Sole Trading concern, Meaning, Definition and Features

18/12/2020 0 By indiafreenotes

Sole trade is the oldest and most commonly used form of business organisation. It is as old as civilization is. Historically, it appears that business first started with this form of organisation. With the development of science and technology the needs of the business also increased and new forms of organisation developed. This organisation is also known as Sole-Proprietorship, Individual-Proprietorship, and Single Entrepreneurship. In sole trade organisation, an individual is at the helm of affairs. He makes all the investments, shares all risks, takes all profits, manages and controls the business himself.

The sole-trader mainly depends up to his own resources, so the business is generally on a small-scale basis. The business is normally run with the help of family members but he may employ persons to look after the day-to-day activities of the business. So far as his liability is concerned, it is unlimited.

Features of Sole Proprietorship:

Individual Initiative:

This business is started by the initiative of a single person. He prepares the blue prints of the venture and arranges various factors of production. He may employ other person for assistance but ultimate authority and responsibility lies with him. All the profits and losses are taken by the single individual.

Management and Control:

The proprietor manages the whole business himself. He prepares various plans and executes them under his own supervision. There may be some persons to help him but ultimate control lies with the owner.

Unlimited Liability:

In sole trade business liability is unlimited. The proprietor is responsible for all losses arising from the business. The liability is not limited only to his investments in the business but his private property is also liable for business obligations.

Business Secrecy:

All important decisions are taken by the owner himself. He keeps all the business secrets only to himself. Business secrets are very important for small business. By retaining business secrets he avoids competitors entering the same business.

No sharing of profits:

A sole trading concern is established and managed by the single person. Profit is not required to share with another. Sole trader individually enjoys the profit and bears the risk by himself.

Limited area of operation:

Since the sole trading concern is invested by the single person, there is less scope for expansion and growth of it. Sole trader individually can’t manage the big size of a business and he can’t manage the big size of a business and he cannot invest for this as well.

Independent Decision:

The sole trader can freely make the decision. He or she does not need to take consent of others while making the decision. Therefore, in this form of business decision making is fast.

Undivided risk and responsibility:

In this business, risk and responsibility can be shared with another person. The sole trader individually takes all kinds of risk. A sole trader is personally responsible for accomplishing all activities of a business.

Objectives of Sole-Trade Business:

Channelise Individual Funds:

Individuals have small surplus funds with them. These funds are not enough to set up big business. People may not like to risk their funds in those businesses where they have no say and control. It is better to set up a small business instead of keeping the funds idle. So sole-trade business provides a channel to make productive use of individual funds.

Serve Consumers:

A small trader comes in direct contact with the consumers. A consumer wants to buy his day-to-day requirements from the nearest place. Sole-traders set up their shops wherever the consumers are available. A consumer saves time by purchasing daily necessities from the nearest retail outlet.

Strengthen Distribution Channel:

Sole-Trade business is generally on a small scale basis. People set up small retail outlets under sole-proprietary organisation. A retailer is an important link in the chain of distribution. He is in direct contact with the consumers. No distribution channel from the producer to the consumer can be successful without the active involvement of sole-traders.

Avoid Concentration of Wealth:

In order to avoid concentration of wealth in a few funds, sole trade business helps in its distribution among large number of people. When large number of people enter into different businesses, may be at a small scale, it helps in distribution of economic wealth.

Help Large Business:

The success of large-scale business is also linked to the help provided by small business units. Small units provide ancillary service to big units. Large units require a number of small components from small units. So sole-trade business provides service to large units by providing them all those things which they do not want to manufacture themselves. In Japan, all large scale units depend upon the supplies from small units.

Disadvantages of Sole Trading Concern

  • Limited capital
  • Limited managerial ability
  • Unlimited liability
  • Loss in absence
  • Uncertain life
  • Limited scope for expansion
  • Limited scope for opportunity

Limited managerial ability:

It is managed by a single owner who may not have adequate managerial skills and technical abilities. So, it may face various managerial deficiencies.

Limited capital:

Its capital is limited due to the investment of a single owner. Such limited capital is insufficient for large-scale production and marketing of goods and services.

Unlimited liability:

The sole trader does not have limited liability to his business capital. The owner must pay the liability of his business even by selling his private properties if the assets of the business are not sufficient to meet such liabilities.

Loss in absence:

It may come to close if the proprietor remains absent from his business due to his illness or other reasons. So, if the owner or proprietor is absent, the business may face the loss.

Uncertain life:

Its life is closely connected with the life of the owner. So, it can be terminated any time due to death, lunacy, insolvency or disability of the owner.

Limited scope of expansion:

It has a limited scope for expansion and development. Due to the limited amount of capital and managerial skills, its activities cannot be diversified.

Limited scope for opportunity:

It offers limited opportunities to his employees. Due to the limited scope of expansion and development of business, its employees get limited opportunities for training, higher studies, career development, attractive salaries, and other benefits.