Sole trader business is started by the initiative of a single person. He prepares the blueprints of the business and arranges the necessary finance. No legal formalities are required in the formation of sole proprietorship.
Any individual can start a business whenever and wherever he likes. However, the sole trader must be a person competent to enter into a contract. The business to be carried on must be allowed by law.
In some cases, a licence from the competent authorities may be needed for starting the business. For example, a person desirous of starting a chemist shop is expected to get a licence from the local Government.
The first decision involved in the formation of sole trader business is the selection of a particular line of business. This decision depends upon the demand potential of a product, the availability of necessary resources and the scope of earning profits.
The selection of a proper site is another important decision. The requirements of customers and the nearness to the market should be considered. The size and scale of operations have also to be considered.
Sole trader business can be closed at any time without legal formalities. The proprietor has simply to settle the claims of his creditors and wind up the business.
Objectives of Sole trader business
The sole trader business is set up for the following objectives:
1. To create self-employment:
Sole trader business helps people to create work for them. Instead of looking for a job outside, a person can start his own small business.
2. To utilise funds:
A person having surplus funds may start sole proprietorship to make productive use of his funds.
If the funds are small and not enough for a big business, it is better to set up a small business instead of keeping the funds idle. Sole proprietorship enables the owner to have full say and complete control over the business.
3. Independent living:
Sole trader business provides opportunity for an independent and honourable living. The sole trader is his own master and frees to take all the decisions.
4. To serve customers:
A sole trader comes in direct contact with his customers. Therefore, he can better understand and serve the consumers. Sole trader business can be set up nearest to consumers so that they can buy their daily necessities conveniently.
5. Equitable distribution of wealth:
Sole trader business helps in the distribution of income and wealth among a large number of people. It avoids monopoly and concentration of wealth in a few hands.
6. Feeder to large business:
Sole proprietorship firms are usually small in size. These units provide ancillary service to big firms.
States the Merits of Sole Proprietorship
The main advantages of proprietorship are as follows:
1. Easy formation:
A sole proprietorship can be set up easily and quickly. No legal formalities and expenditure are involved in the establishment of a proprietorship. The proprietor can select the business of his choice without taking permission from anyone.
There is no need to associate others or to enter into any agreement. Registration of the firm is not required and there is no loss of time. Only a licence may be needed in special cases, e.g., to set up a wine shop. The proprietor can start business operations as and when he desires.
2. Motivation to work:
The proprietor alone is entitled to receive all the profits of business and he alone has to bear all losses. There is a direct relationship between effort and reward.
Therefore, there is an incentive to work hard. The proprietor is motivated to make the best possible use of his skills and resources to maximise profits.
3. Quick decisions:
The sole proprietor is completely free to take decisions and to implement them. He need not consult others or seek their approval.
Quick decisions and prompt actions help lo improve the efficiency of business operations. The proprietor can take on the spot decisions and will, therefore, not let any opportunity slip away.
4. Independent Control:
The sole proprietor is the supreme judge of all matters pertaining to his business. He enjoys complete freedom of action. He has absolute control of his business and nobody can interfere in his work.
He exercises control over all functions of business. Authority and responsibility are vested in the same person.
Personal supervision helps to improve the efficiency of business. Sole proprietor can function smoothly because there is no one to oppose his decisions.
5. Secrecy of affairs:
The sole trader is not required to publish his accounts. He is not expected to share his secrets with others. Complete secrecy of business affairs provides him greater competitive strength.
6. Personal touch:
The sole proprietor can maintain personal contacts with his customers and employees. He can cater to the requirements of each and every customer. He can also build healthy relations with his employees.
7. Flexibility of operations:
A sole trader business is usually small in size and simple in structure. It can, therefore, be adjusted easily whenever necessary. The proprietor can easily expand or reduce his business operations to suit the changing conditions in the market. He can also change or modify his line of business whenever necessary.
