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Financial Accounting Essay

644 words - 3 pages

M1: Compare the final account of two organisations explaining the similarities and differences

Most often, when starting a business people find it difficult to decide whether or not their business is going to operate as a sole trader or a limited company. There are advantages and disadvantages to both, although becoming a sole trader is much easier then limited company. However, a sole trader does not share his/her responsibilities with anyone but they bear it all by themselves. These include; legal and financial whereas a limited company separate legal entity to their directors, limiting the liability if things go wrong.
As a sole trader, you are fully responsible for all the risks and benefits of the business. Including business debts if anything goes because you are the business, you are liable to pay any resulting losses or debt from the business which could result in the owner losing their personal assets to pay off the business ...view middle of the document...

However, as a business grows the sole trader may find that they have increased exposure to the possibility of risk, which could adversely affect personal assets. The tax paid by a sole trader is significantly higher than a limited company. Expenses and tax reliefs are deducted from profits of the business to leave the net profit. Tax is paid at the same rates as an employee. A sole trader may find that the business credit rating is affected by their personal credit rating, which could make it difficult to obtain business finance. It is often much harder for a sole trader to raise business finance, as a fairly new business may be seen as less able to repay loans.
A limited company is owned by its shareholders and has a separate legal entity from the company owners. This limits the liability of shareholders for company debts, protecting personal assets. Personal liability is typically restricted to the share amount of the share holders. Business finance is usually much easier to obtain for a limited company, as creditors and investors know that the company is legally regulated and registered, presenting a professional and trustworthy image to the world. Raising business finance is also much easier as shares in the business can be sold in order to raise investment capital. The investor buys shares in a business in return for a share of the profits, known as a dividend.
A limited company doesn’t have the freedom to act as they wish or keep all business information private. Some information has to be registered with Companies House, like the company’s annual accounts which are free to be inspected by members of the public. Administration expenses of a company are higher, as company law and resulting administration is far more complex than that of a sole trader.
There are many advantages and disadvantages of starting a limited business or becoming a sole trader. It is advisable to consult a professional so that you can make an informed decision based on the facts of your intended business.
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