Sole Traders & Partnerships

Exam code: 7115

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

When an entrepreneur starts a business, they will often start operating as a sole trader
This is a business with a single owner, who may choose to hire employees or operate alone
They are easy to set up and start trading
Information about their financial performance does not need to be shared outside of the business
Over time, or if the business requires significant investment, they may change the legal structure of the business

Advantages	Disadvantages
Easy and inexpensive to set up The owner has complete control over the business All profits belong to the owner Simple tax arrangements	Unlimited liability means the owner is personally responsible for debts the business incurs Limited access to finance and capital Limited skill set of the entrepreneur

A partnership is a formal arrangement by two or more entrepreneurs to manage and operate a business and share its profits
Partnerships are often formed to gain more funding, increase capacity or increase skills and experience in the business
Common partnerships include law firms, accountancy businesses and small-scale construction businesses
Partnerships can often be identified by suffixes such as '& Son' or 'and Partner'

Advantages	Disadvantages
Partnerships are easy and inexpensive to set up Partners share responsibilities, decision-making and liability for debts More skills and knowledge are available Increased access to finance and capital	Partners have unlimited liability Potential for disputes between partners Profits are often shared equally, regardless of the contribution made by each partner It is often difficult to transfer ownership to new owners

Unlimited liability means that the business owner is personally responsible for all of the business’s debts and losses
- If the business cannot pay what it owes, the owner’s personal assets (like savings, car, or house) can be used to settle debts
Sole traders and partners have unlimited liability for any debts incurred by the business
- They are are also legally responsible for any unlawful acts committed by those connected to the business

There is no legal distinction between the owners and the business
As a result, these business owners may have to use their personal assets to pay debts or legal fees
- For example a sole trader may need to sell their own home to pay creditors if their business fails
Owners are likely to be cautious, avoiding big decisions that could lead to debt
It can make it harder to attract investors, as the risk is higher for the owner
Borrowing money from banks may also be more difficult or require personal guarantees

Sole traders