1. Sole Traders
Accounting 3C

2. What is a sole trader? Type of business structure
A business owned by a single person
Examples of sole traders – electricians, plumbers, gardening business, painter, accountant, corner store, clothing alterations, florist,

4. Business name
You can use your own name or you can register another business name (trading name)
Mike Newman Or
Mike Newman Electrical
Eastern Shore Electricians

5. Advantages
Very easy to start – virtually no legal requirements (some businesses may require special licenses)
Owner has complete control over assets and business decisions
Profits are not shared with others (owner receives all profits)
You can employ people to help run your business
Easy to change legal status of the business or close the business, you can just stop!

6. Disadvantages
Starting capital is limited – initial funding must come from the owner’s personal funds.
There are limited skills – few, if any employees, means the skills of the owner must be sufficient to manage the business.
Heavy workload – single owner usually required to work beyond normal working week.
Growth potential is limited – structure restrains its ability to acquire finance and other resources
Owner is liable for all business debts (unlimited liability)

7. Accounting entity assumption
Mike’s business is a separate accounting entity.
Any personal records/transactions of Mike’s must be kept separate from the business records.

8. Separate accounting entity
Transactions of Mike Newman:
Bought electrical tape to be used in the business $500
Paid insurance for family home $600
Paid insurance for van used in the business $400
Bought movie tickets $40
Under the accounting entity assumption, which transactions will not be recorded in the business records?
______________________________

9. Accounting entity assumption (separate accounting entity)
Mike Newman Electrical
Business transactions
Mike’s personal transactions

10. Legal entity
There is no legal distinction between the owner and the business.
The owner and the business are one/the same in the eyes of the law.
What does this mean?

11. Business & business transactions
Mike Newman Electrical
A legal entity
Business & business transactions
Mike Newman
(the person)
Mike Newman Electrical is NOT a separate legal entity from Mike Newman (as the owner)

12. Unlimited Liability
Liability = you owe an external party
Unlimited liability = as the business owner, there is no limit on the liability that you owe an external party
The owner is held liable for all business debts because the business is NOT a separate legal entity from the owner.

13. $60,000 assets $100,000 Mike Newman Electrical Mike Newman Electrical
As the business is NOT a separate legal entity from the owner, the owner must pay off the debts of the business.
Business is unable to pay off all debts.
Business owes lots of money to external parties.
$60,000 assets
$100,000

14. Mike Newman may have to sell his personal assets to pay the debts of the business.
Personal house
Personal car