Sole proprietorship and partnership: WASSCE Commerce

Most businesses in Sierra Leone start small: one person with a stall, a kiosk or a workshop. As they grow, owners often take in partners to raise more money and share the work. This lesson covers the two simplest forms of business ownership, the sole proprietorship and the partnership, and the trade-offs each involves.

Learning objectives

By the end of this lesson you should be able to:

define a business unit and distinguish the private and public sectors
describe the features, advantages and disadvantages of a sole proprietorship
describe the features, advantages and disadvantages of a partnership
state the contents of a partnership deed and name the types of partners
explain why small businesses survive alongside large firms

Business units

A business unit is an organisation set up to produce or distribute goods and services. Business units are found in two sectors:

Private sector	Public sector
Owned by individuals or groups	Owned by the government
Sole proprietorships, partnerships, companies, cooperatives	Government departments, public corporations
Main aim: profit	Main aim: service to the public

Business units: the private sector (sole proprietorship, partnership, limited companies, cooperative societies) and the public sector (government departments, public corporations, local council enterprises)

Figure 1. Forms of business units in the private and public sectors. WASSCE Tutor diagram.

The sole proprietorship (sole trader)

Definition

A sole proprietorship is a business owned, financed and controlled by one person, who takes all the profit and bears all the losses.

It is the oldest and most common form of business: market traders, kiosk owners, tailors, hairdressers, mechanics and small shopkeepers.

Features:

Owned by one person (who may employ others).
Unlimited liability: the owner's personal property can be taken to pay business debts.
Capital comes mainly from personal savings, family and small loans.
Easy to start, with few legal formalities (registration of a business name).
No separate legal entity: the owner and the business are the same in law.

Advantages	Disadvantages
Easy and cheap to form	Unlimited liability
Owner keeps all the profit	Limited capital, so growth is slow
Quick decisions; flexible	Owner bears all losses and risks
Close contact with customers	Long hours; no one to share the work
Personal attention and secrecy of affairs	Lack of continuity: the business may end with the owner's illness or death
Strong motivation to work hard	Limited skills: one person cannot be expert in everything

The partnership

Definition

A partnership is an association of two to twenty persons who agree to carry on a business together with a view to profit, sharing the capital, management and profits or losses.

Partnerships are common among lawyers, accountants, doctors, estate agents and family businesses.

The partnership deed

Partners should sign a partnership deed (agreement) setting out:

the name and address of the business and the partners
the nature of the business
the capital contributed by each partner
how profits and losses are shared
the duties and powers of each partner
interest on capital and drawings, and partners' salaries
how disputes are settled
how a partner may leave and how new partners are admitted
what happens on dissolution

If there is no deed, the law usually treats partners as sharing profits and losses equally.

Types of partners

Type	Meaning
Active (general) partner	Contributes capital and takes part in managing the business; unlimited liability
Sleeping (dormant) partner	Contributes capital but takes no part in management
Nominal partner	Lends their name (reputation) but contributes no capital and takes no profit
Limited partner	Liability limited to their capital; cannot take part in management (only in a limited partnership, which must have at least one general partner)
Minor	A person under the age of majority admitted to the benefits of a partnership

Advantages of a partnership	Disadvantages
More capital than a sole trader	Unlimited liability (for general partners)
Shared work, skills and ideas	Profits are shared
Losses are shared	Disagreements can paralyse the business
Easy to form	Slow decisions: partners must agree
Continuity is better than a sole trader's	Limited life: death or withdrawal of a partner may dissolve it
Business affairs remain private	Capital is still limited (maximum of 20 partners)

Worked example

Sharing partnership profit. Fatu and Musa run a shop. Fatu contributed NLe 30,000 and Musa NLe 20,000. Their deed says profits are shared in the ratio of capital. The profit for the year is NLe 15,000.

Ratio $= 30000 : 20000 = 3 : 2$ .

Fatu's share $= \dfrac{3}{5} \times 15000 =$ NLe 9,000.
Musa's share $= \dfrac{2}{5} \times 15000 =$ NLe 6,000.

Why small businesses survive

Despite competition from supermarkets and large companies, small firms remain the majority because:

they need little capital to start
they give personal service and often sell on credit to regular customers
they open long hours and are close to customers' homes
they sell in very small quantities (a single cube of seasoning, a cup of rice)
some goods and services need individual attention (tailoring, hairdressing, repairs)
the market may be too small for large firms
many people prefer to be their own boss

Common mistake

Unlimited liability means the owner can lose personal property, not that the business has unlimited money. A sole trader with a debt of NLe 50,000 and business assets worth NLe 20,000 may have to sell personal property to pay the remaining NLe 30,000.

Key points

A sole proprietorship has one owner, unlimited liability, quick decisions and limited capital.
A partnership has 2 to 20 partners, more capital and skill, but unlimited liability and possible disagreements.
A partnership deed sets out capital, profit-sharing, duties and dissolution.
Partners may be active, sleeping, nominal or limited.
Small businesses survive through personal service, credit, convenience and low capital needs.

WASSCE examination focus

WAEC tests this

Expect to state the features, advantages and disadvantages of a sole proprietorship or partnership, to compare the two, to list the contents of a partnership deed, to explain types of partners, and to explain why small firms survive. Use a two-column table for comparisons.

Quick check

What is unlimited liability?
State four items found in a partnership deed.
What is a sleeping partner?
A profit of NLe 12,000 is shared between two partners in the ratio 2 : 1. How much does each get?

Answers: 1. The owner is personally responsible for all the debts of the business, even beyond the capital invested. 2. Any four: names of partners, nature of business, capital of each partner, profit-sharing ratio, duties, interest on capital and drawings, salaries, settlement of disputes, admission and retirement, dissolution. 3. A partner who contributes capital but takes no part in management. 4. NLe 8,000 and NLe 4,000.

Sole proprietorship and partnership