Sole Trader

 

Meaning

A person who carry his business on himself or herself. And a person who is responsible entirely for its own organization. He invest money into the business and own assets. there is not distinction between the business and the proprietor. in law they are viewed as one. any liabilities that the business has, must be ultimately found from the proprietors own personal wealth. should the business not be able to pay them.

Features

It is the oldest form of commercial organization. It is because of its peculiar features that even in these days of modernisation individual proprietorship stand out unaffected.

  1. Single Ownership : This is owned by one man and nobody else contributes capital.
  2. Own Control : He has absolute control over the affairs of the concern. His decision is final. Since he need not consult others, he can take quick decision and gain enormously
  3. Own Profit : The attraction of reaping the entire profits motivates him to put forth the best in him. He strives tirelessly for the improvement and expansion of his business.
  4. Unlimited Liability : The liability of the sole proprietor is unlimited. As a result, when his business assets are not adequate for paying the debts, his private properties have to be sold.
  5. Absence of Government Regulation : A sole proprietory concern is free from Government regulations. No formalities are to be observed in its formation, management or in its closure.
  6. No Separate Entity : The sole trading concern is not regarded as an entity different from the proprietor. Consequently the business comes to an end with the permanent disability or death of the proprietor.
  7. Limited Capital : Since capital is contributed by only one individual it is bound to be small. Apart from this financial constraint his inability to manage beyond a level also impedes its expansion. The size of the business unit therefore tends to be small.

 

Characteristics

Liability

Lack of liability protection exists as one of the biggest disadvantages of operating as a sole trader. The government treats a sole trader and the business as the same legal identity. Sole traders have unlimited liability for events that occur while operating the business. If the company faces a lawsuit and does not have sufficient assets to cover a judgment, a sole trader may lose his home, automobile and other personal assets as a result. Creditors of a sole trader may pursue his personal assets as compensation for business debts and obligations.

Taxes

Sole traders do not have to file a business tax return on the company’s profits and losses. Sole traders can pass their portion of company profits and losses directly to their personal income tax return. This is a contrast to a corporation that must file a corporate tax return. Sole traders must pay self-employment taxes on income earned from the business. Unlike corporations, sole traders are not able to deduct fringe benefits like the cost of providing death and life insurance benefits to employees.

Control

A sole trader has control over every aspect of the business. Sole traders do not have to consult with other individuals to make decisions for the business, which allows them to respond quickly to changes in the marketplace. This can also backfire if a sole trader lacks expertise in a required field like accounting or marketing. Sole traders can allocate company resources in any manner, as no law requires a sole trader to separate his personal income from business income. This means a sole trader may use company funds to meet personal obligations.

Considerations

A sole trader business lacks continuity. This means the company will end automatically if a sole trader dies, retires or decides to sell the business. This lack of continuity makes it difficult for a sole trader to attract investors. Sole traders may have to rely on their personal assets and business loans to secure financing to operate. A sole trader may have difficulty securing business loans for fear that the owner will die or become disabled.

 

 

Advantages and Disadvantages of sole trader

 

Advantages

Control – Sole traders maintain full control of their business. Running it how they please without the interference of others.

Profit retention – Sole traders retain all the profits of their business. Private data – Information about sole traders is kept private, unlike that of limited companies which is necessarily made public after registration with Companies

House. Specialist – Often a small business, sole traders can offer a more personal service with local roots and ties. This can be more appealing to potential customers in the local community.

Personal – Because there is no need to confer with other decision makers, sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers.

Easy to Form and Dissolve : Since no legal formalities need to perform to start a sole proprietary business, it is most easy to start a business as a sole proprietary concern. Sometimes, a few restrictions are placed by local bodies such as municipalities, etc., from the view point of maintenance of health and sanitation. Just as it is easy to form, it is equally convenient to dissolve a sole proprietorship concern.

Direct Motivation : In this form, there is a direct relationship between rewards and efforts. The sole proprietor enjoys the entire profits and hence is inspired, induced and motivated to give his best of efforts and skills in running the business.

Absolute Control : The proprietor is free to prepare any plans and policies and execute them for the success of his business without any interference or clash of interest from any quarter. He is free to direct and control the operations of his business.

Business Secrecy : To face the challenge of competition in the market, maintenance of business secrecy provides and edge to the firm over its rival firms. The degree of retention of business secrecy is the highest in this form of organization.

