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Sole Trading Concern
This resource explains about various terms coming in Sole trading concern.
Sole trading concern is the oldest type of business organization throughout the world. It is simple and natural type of organization because it is owned, controlled, supervised and managed by single person known as sole trader. The proprietor is free to choose any business which is according to law of land. A person having small capital, little skill and intelligence can start any lawful business. From above, it is clear that sole trader is the sole proprietor, promoter, manager, controller and the risk bearer of the business or individual entrepreneurship.
"Sole trading concern is the business in the hands of one person, who is not only responsible for its management but also for its risks."
According to Michael Greener, "A Sole trader is a person who trades on his own account rather than in partnership or as member of the company".
Features of Sole trading Concern:
(1) Single Ownership: This business is managed and controlled by an individual alone (one person or one proprietor). He is single owner of the business. All the capital, property and assets of the business are brought by the owner himself. The owner of this organization is known as Sole Trader.
(2) Individual Capital: Here, capital is brought by single person. He himself arranges for the additional capital by borrowing from his friends and relatives. This organization is having limited capital; therefore the business is conducted on small scale and in local trader market.
(3) Unification of Ownership and Management: A sole trader is the complete master of his business and enjoy complete control over his business. Therefore, he can take any decision in his business as he thinks fit. He has the supreme authority to command over his business. If there are some problems, he can immediately take corrective steps to control and correct the faults of the business. Instead of appointing outsiders, for management, he prefers to take the help of the family members. In other words ownership, management and control are not separated but co-coordinated.
(4) Unlimited Liability: Sole Trader and his business unit are treated as one and the same. So when there are losses in business operations then these should be settled by sole owner by selling his personal property. The liability of sole trader is unlimited. This means he is personally liable to pay all the debts of the creditors. Sole trader and his business are inseparable i.e. one and the same.
(5) Freedom from Government Regulation: In this type of organization, there is very limited control of the government. There are almost no legal formalities to start or close down a business, however, certain types of business like restaurants, liquor, tobacco and medicines (drugs), etc. need license. Among other businesses, a person may choose that he likes except that which is against the law of land. There is no separate act for sole trading concern.
(6) No Sharing of Profits and Losses: There is direct relationship between efforts and reward. Due to the single ownership, the profits of the business are the profits of the proprietor. Since he alone contributes the capital and takes risk of business he is fully entitled to the profits of business.
(7) Lack of Legal Status: This organization is not governed by special act. It is purely personal organization. The registration of this organization is not possible. Therefore, the sole trading concern and sole trader are one and same person. It is not artificial person like Joint Stock Company.
(8) Risk Bearing: A sole trader takes entire responsibility of his business and bears the risk of losses involved in the business.
(9) Flexibility in Operation: Sole trader enjoys maximum flexibility. He can take right decisions at the right time depending upon the situation. At any time he can expand his business. He may also change the line of his business at any time. He may even close down the business, if the situation so demands.
(10) Business Secrecy: The sole trader can maintain complete business secrecy. He need not publish any accounts & records. Competitors cannot easily get business secrets and information of the sole trader's activities.
(11) Local Area Business: Normally, a sole trader conduct business in a local area. This is because of limited size of his business. However, there are sole traders who may cater to regional and national markets. Sole trader may also undertake foreign trade.
(12) Close Contacts: The sole trader can develop close contacts with his customers. He regularly deals with local customers and as such he can develop personal contacts with his employees also.
(13) Quick Decision: The sole trader can take quick decisions. Normally, the sole trader takes decisions on his own. He need not consult others to take decisions.
Advantages of Sole Trading Concern:
The advantages of sole trading concern are as follows:-
(1)Simple and Easy Formation: Formation of sole trading concern is very simple. A person, who is competent to enter into an agreement, can start a sole trading concern. There are no legal formalities. In some cases only he need to obtain license. For example: For starting a restaurant, to deal in liquor or tobacco, for dealing in medicines. As the formation is simple and easy it saves time and money.
(2) Close Contact: In this organization, it is very easy to establish maximum personal contacts with the customers and employees. Sole trader can take care of likes and dislikes of consumers, similarly he creates good relations with his employees due to which customers turn into permanent customers and do publicity. Employees also work with loyalty and honesty.
