SOLE TRADERS

Learning ObjectivesTo understand what a sole trader is (E)

To analyse the advantages and disadvantages of setting up a sole trader business (C)

To evaluate the reasons for starting a business as a sole trader. (A)

http://www.bbc.co.uk/learningzone/clips/exploring-the-sole-trader-business-model/13155.html

SMALL LARGE

Hairdresser

Coffee shop Market Stall

ExamplesFlorist

DEFINITION:A sole trader is an INDIVIDUAL who may or

may not employ other people, but who OWNS and operates the business and who has UNLIMITED LIABILITY.

Unlimited liability - this means that the owner has a LEGAL OBLIGATION to pay any losses made by the business. For a sole trader there is no difference in law between the profits and debts of the business and the finances of the individual owning the business. Legally they are ONE and the same.

AdvantagesIn pairs come up with what you believe to be

the advantages of starting a business as a sole trader (individual).

ADVANTAGES OF SOLE TRADERS

EASY

TO SET UP

• It is easy to set up a sole trader. A person can set up a business immediately.

• There are few, if any, forms to fill in or procedures needed to set.

EASY

TO RUN

• Easier to run than any other types of business. The owner is in sole charge, easier in terms of decision making.

• They do not need to get others to agree before making changes

TAX ADVANT -

AGES

• Taxed differently eg. NI contributions are lower

• There are no legal fees to set the firm

CONTROL

• The owner is in sole charge – can make whatever changes they want

• No meetings required to implement these changes

CAPITAL

• A business nearly always needs some capital to start trading

• However, the amount of money needed to set up a sole proprietorship is often small

PROFITS

• All the profits of the business are kept by the owner

• Effort = reward • The harder the sole trader works, the

more successful the business becomes, more can be earned

PRIVACY

•Only the Inland Revenue & Customs and Excise need to know about the finances of a sole trader

•Don’t have to publish info. Which could be seen by the public or by rivals

FLEXIBILITY

•Many sole traders have some choice about when they work

•They don’t have to ask permission eg. To have an hour off

DisadvantagesIn pairs come up with what you believe to be

the disadvantages to starting a business as a sole trader.

DISADVANTAGES

UNLIMITED

LIABILITY

• If the business does very badly and has lots of debts, as a sole trader you must pay off these debts even if it means selling all your possessions, like a car

LACK OF CONTINUIT

Y

• The sole trader IS the business, it may not survive if the sole trader stops work

• There may be no one for you to sell it off to or even to pass it on to

ILLNESS

• The business may stop if the sole trader is ill• They would have to close the shop and

consequently could lose income and profits

LONG HOURS

• Sole traders work really long hours to keep their business afloat

LIMITED

SPECIALISATION

• Sole traders carry out jobs in the business themselves

• larger firms can afford to buy in specialist workers, sole traders may not gain advantages related to specialisation

Limited

economies

of scale

• Higher average costs than larger businesses. • Unable to gain economies of scale – don’t get

same discounts

DIFFICULTY OF RAISI

NG CAPIT

AL

• may have to borrow the money from a bank, who may only agree to it if they pay a high interest repayment rate

• find it hard getting money to expand the business

TaskComplete Examination Questions on Page

151 of the book provided

EXTENSION QUESTIONSWhat is a sole trader?

What are the advantages of setting up a sole trader business?

What are the disadvantages of setting up a sole trader business?

What is unlimited liability?

PartnershipsWe are now going to look at partnerships.