Advantages and Disadvantages of Profit Business Structures and the Use of Accounting Information

BUSINESS MANAGEMENT
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Introduction
Determination of the type of structure for a business is one of the first steps taken by
individuals wanting to start businesses. Multiple business structures are available for new
businesses including partnerships, sole proprietorships, and limited companies. Each of these is
characterized by unique tax and legal ramifications. There are also advantages and disadvantages
of different business structures. This paper will discuss the advantages and disadvantages of
profit business structures and explain how accounting information is used by different users.
a. Explain three Advantages and disadvantages for Profit business structures
Sole trader
A sole trader refers to a business structure where a business is exclusively owned and run
by a single individual. The business entity is not distinguishable from the owner (Nickels,
McHugh and McHugh, 2008).
Advantages of a sole trader
Exclusive control
A sole has exclusive control of the business entity. They run their business on their
own(Carlon, Mladenovic, Palm and Waters, 2011)..
Profits retention
A sole trader keeps all profits after tax deductions have been made. They do not have to share
their profits with anyone (Carlon, Mladenovic, Palm and Waters, 2011).
Low startup cost

Setting up a sole proprietorship does not require high startup cost unlike other business
structures(Carlon, Mladenovic, Palm and Waters, 2011)..
Disadvantages of a sole trader
Financial challenges
Sole traders often experience challenges in raising finances for their businesses(Keulen
and Gritter, 2011).. Due to these challenges they may have difficulties in achieving future
expansion goals.
Unlimited liability
The law does not recognize sole proprietors as spate entities from their business. This
means that they have unlimited liability. In the case of bankruptcy for example they may risk
their wealth outside the business entity (Keulen and Gritter, 2011).
Decision making
The sole trader is responsible for making all decisions meaning that the failure or success
of their business entity is solely on them(Keulen and Gritter, 2011).. They do not have anyone to
assist then in making decisions.
Partnership
A partnership refers to a formal arrangement by two individuals to run a business entity.
They may either have limited liability or have partners share profits and liabilities equally
(Hillman & Loewenstein, 2015).
Advantages
Ease of funding