(3) Quick Decisions and Prompt Actions: Sole trader himself takes all the decisions as he is only the owner of his business, there is no need to consult any other for decisions. Certain types of business like speculative business require quick decisions. Since in sole trading concern, there is no one to consult or advice or make disputes. Therefore, the decisions taken by the proprietor are final and carried out promptly.
(4) Flexibility: It means quick and easy changes in business. This form of business has total flexibility. A sole trader can change nature, object, place, etc. of business at his own desire and at any time. Because this business organization is not managed by any special act and there are no government regulations.
(5) Direct Motivation: All the profits of the business are the profits of the owner alone. This means there is direct relationship between efforts and rewards and this encourages and induces the sole trader to manage the business efficiently with hard work. He takes highest interest in the business. As he will work hard, he will get more profits therefore, he is induced to work hard for business.
(6) Business Secrecy: Less the number of persons in business more will be the secrecy. It is said that business secrets are similar to secrets of gold mine. A sole trader is a single person; he neither discloses his accounts nor is he required to consult anyone on his business policies. In this way the business secrets are safeguard by a sole trader.
(7) Unlimited Liability: The unlimited liability helps the creditors and sole traders, because he enjoys the confidence of creditors. Creditors know that he will work carefully and economically, he will also try to take sound and correct decisions because his liability is unlimited. Secondly, his unlimited liability gives confidence to his creditors that they can recover their dues from his personal property.
(8) Better Credit Standing: The sole trader enjoys the better credit standing in the market because of unlimited liability and close contacts. This creates confidence in the minds of creditors, suppliers, etc. and thus sole trader can easily get credit facility and can expand his business according to his desire and capacity.
(9) Limited Government Regulations: There is no separate act and no government control on sole trading concern for its operations, expansion and dissolution. The sole trader is free to have any business which is permissible according to law of land.
(10) Economy in Management: Economy in management means savings in management expenses. Other forms of organizations have to appoint various personnel for managing various business activities but in the sole trading concern, the sole trader himself makes the supervision, management and control or he takes the help of members of his family. Therefore, there is economy management.
(11) Opportunity for Self-Employment: Unemployment is a situation in which the people are willing to work and able to the work but there is no work to do. The sole trading concern is very much useful for the self employment. Any person by bringing small amount of capital and by using his skill and intelligence can start the sole trading concern. This organization also provides way of life to a person who has ability to do something of his own as he has skill and ability.
(12) Limited Tax Burden: Tax is the revenue for the government whereas it is a liability of the businessman, therefore, he prefers to have limited tax burden. The sole trader has small burden of tax liability because generally, he has business of small size. Taxes like Sales Tax, Excise Duty may not arise in this organization, he has to pay only one type of Tax i.e. Income Tax (NOW VAT)
Disadvantages of Sole Trading Concern:
(1) Limited Capital: The owner of the business has only two sources of getting the capital, i.e. by personal savings and by borrowings from friends, relatives and institutions. The borrowings as well as saving capacity of one person are always limited. Therefore, as in sole trading concern the capital is limited for sole trader; it is not possible to have a large scale business.
(2) Limited Managerial Ability: A sole trading concern has limited managerial ability since there is only one person to manage and control the business. If paid employees are appointed they also work according to the capacity of the salaries they are getting. The employees do not take keen interest in the business, therefore, the sole trader also find it difficult to manage all business activities properly. In other words, any person is not capable for having full knowledge of all business activities. But in sole trading concern all the decisions are taken by Sole Trader relating to expansion, more capital, purchases, sales etc. Therefore, this organization is having limited managerial ability.
(3) Doubtful Continuity: This form of organization does not have stability of life. Its existence is totally depending on the life of its owner. Generally, it comes to an end due to death, insolvency or insanity of the sole trader. Therefore, sole trading concern is always doubtful. There are some chances that the family members of the sole trader may continue the business after his death, etc.
(4) Unlimited Liability: This means the sole trader is personally liable to pay for the business losses. He has to sell his personal property for paying the liability of business. Sole trader and his business are inseparable. Therefore, a sole trader has to do the business with due care and caution and has to think twice before taking the decision of new or risky job.
(5) Absence of Economies of Large Scale: This means the benefit of large scale by way of discounts, concession, etc. Sole trader cannot enjoy economy in purchases, economy in transportation, economy in advertisement and other expenses. The sole trader is not getting these benefits of large scale because he is generally having small business with limited capital. All this ultimately reduces the profit and he cannot make quick progress in business.
