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By the end of these notes, you should be able to:
A business entity is simply an organisation that exists to carry out business activities — buying, selling, producing goods or providing services — usually with the aim of making a profit.
Different businesses are set up in different ways. The way a business is set up is called its type of business entity (sometimes called its legal structure). The type of entity affects:
There are three main types you need to know:
A sole trader is a business that is owned and run by one person. This is the simplest and most common type of business.
Example: A local hairdresser who works alone, a market stall seller, a freelance graphic designer, or a plumber who runs their own business.
There is no legal separation between the owner and the business — they are treated as the same person in the eyes of the law.
This is the most important concept for a sole trader. Unlimited liability means that if the business cannot pay its debts, the owner must pay them personally — even if it means selling their own car, savings, or home.
Example: If a sole trader's business owes $20,000 but the business only has $5,000, the owner must find the remaining $15,000 from their own personal money.
| Advantage | Explanation |
|---|---|
| Easy and cheap to set up | There are very few legal requirements. You can start trading almost immediately with minimal paperwork. |
| Full control | The owner makes all decisions alone — no need to consult anyone else. |
| Keep all the profit | Since there is only one owner, all profits belong to that one person. |
| Privacy | Sole traders do not need to publish their financial accounts. Their financial information stays private. |
| Flexible | The owner can change direction, hours, and methods quickly without having to get others to agree. |
| Personal relationship with customers | Because the business is small, the owner can build strong, personal relationships with customers. |
| Disadvantage | Explanation |
|---|---|
| Unlimited liability | The owner is personally responsible for all debts of the business. This is a huge financial risk. |
| Limited capital | It can be hard to raise large amounts of money because the business relies mainly on the owner's personal savings or small loans. |
| No continuity | If the owner dies, becomes ill, or wants to stop working, the business may collapse — there is no one to automatically take over. |
| Heavy workload | The owner must do everything alone (unless they hire staff), which can lead to stress and burnout. |
| Limited skills | One person cannot be an expert in everything — accounting, marketing, production, and management all at once. |
| Harder to grow | Because of limited finance and resources, it is difficult to expand the business significantly. |
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