1. Advantages of a sole trader
* Ease of formation and dissolution
Compared to other forms of business, sole trader is one of the cheapest businesses to set up and to administer. Its administration system requires only the accounting and bookkeeping system to show the business profits or loss, and the business revenue and expenses.
* Direct motivation and secrecy
The owner owns all the risk associated with the business hence he or she is motivated to work hard to minimize loss and maximize profit. Similarly, since the business is operated by one person, the business secrets are only known by the owner. The sole trader does not have a legal ...view middle of the document...
* Uncertainty of continuity
A sole trader business lack certainty of its continuity. This is in case the owner dies or is incapacitated and is unable to run the business. Business may come to a stand still if there is no person to run it. Even though the business can be inherited, the successor may lack the skills to operate it like the proprietor.
* Limited resources
Since the business is solely owned, the cost of raising capital may be high for one person to rise. Most sole traders end up relying on loans, and personal assets to finance their business.
* Limited managerial ability
The owner takes all the responsibility of managerial tasks such as financing, purchasing and selling. It is uncommon to find a person with all this capability; hence decision making is not balanced in all areas. In most cases, sole traders are faced with financial constraints; it is difficult to hire expertise in different areas hence hindering the growth of the business.
3. How to safeguard your personal assets from business
* Choose the right entity for my business
Although sole trader may seem as the simplest business, it is not the best when it comes to protecting personal assets. As a sole trader, all personal properties are exposed to a potential lawsuit. The best entity to choose is setting up a business as a corporation or limited liability company which protects a personal property in case of a lawsuit
* Keep work and personal finances separate
Personal assets and business assets should be considered differently. The best way to do this is use a separate checkbook for business, use the company name on all the documents related to it, and maintains the corporate book.
* Purchase the proper insurance.
Insurance cover is a vital document in any business. For this reason, it is important to ensure that the business always has a cover and is reviewed annually with the insurance company to ensure the policies are relevant, and they provide the best coverage.
4. What are the disadvantages of setting up as a limited company?
* Complex accounts
The rules governing the accounts and bookkeeping systems in a limited company are more complex and restrictive than those of a sole trader. The company is expected to have the year books of accounts with double entry format, balance sheets, and other related notes. With a large company, preparing all these information is highly costly and time consuming.
* Dilution of powers
Since the company comprise of directors and shareholders,...