Sole trading concern

Table of Contents

Introduction of sole trade concern

The sole trading concern is thriving not only in India but in International countries also. A sole trading concern is a form of private-sector enterprise that is owned maintained and managed by an individual businessperson.

This type of business organization is also called a one-man business or individual proprietorship, or individual entrepreneurship, and owner of the business is commonly called the sole proprietor or sole trader.

The Sole trading concern is a form of an organization having only one owner. The word proprietor means the owner and sole means single. It is the oldest and purest form of organization.

Usually, the word sole trader is used when the owner is also a manager of the business and when it is a one-man show. It then typically operate in a local market due to the smallest scale of the company. A sole trader can maintain good relations with his customer and provide personalized service.

The sole trader invests his capital into the firm and manages all the business. The full control of business rest in him. He bears the entire risk and derives the total benefit.

He may engage in any activity he chooses without many legal formalities unless he wishes to participate in a certain type of business requiring a license.

Example: If a man wishes to open a general store, he made do so, if he can find a good location and have sufficient money for that business. On the other hand, to open a medical store, he will have to obtain a license from government authorities.

Definitions of a sole trading concern

Prof James L Lundy:

The sole proprietor is an informal type of business owned by one person.

Prof. J.L. Hanson:

sometimes known as a one man business.

It is a variety of business unit where one person is solely answerable for providing the capital, bearing the risk of the enterprise and administration of the business.

Features of a sole trading concern

Minimum government regulations:

There are minimum government regulations on the activities of a sole trader proprietor concerned are not governed by any separate law and are easy to form, because no rigid legal formalities have to be followed for either forming, running or closing down the organization.

Only the tax laws and labour laws have to be followed.

Unlimited liability:

The liability of a proprietor is unlimited. The liability of the sole trader can be higher than the capital bought by him.

Unlimited liability means, there is no difference between his personal and private assets and the assets of the business.

In the case of massive loss and if it is not possible to make the payment with the help of the asset of the business, then the personal asset of the proprietor can be attached for being a setting that liability.

Freedom in a selection of business:

A sole trader can choose any business as per his wish. There is no restriction on the type of business, which may be conducted by a proprietary concern.

Any legal business can be conducted by concern. He may follow any way of keeping books of records. Usually, sole traders in India adopt a single entry system of accounting.

Secrecy:

Secrecy plays the most significant role in the sole trading concern.

The information about all the important matters concerning the business results only with the owner and not outside party can take any undue advantage out of it. The proprietor can ensure maximum business secrecy.

Single ownership and management:

A sole trader is the sole owner of all the assets and resource of the business. There is none another person who shares in the profit or loss of the sole trading concern. He is the owner and administrator of his firm.

Direct contact with customers and employees:

Since a proprietary usually deals directly with his clients and worker, he can maintain good relation with his workers and provide personal attention to his customer.

Suitable for some special business:

There are some specific businesses and contracts which require particular consideration and service and can only be started as a sole trader, for example, beauty parlor, cake shop, and agriculture products.

No sharing of profits and risks:

A proprietor gets all the profit of the business concerned and assumes all the losses and risks involved in the business. There is nobody to share in his profit or losses.

Merits of a sole trading concern

Easy formation:

It is very easy to establish sole trading concern because very few legal formalities are involved in the creation of a business. This business can be started without getting it listed

Anybody who is a major at age, has a sound mind and has not been disqualified from conducting business under any law, can start proprietary concern.

Due to simple configuration, there is a direct relationship between struggle and reward.

The benefit of secrecy:

The owner and administrator being the same person, the sole trader does not need to reveal his business secrets with any third person, neither does he needs to publish his accounts, nor he is answerable to the third party.

Since the ownership, as well as the management of the business, are in the hands of the sole proprietor, he can maintain vital business secrets, e.g. the exact formula used to make a product.

Direct motivation:

The proprietor himself is the owner as well as the manager, and there is a direct relationship between the effects and rewards he puts and the profit he makes.