The proprietor is the owner, manager and controller of business. He does not appoint specialists for various functions. Therefore, the management of proprietorship is inexpensive.
9. Minimum Government Regulation:
Sole proprietorship business is free from Government regulations. There is no Government interference in the day-to-day functioning of business.
No legal formalities are involved in the working of sole proprietorship except tax laws and labour laws. Thus, the sole trader is subject to minimum legal formalities and Government restrictions.
10. Easy Dissolution:
It is very simple and convenient to dissolve a sole proprietorship. No specific legal formalities or regulations are involved in dissolution.
11. Social utility:
Sole proprietorship provides an opportunity for gainful self-employment to persons with limited money. It offers a way of earning an honourable living to those who do not want to work under others.
It also facilitates equitable distribution of income and wealth. It leads to the development of personal qualities such as self-reliance, initiative and responsibility.
Sole proprietorship provides equal opportunity to everyone to use his resources and talent to the maximum advantage. It leads to diffusion of ownership.
State the Demerits of Sole Proprietorship
Sole proprietorship suffers from the following drawbacks:
1. Limited capital resources:
The financial resources of a sole trader are limited. He has limited funds and his borrowing capacity is limited. His bargaining position is weak.
2. Limited managerial ability:
One person cannot be expert in each and every function of business. All the qualities required for success in business are rarely found in one individual. The proprietor may not be able to denote sufficient time to all the activities.
He may commit errors of judgement and his decisions may be unbalanced. The organising ability and managerial skills of a sole proprietor are limited. In the absence of experts, division of labour is not possible.
3. Unlimited liability:
The proprietor is personally liable for all the losses of business. Fear of loss of personal property due to failure of business makes the proprietor very cautious and conservative.
As a result, the business may fail to grow and keep pace with new developments in its particular field. Risk involved is unlimited.
4. Uncertain life:
Sole proprietorship does not enjoy continuity of existence. It is dependent on the life of the proprietor. Business may come to a standstill due to the illness, insolvency and death of the proprietor.
His successors may not be capable enough to carry on the business successfully. The owner and his business are inseparable as the business has no separate legal status.
5. Limited scope for expansion:
Due to limited financial and managerial resources, there is little scope for expansion and growth in sole proprietorship. In the absence of large scale operations it cannot take advantage of economies of scale.
Sole trader cannot attract trained employees due to limited opportunities for career advancement. Therefore, sole proprietorship is not suitable for large scale operations.
Suitability of Sole Proprietorship
Thus, sole proprietorship has several advantages and disadvantages. According to William R. Basset, "the one man control is the best in the world if that man is big enough to manage everything."
But, one man can rarely manage and control everything. Therefore, sole proprietorship is a suitable form of organisation in the following cases:
(a) Where the market is local, e.g., small-scale retailers;
(b) Where personal attention to the needs and preferences of customers is essential, e.g., tailoring, beauty parlors, etc;
(c) Where fashions change very frequently, e.g., artistic jewellery;
(d) Where small amount of capital is required but personal skills are more important, e.g., health clinic; and
(e) Where quick decision and prompt action are necessary, e.g., stock brokers;
(f) Where risk involved is negligible e.g., doctors, lawyers, chartered accountants.
Social Utility of Sole Proprietorship
The sole proprietorship form of business is socially desirable due to the following reasons:
(i) It prevents concentration of economic power in few hands through more equitable distributions of wealth in the society.
(ii) It provides opportunity for self employment with limited investment.
(iii) It offers employment to a large number of people in society.
(iv) It facilitates the growth of cottage and small scale industries.
(v) It encourages decentralisation of economy and diffusion of ownership.
(vi) It facilitates balanced regional development of the country.
(vii) It offers an honourable living to those who do not want to work under others.
(viii) It promotes self-reliance, responsibility, initiative and enterprise among middle class.
(ix) It promotes independent living for those who take pride in ownership.
(x) It gives an opportunity to people to utilise their skills for their benefit and for the benefit of society.