SOLE
TRADER ORGANISATION
The sole trader organisation (also called proprietorship) is
the oldest form of organisation and the most common form of organisation for
small business even today. It is the simplest and easiest to form. What is
required is that an individual decides about the type of business to be started
and arranges the necessary capital. Required capital may be mobilised from his
own savings, or may be borrowed from friends and relatives. The business may be
carried either in a portion of his own residence or in a rented building. The
person generally manages the business on his own. He may also take the help of
his family members or employ some persons, if necessary. He can take the advice
from others in running the business, but his own will be the final decision. Thus,
the sole trader enjoys full control over the affairs of the firm. He enjoys all
the profits earned by the business. So, in case of loss, naturally, he has to
bear the full burnt of it.
Thus, we can now define sole trader organisation as "one
man's business in which an individual produces independently with his own
capital, skill and intelligence and is entitled to receive all the profits and
assumes all the risks of ownership". J.L. Hanson defines it as "a
type of business unit where one person is solely responsible for providing the
capital for bearing the risk of the enterprise and for the management of the
business". Under this form of business organisation, no distinction is
made between the business concern and the proprietor. Likewise, the management
rests with the same person.
Main Features
Based on the above discussion. we can list the main features
of sole trader organisation as follows:
1-
One-man ownership: The ownership lies with one person only.
There are no associates or pa-triers He invests his own money or borrows from
the friends and relatives.
2-
No separation of ownership and management: The owner himself
manages the business. Therefore, the separation of ownership and management
which is quite common in big business is not present in this form of
organisation. Since the proprietor himself manages the business, he exercises a
high degree of supervision and control in the working of his business.
3-
No separate entity: The business does not have an entity
separate from the owner. The proprietor and the business enterprise are one and
the same.
4-
All profits to proprietor: Since there are no partners, all
the profits are enjoyed by the sole proprietor.
5-
Individual risk: All losses in the business are borne by the
proprietor himself.
6-
Unlimited Liability: The proprietor has an unlimited
liability. This means that in case of loss even the personal property of the
owner can be utilised for clearing the business obligations and debts.
7-
Less legal formalities: To set up sole proprietorship, no
legal formalities sire required, Of course, there are some legal restrictions
for the setting up of a particular type of business. For example, an individual
cannot start a hank or an insurance company. But one can start a fruit stall or
a cycle shop without much legal formalities. However, in some cases a license
may be required. For example, to start a restaurant, you need license from
municipal corporation.
Merits
and Limitations
You have learnt about the main features of the sole-trade
business, In view of these features, this form of organisation has the
following merits and limitations.
Merits
1-
Easy formation: There are no legal formalities to be observed
while starting this form of organisation. Therefore, its formation is very easy
and simple. The expenditure involved in the process of formation is also
negligible.
2-
Direct motivation: As you know, all the profits and gains of
the business are solely and exclusively pocketed by the sole proprietor. This
motivates the proprietor to work hard and develop the business to get more and
more profits. His involvement in the business is, therefore, complete and free.
3-
Full control: The proprietor is the monarch of the business he
owns. He manages the whole business and takes all decisions himself. In other
words, proprietor exercises full control over the functioning and working of
the business.
4-
Quick decision: The proprietor does not depend on others for
decision making. Since there are no partners, he is not required to consult
others. This enables the proprietor to take quick decisions on numerous matters
concerning his business.
5-
Flexibility in operations: Being a small organisation it is
easy to bring changes if situation so demands. In a large sized organisation to
bring changes is difficult.
6-
Secrecy: Since. the whole business is handled by the
proprietor his business secrets are known to him only. He is not bound to
publish his accounts. Therefore, the degree of secrecy is the highest in this
form of organisation.
7-
Personal touch: When the proprietor handles everything
relating to the business himself, it is easy to maintain a personal rapport
with the customers. He can easily know their tastes, likes and dislikes and
adjust his operations accordingly. Similarly, in this form of organisation,
employees, if any, work directly under the proprietor. So, it gives scope for
the proprietor to maintain harmonious relations with the employees.
8-
Dissolution easy: Since
there are no co-owners or partners, there is no scope for the difference of opinion
in the case of dissolution of business. The proprietor is free to withdraw from
the business or to sell it at any time he wants. Because of ease in formation
and withdrawal, proprietorship form is often used to test business ideas.
Limitations
1-
Limited resources: The capital and other resources of an
individual are always limited. The sole trader has to mainly rely on his own
money and earnings, or he can borrow, if necessary, from relatives and friends.
Thus, the proprietor has a limited capacity to raise funds. This makes it
difficult to plan any large- scale expansion.
2-
Limited managerial capability: In the modern business,
knowledge and skills in various fields like production, finance, marketing,
etc., are required. It is not possible for a single individual to possess
expertise in all these areas. So, his decisions may not be balanced.
3-
Not suitable for large scale operation: Since the resources of
the sole trader are limited, it is suitable only for small business and not for
large scale operations.
4-
Unlimited liability: You know that the proprietor has an
unlimited liability. In case of a loss, even his personal property and
belongings can be utilised for clearing business obligations. Therefore, he
cannot take much risk and is discouraged from expansion of his business.
5-
Less stability: The continuity and stability of the business
depends solely on one person. When the man dies, there is a likelihood of
closure of the business.
6-
No check and control: As the sole trader is the monarch of the
business, no outsider can question him on his acts and deals. There are no
checks and controls on the sole trader.
7-
Less scope for economies of scale: Sole trader usually
operates on small scale only. So, he can not enjoy the benefits of large scale
production or buying or selling. This may raise the cost of business
operations.
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