A sole trader and a partnership are not separate from their owners, but a company is. That single fact drives the differences in liability, in how profit is shared, and in what the statements call the owners’ money.
This is the last skill lesson in the limited companies chapter. You can compare the partnership side in the partnerships chapter.
What are the main differences?
| Feature | Sole trader | Partnership | Limited company |
|---|---|---|---|
| Owners | One | Two or more | Shareholders |
| Legal person | Same as owner | Same as partners | Separate from shareholders |
| Owners’ liability | Unlimited | Unlimited | Limited to the shares |
| Owners’ money is called | Capital | Capital and current accounts | Share capital and reserves |
| Profit taken by owners | Drawings | Drawings and appropriation | Dividends |
Each row has a reason. Because a company is separate, its debts are its own, so the shareholders’ loss is limited.
Worked example: the same profit, three ways
Suppose each business earns RM60 000 before any owner reward, and each owner group takes RM24 000 out.
Sole trader. The owner’s drawings are RM24 000. Capital rises by 60 000 − 24 000 = RM36 000.
Partnership. Two partners share the profit in the ratio 1:1, RM30 000 each. Their drawings total RM24 000, so current accounts rise by RM36 000 in total.
Company. The company first pays income tax of RM10 000 to reach profit for the year of RM50 000. It declares dividends of RM24 000 and retains RM26 000, because 50 000 − 24 000 = 26 000.
The owners in all three take RM24 000. The difference is the name of the money taken, the place where the rest is recorded, and the extra tax line in the company.
The mistake that costs marks
One slip is to write “drawings” in a company’s statements. The word sounds natural, because shareholders take money out, but it belongs to unincorporated owners.
| Step | Wrong | Right |
|---|---|---|
| Name for owners’ withdrawals | Drawings | Dividends |
| Where it is deducted | Capital | Retained profits |
| Owners’ money | Capital | Share capital and reserves |
Another slip is to say shareholders are “liable for all the company’s debts”. Limited liability is the reverse.
How do I write a full-mark answer?
Use one sentence for the difference and one for the effect. For example: “A company is a separate legal person, so shareholders’ liability is limited to the amount they invested, while a sole trader’s personal assets can be used to settle business debts.”
Use the same shape for every explain answer. Name the feature, compare the two forms, and give the effect. You can log answers that lose marks in the mistake log and paper-error review tool.
Check yourself
State two differences between drawings in a sole trader’s business and dividends in a company, and give an effect of each.
Answer
First difference: drawings are taken by an owner who is not separate from the business, but dividends are declared by a company and paid to its shareholders in proportion to shares held.
Second difference: drawings reduce the owner’s capital, but dividends reduce retained profits.
Effect: a sole trader’s capital falls with each withdrawal, while a company’s dividends are limited by the profit it has kept.
What to study next
Test all four lessons on the limited companies practice set.
If you want a teacher to check your written explanations, see online one-to-one Accounting tuition.