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Sole Proprietorship
A sole trader or sole proprietor is an individual who has
a business of its own, carries out business operations and is fully responsible
for risks and profits. He does not have any need to share the profits with
others. It is the primary and initial stage of commencing a business. Foe
starting such a business, a businessman does not require any legal acceptance
and does not bound by the rules and policies of law. He is free to choose the
product in which that individual wants to deal in. He may also borrow fund from
other people or take a bank loan to start business. He may also hire people as
a worker to help him but the ultimate authority of business goes to that
individual only.
Therefore, we defined sole proprietorship as “It refers
to an individual who starts the business and carries out for its own benefit
and is solely responsible for all business activities.”
Features of Sole
Now let us read about the characteristics of the sole trader. Sole trader has various characteristic which are given below:
1.
Single ownership: A sole trader
starts its business alone. He does not require anyone to take part in it. He is
the single owner of that business. Even if he hires someone for his help then
also the authority goes to the sole proprietor only. He contributes its own capital and some
borrowed from others.
2.
No legal Entity: Sole
proprietorship does bound with any legal authority. So, individual’s business
is not a separate entity than its owner. If the owner of business dies, the
business would wind up forever. It does not involve the continuation of
business after owner’s death. The proprietor is one and same.
3.
Unlimited Liability: The
liability of individual is unlimited. Even if, by selling the assets of
business, if the proprietor unable to pay the debt, then he would have to clear
by selling the personal assets also. As comparison to other entities, sole
trader business has more liability because he is the sole owner of business and
he cannot distribute his losses or debt to other person such as in case of
partnership firm.
4.
No legal Formalities: As we know,
that the law does not play any role in setting up or maintaining the sole
trader business. The legal formalities such as MOA, AOA or prospectus are not
required in business other than Joint Stock Company. One can easily start this
business anywhere and at anytime. He does not have law related issues and risk.
He is free from all legal tactics.
5.
No profit sharing: Sole trader does not share profit with
anyone. The revenue which is earned by sole trader is taken by the owner of
business (sole trader). All the contributions in the business is made by the
individual proprietor.
6. Small
Size: As we all know, sole
trader invests very small capital and resources in his business. Such a
business is small in size. It has very less turnover and very less management
is required in such types of business.
7.
No profit sharing: A sole
trader is the sole owner of his business. The entry of others is restricted.
Basically, Sole trader business is not large enough to share the profits among
two or more persons. These types of businesses contain only one individual
person which is the owner itself. In India, sole trader business has much value
than the other types of businesses.
Formation of Sole
The formation of sole trader
business is made by taking registration in
Small Business Development Centre (SBDC). A sole trader is inspired and
has a desire to start a sole proprietor business. The registration is not
compulsory. An individual can choose a perfect location which is near to market
area where there are large numbers of consumer interactions. Nowadays, shops
are registered under shops and establishment act 1948. By doing so, a business
get as legal right and remedies to safeguard its business from the takeover by
some other persons.
United States
In United States, Sole trader
business does not require any formalities to be done. But, Sole trader business
are not very free in the US. They had to issue license and get legal authority
to start a Business. These business are not treated on the basis of taxation
laws. Only GST tax which is paid by the consumer on goods are to be received by
the government of United states.
Merits of Sole
Now there are some of the advantages or
benefits also which help the sole trader to make the business successful. Sole
trader is free from all boundations. So, he may enjoy more benefits in this
type of business.
The merits of sole trader are as follows:
1. Personal touch: Often, most of
the customers who purchase products from sole trader keeps the contact of the
shopkeeper. If the consumers give more preference to the purchase commodity,
then he becomes habitual and contact every time when he want to purchase that
commodity. Some customers find it convenient to make contact to know the prices
of the goods or gain information about the stockless goods.
2. Low Investment: Businesses like
sole proprietor generally invest low amount of capital. The assets which he put
on his shop are low priced. Little investment bring flexibility in the
operation and all work done in ease. It requires that much investment which is
invested by the owner.
3. Motivation to work: The owner alone
receives all the profits he earn. There is no distribution of profit as in partnership
and no paying of salaries to the employees. He seeks regular motivation and
tries to implement more and new creative things to attract customers. The proprietor
makes the best possible use of its skills in order to earn more profit.
4. Quick decisions: As there is
single individual to control all operations, the sole trader does not need to
take consultation and suggestions from other persons. So, he can take its
business decisions on its own. He does not require any approval. He makes
various strategies for increasing sales and maximizing profits.
5. Easy formation: The formation of
the sole business is very easy. You did not need to fill any legal form or
doing any other legal tactics. You can easily commence any sole business at
anywhere without the permission of law. It is an unincorporated business. The
proprietor has his own right of choice of business which he wants to commence.
He did not have any binding force to choose a particular type of business.
Demerits of Sole
Now the sole proprietorship has some consequences:
1.
Limited Capital Resources: Since a single
person is holding this business so, the capital which he invested and the
resources which he used in this business is very small. He has a limited borrowing
capacity. The sources of his funds are bank loan, money received from friends
and relatives and other sources.
2. Managerial ability: In a company, a single
person cannot hold each and every work. Same as, in the sole trader, a single individual
does not have all the managerial abilities. He does not have skills and
expertise in all fields of the business sector. All qualities in a sole trader
are rarely found.
3.
Unlimited Liability: The liability of
every sole trader is unlimited. In case, if the sole trader’s debt exceeds his
equity capital and if the debt is not paid after realising all the assets then he has to pay the full debt by attaching
all his personal assets also.
4.
Uncertain life: The duration of
business is neither fixed in any legal document or nor it enjoy perpetual
succession. After the death of the owners the sole business would also come to
an end. Business my come to end due to certain reasons such as insolvency,
lunacy, unsound mind.
FAQ
Q.1 What are its social utilities of sole trader?
Ans.1 The sole trader has certain social utilities which are:
2. It promote independent living and trading according to their own wish.
3. It gives an opportunity to make proper utilisation of their skills and knowledge.
4. It promotes self-reliance.
Q.2 Is sole trader good or bad?
Ans.2 Every form of
business ownership has its own merits and demerits. One advantage of sole trader
is it does not need to follow anyone’s policy and also need not to obey anyone’s
order. A sole trader independently holds his business and also enjoys the whole
profit. The major disadvantages is that he has to bear all his losses and is
responsible of all his contingencies.
The Last Saying
Lastly, I would like to conclude that sole trader has the
control and ownership of his business and his business revolve on his
willingness. The sole trader may alone take all his decisions related to the sales
and may or may not maintain all the records of his working.
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