Promptness in Decision-Making : A sole proprietor being a single owner is not required to consult anyone while taking decisions. This enables him to take prompt and quick decisions taking advantage of the opportunities which may arise in business from time to time.

Flexibility in Operations : If the situation demands changes in strategy, the same can be easily brought about to meet the changed situation without causing least of unsought consequences. Sole proprietorship offers the scope for flexibility in business operations by allowing the business to adapt and adjust itself to changing times and situations.

Personal Relations : Normally, the size of a sole proprietary business being small, the owner maintains a personal touch with his employees and customers. Personal attention to customers results in increased sales and individual attention to employees brings in efficiency and motivation on the part of employees there by reducing the cost of production. The resultant reduced costs and increased sales are reflected in increased volume of profits.

Credit Standing : Since a sole proprietor is liable to pay the debts of the business out of his private property and investment as well, the credit worthiness or standing of the sole property concern is greatly enhanced. The creditors, therefore, do not hesitate to lend to a sole proprietor.

Limited Regulations : The business activities of a sole proprietor are least regulated by law and the Government. No doubt, a sole proprietary business has to comply with labour laws and tax laws, there is no other interference in the day-to-day running of the business from the Government. Similarly, there is no Government regulation in respect of formation and dissolution of its business.

Independence : This form of organization offers a way of life for acquiring honourable living to those persons who do not want to serve others and take pride in ownership and control of their business. It provides an opportunity of business career to many people with available resources and there by utilizing their capacity and skills in the field of business. The sole proprietor being his own master and manager derives greatest possible satisfaction in terms of having created or rendered worth while commodity or service.

Development : Since a sole proprietor has to face all kinds of problems and challenges single handed, the qualities of initiative, self-reliance and responsibilities get developed in him, there by, enabling him to enjoy a respectful life in the society full of warmth and social contacts.

 

Disadvantages

 

Liability – sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets they have both in and outside of the business.

Finance – sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future.

Reverse economies of scale – sole traders will be unable to take advantage of economies of scale in the same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs.

Decision making – all decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person

Limited Capital : Since the capital is contributed by one individual only, business operations have necessarily to be on a limited scale. Even when he wants to raise funds by borrowing, the borrowing capacity of one individual is bound to be limited. Thus large scale units which require enormous capital cannot be started by an individual.

Limited Managerial Skill : Whoever may be a person his resourcefulness and business management will be less effective beyond a certain stage. Further, since he has to keep his fingers on everything and has to work under severe stress, he likely to take wrong-decisions. Thus, these two factors, namely limited availability of capital and limited managerial ability do not allow the business unit to expand.

Unlimited Liability : The liability of a sole trader being unlimited, even his private assets are in danger of being lost.

Uncertainty of Continuity : Since the success of the sole trading concern hinges on the personal qualities of the proprietor, any prolonged illness or permanent disability or death brings the business to a standstill.

Inability to Avail of Specialization : Since the business unit is small and the financial resources limited experts in different fields cannot be employed to secure maximum advantage. He alone has to handle production, marketing, correspondence, etc. It is common knowledge that one cannot be an expert in all these varied fields of business activities, as a result, efficiency suffers.

Hasty Decision: Though quick decision is a definite advantage, sometimes the decision taken in a hurry is likely to spell ruin to the business. One has to agree with the proverb, ‘haste makes waste’

 

 

Reference

http://blog.thecompanywarehouse.co.uk/2010/05/24/advantages-and-disadvantages-of-a-sole-trader/

http://www.dineshbakshi.com/igcse-business-studies/business-organisation/revision-notes/877-sole-trader-sole-proprietor

http://www.ask.com/question/what-are-the-advantages-and-disadvantages-of-a-sole-trader

http://www.smh.com.au/small-business/advantages-and-disadvantages-of-operating-as-a-sole-trader-20090619-cpvm.html

http://www.smallbusinesspro.co.uk/small-business-finance/sole-trader.html

http://www.ehow.com/list_6507289_characteristics-sole-trader.html

http://www.zeepedia.com/read.php?sole_proprietorship_and_its_characteristics_advantages_of_sole_proprietorship_introduction_to_business&b=46&c=4

http://marketinglord.blogspot.in/2012/07/characteristics-of-sole-trading-concern.html

http://smallbusiness.chron.com/characteristics-sole-trader-12081.html

http://www.preservearticles.com/2012022323647/what-are-the-characteristics-of-sole-proprietorship.html

 

 

 

 

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