(6) Absence of Legal Status: The sole trading concern and sole trader are one and the same. They cannot be separated from each other. This organization does not have separate life from sole trader. Due to the death of sole trader this organization is dissolved. Generally, any organization gets legal status and can work as separate artificial person after its registration, but for this organization there is no provision for registration.
(7) Absence of Division of Labor: Division of labor means division and distribution of work among different persons according to their skill and ability. Division of labor brings specialization. Sole trading concern is managed and controlled by one person. There are many activities i.e. purchasing, selling, advertising, accounting in the business. As all the activities are done by one person, he is unable to concentrate on any one activity therefore, there is no specialization. In other words sole trader is 'jack of all but master of none".
(8) Limited Bargaining Powers: The sole trader has limited bargaining powers. He has to depend on his supplier as well as customer. The supplier demands cash payments whereas the customers demand goods on credit. This is due to limited capital and the business in competitive local market.
(9) Hasty Decisions: A sole trader is free to take all decisions at his own sweet will. There are some chances of hasty decision, which may result in losses because it is always said "Haste makes waste".
Suitability of Sole Trading Concern
(1) Small Business: If a person is interested in conducting the business on very small scale then the sole trading concern is very much suitable, because it is an ideal organization for small business with limited amount of capital.
(2) Limited Capital: When the businessman is having limited savings or the limited borrowing capacity, then he may prefer to have that organization which can be started with limited capital, in such a case "sole trading concern" is suitable because it requires small amount of capital and little intelligence.
(3) Local Market: At present, we are in the international economy stage. But still some people are of the view to have business in local market and for having the business in local market. The sole trading concern is very much suitable.
(4) Frequent Changes: This means quick and easy changes in the business activities, may be relating to change in place, change in nature of business or the size of business. These changes may be useful and advantageous for earning more profit. Flexibility requires the quick decision and prompts actions which are possible only when the decision is taken by one person. Thus sole trading concern is suitable for frequent changes.
(5) Personal Attention: There are various business like general shops, beauty parlors, saloon, tailoring etc, which requires personal attention of the owners and sole trading concern is suitable for such business as it is managed and controlled by the proprietor personally.
(6) Limited Risk: For the small risk or the limited risk, sole trading concern is very much suitable as the business is on small scale and if there is any loss it will be limited and can be easily afforded by sole trader.
(7) Quick Decisions: Joint stock companies and co-operative societies take decisions by conducting the meetings, hence there is always delay in taking decisions. Whereas in sole trading concern there is no need to take the consent of others for taking decisions. Therefore, it becomes easy for him to take quick decisions. Thus the business where quick decisions are necessary for such the "sole trading concern" is suitable.
(8) Customers Patronage: The sole trader gets a lot of encouragement and patronage from its customers. Due to personal attention and relation, customers also prefer to buy from sole trader.
(9) Individual Tastes: A large organization would find it difficult to pay attention to individuals tastes due to large scale business. On the contrary, a small form in order to attract more customers, would give service as per the taste of individuals.
(10) Change in Fashion: Due to small size of business a sole trader can easily change the production according to the changes in fashion. He can easily supply goods as per the taste, demand and fashion of consumers.
(11) Greater Motivation: Another reason why small firms still survives is that, individuals who generally own these firms are able to pay much greater attention to detailed working. They are able to spot out any losses and wastages which might be occurring, and try to avoid them. Also there is direct efforts and reward relation, this motivates sole trader.
(12) Speculative Business: Speculative business depends on quick decision and prompt actions which can be easily done in case of small firms, like sole trading concern.
(13) High Degree of Skill: Certain business activities require high degree of craftsmanship, for example:- furniture, jewelery, etc. In such cases, sole trading concern is more suitable.
(14) Self Employment: Sole trading concern offers self employment opportunities to a large number of unemployed persons. We find a large number of persons in retail trade doing sole proprietorship activities. For example:- Grocers, Cloth Merchants, Medicine Dealers, etc.
In spite of the large scale organizations like partnership firm, joint stock company etc., the sole trading concern is popular and suitable due to small business, limited capital, personal attention, self employment, etc.
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