entity as such.

To set up a sole proprietorship all that is needed is the capital and the "entrepreneural spirit, courage and energy" to start transacting business with customers.

There is no legal requirement to keep audited accounts books but the proprietor must still pay income tax on profits received from the business and account for VAT if registered. Records are thus needed to communicate taxable earnings to the Inland Revenue and inputs/outputs to the Customs and Excise.

Advantages and Disadvantages

• Inexpensive and quick to set up. No legal procedures. Begin trading immediately.
• Profits and earnings go to the autonomous, independent proprietor who can decide and act quickly. Annual accounts do not have to be submitted to Companies House so saving on bookkeeping/auditing charges i.e. he/she need not publicly disclose the businessēs financial affairs except to the tax people.
• There is a problem of "one-man/woman band". All tasks such as selling, accounting, tax records etc are frequently undertaken by the proprietor. If he/she is weak in any area of knowledge, experise and acumen - the business will suffer. He/she may be a good painter and decorator but is poor at administering paperwork or marketing goods and services well.
• a sole proprietor ‚s work is usually intensive. When he/she is not working, no money comes in. Holidays and time-off are difficult and economies of scale e.g. in buying, are often elusive. Unit costs are often higher e.g. purchase price per ream of photocopying paper, quantity of packaging materials etc.
  
• The sole trader is personally liable for the debts of the business. If their business fails their personal belongings can be sold to meet the debts of the business. The proprietor enjoys the profits but accepts personal responsibility for losses for which they have unlimited liability. He/she is the business and not an employee of it. If a customer sues for damages arising from work done, then this must be settled from the proprietorēs own personal resources. The risk of losing a home and personal wealth/savings is clear albeit that insurance polices can be taken out against certain losses.
• losses in the first few years of business can be offset against income from the three years before the business was begun (tax refund).
• the sole prop. has no access to equity capital (from selling shares in the business).

Sole proprietorship is a successful, and popular form of business. Probably about 1 million such businesses exist and new sole proprietorships are created (and die) every day..

Partnerships

a ..... "relationship which subsists between persons carrying on a business with a view to profit"

Partnership Act 1890

There have been several interpretations of partnerships. A partnership = is not incorporated and has unlimited liability, but can be legally acknowledged organisation where two or more and often not more than fifteen join together to carry out a business.The partners' names must be on all business stationery and displayed on the premises.

Partnerships are common amongst professionals such as accountants, solicitors/barristers . Trades-person partnerships (e.g. Mary and Jimēs Shirt Ironing Service) are also evident.

Professional partnerships give clients some assurance in that, say, their solicitor is one of a partnership who share accountabilty. Losses must be borne by ll partners, even if caused by one only.

Partnerships enable:

• More than one person invests in the business and there is still no need to submit accounts. Yet partners divide profits between themselves
  
• Partnerships bring together skills and abilities (specialisation) to benefit the business. The burden of work can be shared and so relieving pressure.
  
• Liability losses are shared between partners, reducing personal bankruptcy risks.

Disadvantages include:

• Unlimited liability (more complex than for a sole proprietor).
• Set up costs. Legal agreements are needed to e.g. constrain partner(s) who may want to take flight if the business is in difficulty. Profit distribution between partners must be defined.
  
• The sole proprietor is no longer independent. Decisions require consultation between partners if the partnership is to work effectively. One partner cannot act unilaterally e.g. over investments, holidays, contracts to accept etc. Decision-making processes can be slowed with the potential for argument.
• Partners, as for sole proprietors, are the business (not employees). If one dies or cannot continue with the business, then the partnership is dissolved (partnership agreements need to provide for this).

Partners are liable for income tax but there is no requirement to keep audited accounts (potentially less admin.) and no need to disclose publically the businessēs turnover and financial performance except to the tax people.

Partnerships can grow into big U.K-wide and international organisations as have some of the accounting firms (partnerships). They may have many employees.

See also Partnerships Incorporated Business Organisations

Students of business should able to explain limited liability, its importance and how it works, how ownership (shareholders) occurs and the obligations of limited liability; how such companies are managed and organised functionally. You should also appreciate the nature and structure of a holding company and how holding companies make money.

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Developed and maintained by Chris Jarvis for the BOLA project