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Tuesday, January 18, 2011

Explain the differences between a sole trader and a partnership.

Ans. A sole trader is an individual or a single person who owns, controls and runs the business. The partnership, on the other hand, is a business owned and controlled by two or more (upto 20) members called partners.
The sole trader invests all the capital into the business due to which the capital is limited only to the owners savings, profits and any other income source. The sole trader also gets to keep all the profits or is liable for all debts. In a partnership, more capital is available as more people are investing. The profits made and any losses incurred are shared among the partners. Also there are greater chances of expansion in a partnership as compared to sole traders.
A sole trader is the only person who owns and so has to take care of all aspects like marketing, accounting i.e. he / she might have to do things he / she is not good at. But in a partnership, greater chances of specialization are available as the different partners may sepcialise in different areas of business functions.
Even though both sole traders and partnerships have unlimited liability, there is a limited partnership. In this one member has unlimited liability and so runs the business while the others are sleeping partners and have limited liability.
For the sole trader business, if the owner becomes sick or takes a holiday, the business stops working while in a partnership, the other partners can take care of the business and keep it running in case of unfitness or absence of a partner. Then if a problem arises for a sole trader, he has no one to discuss it with and financial costs of the consultants would be too high. But in a partnership, the partners can discuss problems amongst themselves and may come up with a solution without the need of any advisors. Also since partnerships are larger than sole traders and work on a greater scale so they could even benefit from the economies of scale. Therefore, it means that the average cost of running a partnership could be lower than sole traders in general. Since a sole trader is single person, he is able to establish close relations with his customers. He talks directly to them and enjoys their confidence. Therefore, a sole trader can meet the exact expectations of the customers. But in a partnership, due to greater number of people working together, the personal contact with the customers might be difficult and a subordinate would have to be employed into talk with and deal with the customers. A sole trader also is able to do a work of his own choice and gain personal satisfaction from it while in a partnership, all the different partners must agree one sort of business regardless of their personal interests and satisfaction.

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