Question

Your friend, Brian, works as an Electrician working on several Commercial Buildings. He has recently finished his apprenticeship and is starting to get paying customers. He has contacted you as he knows you have been undertaking some accounting studies as part of your qualifications as he has decided to start his own Electrical Business. He wants some advice regarding his options for the structure of his new business venture, which are either a sole trader or a company. He anticipates that initially he will work alone but in the future, he may grow the business and have employees.

1. What three factors would you consider as important in deciding which business structure to advise, i.e. whether to operate as a sole trader or a company? (100 words max).

2. Explain three advantages and three disadvantages of each of these business structures (sole trader and a company)? .

3. Which one of the two of the structures would you advise and why?

Answer 1

(a)Three factors which is important in deciding whether to operate as a sole trader or a company are as follow:

• Capital requirement

Capital requirement is crucial factor to decide a particular form of business. It is closely related to decide which type of organisation will be best . Organisation requiring heavy investment for establishment should be organised as company and enterprises requiring small investment should be organised as sole trader

• Scale of operation

If the scale of operation of business is large company form is best and if the scale of operation of business is small sole trader is best

• Rules and regulations

There are a lot of complex rulea and regulations to establish a company because company is a legal entity, it is created and dissolved by law.Establishment and operate of company is very complicated and expensive.

While sole trader is the easiest and cheapest to get started and also to maintain.

SOLE TRADER

Advantage:

(i) Easy to get started and operate

(ii) Sole traders maintain full control of their business without any interference

(iii) Sole traders retain all profit there are no need of distribution of profit.

Disadvantage:

(i) Difficult to raise fund when sole traders require huge amount of fund for expansion of business

(ii) Lack of expertise, all decision is taken by the owner itself.

(iii) Unlimited liability

COMPANY

Advantages:

(i) Easy to raise finance for expansion of business

(ii) Limited liability

(iii) Easy to take effective decision with the help of expert and qualified person.

Disadvantage:

(i) Expensive to establish and maintain it .

(ii) Lack of secrecy

(iii) Compliance of rules and regulations is very complicated.

(a). I advise Brian to structure his new business as sole trader not as a company because he anticipates that initially he will work alone and to fulfill his intention sole trader will be best .

Brian provide service to the customer for that he doesn't require a huge investment Hence, for now sole trader weill be best for him. THANK YOU