A comparision of Private Limited Company and a Sole Trader Free essay! Download now
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A comparision of Private Limited Company and a Sole Trader
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| Words: 430 | Submitted: 24-Oct-2011
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DescriptionThis shows the advantages and disadvantages of being a PLC over a sole trader
PRIVATE LIMITED COMPANY VS SOLE TRADER.
QUESTION: Kevin James a tailor is contemplating on whether to remain a sole trader or to form a private limited company. Explain to Kevin three advantages and three disadvantages that a private limited company has over a sole trader.
Firstly, one of the main advantages of a Private Limited Company over a sole trader is that, members may enjoy the availability of Limited Liability, hence the business is incorporated (i.e. the business has a separate identity from the owner).Therefore, liability for payment of debts stops at the Company, and owners and shareholders are not personally liable for any other debts than that of which they have purchased. On the other hand, a sole traderís liability status is unlimited and there is no distinction between personal and business money. Hence if the business incurs debts, the sole trader will stand to lose personal assets.
Another advantage that a Private Limited Company has over a sole trader is that the company has an unlimited life, while a sole trader lacks continuity. This means that in a company, years after some founding members have died or moved on, the company can still be operational while since the sole trader business is a personal one, if the owner dies, the business also dies.
Thirdly, more capital can be raised as there are many owners or shareholders in the private limited company. Being sole trader, however it is difficult to raise capital since only one person contributes money.
Although, a Private Limited Company has many advantages over a sole trader, there are also a few disadvantages. One of this is that profits can be diluted because they must be evenly distributed among all shareholders. However, in a sole proprietorship all profits would go to the sole trader.
Also a disadvantage with a Private Limited Company is it isnít very easy to sell shares if a person wishes to do so. Not only will it take time but it will be necessary for a buyer to purchase the share(s) form the previous owner. Shares tend not to be very transferrable, and the directorís consent must be given before any actions can commence. Where as, in a sole proprietor, there is no need for consent, no waiting as there are no shares to be purchased from a business.
Lastly, there is a legal procedure to follow when establishing a Private Limited Company. This procedure is very time consuming and can also be very expensive. However, with a sole trader, no major legal formation is required.
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