Since all the profit or losses are directly vested with himself, the sole trader is more aware of the effects put in and can thus grow very fast.

Quick decisions:

Sole trader takes smart decisions on various matters relating to business operations. As his business has one owner and decision-maker, the proprietor can make decisions and implement them immediately without consulting others.

Therefore this form of organization is suitable for such businesses, which requires quick decisions such as speculations and trading.

Lower costs:

The sole trader has complete control over the business, and he is also manager himself.

He controls all aspects of the business organization, so he ensures that there are less waste and better control on the expense incurred as all cost goes out of his pocket.

Development:

The risk and rewards are directly connected with only one person, and due to the reason that he is wholly responsible and involved with every aspect of his business.

The sole trader takes extra efforts to update his skills and learns through his experience consistently. He tries to keep improving his personality, leadership qualities, and make better decisions.

Flexibility in operations:

Since only one person has to make decisions, the owner or sole trader can be very flexible. Being the only decision-maker of business, he can make a quick change in the decision as per the changing circumstances.

This may involve expansion or existing business, adding new business, reduction of business activities, etc. This is very necessary for the benefit of any business.

Limited government control:

The activities of a sole trader are organized by government and law to the minimum limit. Sole trading business is not asked to get listed.

There are no laws for operation, function, or dissolution of the sole proprietor. It has only to follow the usual tax rules and general regulations. Otherwise, government interference is minimum.

Credit standing:

Close contacts with customers help a sole trader to build up Goodwill for himself. Banks and institutes can give loans easily due to the unlimited liability of the owner, depending on his assets.

Also, it is easier for him to apply for such facilities since he does not have to consult anyone else or take permission from other owners.

Efficiency:

As he is direct gaining from profits and is directly liable and responsible for losses, the proprietor runs his business with maximum efficiency with least wastage of time, effects and resources.

He also makes sure that product is maximum and maximum skill is used in every aspect of the business, leading to a higher profit and better reputation.

Limitation of a sole trading concern

Limited managerial ability:

The sole trader thought capable cannot be expected to have complete knowledge like other types of business. Neither can he give equal consideration to all features of the business as an expert nor expansion of the firm.

Being alone owner, he has to look after every phase of business. Sometimes, the scope of his business, enlarged and he is expected to face many difficulties, in such a situation, his decisions may be wrong, which would be a cause of reducing profit.

Limited amount of capital:

As only one person is the owner and provider for all the resources required for the business, a proprietary concern has a limitation on the amount of capital.

The owner can get in his own money or borrow from various sources. Such as bank or friends and relatives, but still, he cannot expand his business.

Unlimited liability:

The most significant disadvantage of the sole trader is unlimited liability. Higher risk due to unlimited liability causes the proprietor to be over-cautious.

He may be individually the sufferer if things go opposite. So there is always a threat for him to undertake new ventures even when they can be very profitable, because of only one thing that the liability of a sole proprietorship is unlimited.

This can affect the growth of the business negatively.

Not suitable for large scale operations:

The sole proprietorship is not ideal for large scale business operation. Due to a small scale, the business cannot be extended beyond a specific limit.

Thus a proprietor has to conduct business on a small scale. He cannot fully utilized adequate resources.

Lack of stability:

There is a continuous uncertainty in running a sole trader. If anything happens surprisingly, the entire organization can fall.

Not been a legal entity, it is linked directly to the owner, i.e., there is no difference between the sole owner and the business.

The organization can be terminated with the death or bankruptcy of the owner occurs.

Absence of specialization:

A sole trader himself is an owner, manager, supervisor, and controller of his business. Moreover, due to the small scale business and division of labour and specialization, he cannot conduct business efficiently.

Unprofessional decisions:

As a sole owner, he is not liable to any individual. He may end up making decisions which may be based on limited knowledge.

This can result in poor business policies likely to fluctuate without any reason and result in huge losses.