FORMS OF OWNERSHIP

Sole trader vs. Partnership

1. The characteristics of the different forms of ownership

 1.1 SOLE TRADER

 This is a business owned by one person. A sole trader is someone who owns a business with no other owners; she/he contributes all the capital or borrows it from someone else, usually manages it alone and/or with the help of employees, bears all the responsibilities and gains all the profits.

Characteristics of a sole trader:

• Only 1 person owns the business.
• If the owner dies or retires, this business no longer exists. There is a lack of continuity.
• The owner is responsible for all the debts of the business, should it go insolvent. This means that he/she has unlimited liability.
• Sole traders have a close relationship with their customers.
• The business and the owner are not separate – this business is not a legal entity (personality).
• It is an easy and uncomplicated way of forming a business.

Advantages and disadvantages of a sole trader

1.2. PARTNERSHIPS

A partnership is where between 2 to unlimited number of owners (called partners), contribute or combine their skills, experience, labour, goods, knowledge and capital to make and share profits. The actions of each partner affect the business as a whole and all the partners are responsible to the partnership and each other.

Forming a partnership

Partnerships are formed orally or in writing. The written contract is drawn up by an attorney and is called the Partnership Agreement.

The partnership agreement includes the following:

• The name of the partnership.
• The names of the partners.
• The duties of each partner.
• The aim and nature of the partnership.
• The contribution of each partner.
• How the profits will be shared or how the losses will be divided.
• How disputes (disagreements) will be settled.
• Salaries paid to partners.
• How leave is allocated. Any insurance, drawings allowed and how interest will be paid.

Characteristics of a partnership:

• If one of the partners resigns or dies, the partnership no longer exists.
• All the partners are jointly and severally liable. This means that each partner is liable as individuals and as a partnership for any debts of the business. This also means that they have unlimited liability. A partner is an agent of the business and acts on behalf of the other partners when conducting business.
• It may be formed orally or in writing.
•  A partnership may be formed for a once-off venture or for a longer period of time.
• It is not a legal personality. The partners and the partnership are not separate.

Advantages and disadvantages of a partnership: