Chapter 02-Sole Trading Concern

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FEATURES
1. Single Ownership
2. Capital
3. No Sharing of profits and losses
4. No separate Legal Status
5. Unlimited liability
6. Management Rights
7. Freedom from Government Regulation
8. Generally Local Business
Advantages
1.

Easy to form and close,

2. Prompt Decision and Quick Action

3. Business Secrecy
4. Personal element
5. Economy and Efficiency
6. Flexibility
7. A Self-employment
8. Motivation
9. Credit Standing
10. Competition
11. Low Tax Liability
12. Better Co-ordination
13. A Training School for Business
Disadvantages

1.

Limited Savings

2. Unlimited Liability
3. Limited Managerial Skill and Ability
4. No Stability:
5. No Legal Status
6. Hasty Decision
7. No Division of Labour and Specialisation
8. Absence of Large Scale Economics
9. Weak Bargaining Position:
10. No Scope For Expansion
11. Limited Scope for the Progress of Employees
Definition: According to the encyclopedia of business and commerce. A sole trading is a form of
business unit in which an individual invests only his capital uses his own skill and intelligence in
the management of its affairs and is entitled to all the profits and is also solely responsible fro all
the risks of ownership. It is also called a one man show .It is purely personal organization. Sole
means one so when all business activities are managed and controlled by one person is called sole
trading concern. It is an oldest and simplest form of business organization.
Characteristics / features of sole trading concern:1.

Single ownership: All assets and properties belong to proprietor. It is an individual

ownership organization where proprietor is a sole coordinator of all business activities.

2. Self investment: Entire finance to manage the business contributes by proprietor. He can
also borrow from his friends and relatives for his business. But his borrowing capacity is
limited.
3. Self management: Sole proprietor is the complete authority and full power of all
managerial functions . he is the final decision making authority and he can appoint
employees for his business for smooth conduct of business.
4. Separate legislation: There is no separate legislation for sole trading business only license
is required from local body to commence the business. However general laws apply to his
business.
5. No sharing of profits: All the profits belong to proprietor this motivates him to work hard.
At the same time he is solely responsible for all risks and uncertainties of business. There
is no question of sharing of profits because it is one man show.
6. Unlimited liability: The liability of sole trader is unlimited. He is fully responsible for
success and failure of business. If his business assets are not sufficient to pay off his
liabilities, he uses his personal assets for settlement of business dues, so no distinction
between personal and business assets.

7. No legal status: Sole trader does not engage any legal status i.e. proprietor and his
business are inseparable life of his organization depends upon the life of proprietor. It is
purely personal organization.
8. Local business: Sole trader operates his business in local market i.e. his business is purely
local in character. This is because of limited financial resource and managerial ability.
9. Freedom of business: There is no restriction of any kind on proprietor he has full freedom
to carry any lawful business and he can adopt any method of keeping books of account
normally he adopt single entry system of book keeping.
Advantages / Merits:
1.

1. Easy formation: this is most easy and simplest form of business. It involves less legal
formalities, so inexpensive to start. A person with limited capital and some business skill
can start this form easily.

2. Quick decision: He need not consult anyone for decision as he is the complete authority
to adopt suitable course of action. So he can implement decision quickly for his benefits.
3. Flexibility: Proprietor can make any change in business policy as per his desire to grab
the market opportunities so proprietorship organization is more adaptable and adjustable
according to changing business situations.
4. Business secrecy: sole trader can easily maintain vital business secrets to himself because
it is purely personal organization. He is not legally obliged to publish the books of
accounts.
5. Direct motivation: As he put move efforts he enjoys more profit this is called motivation.
His motivation him to work hard for he success and prosperity.
6. Personal contact with customers: Sole trader understands likes and dislikes of consumers
and offer personal attention to the needs of customer. This results in to more profit,
goodwill & more creditworthiness.
7. Good Relations with employees: In sole trading concern employees are few so proprietor
can pay attention to the problems of employees and solve their disputes if any and
motivate them to work for betterment of organization.
8. Economy: Sole proprietor tries to avoid all kinds of wastages of resources at the same
time curtail unnecessary expenses of business. This lead to economy in business.
9. Limited tax burden: As compared to other forms, the tax liability of proprietor is limited.
He can do a good amount of tax planning.
10. Advantages of unlimited liability: Due to unlimited liability proprietor can become more
sincere, alert and active as he knows that if something goes wrong he will have to use his
personal assets this makes him more punctual and devoted. It also increases creditor
worthiness of proprietor.
11. Self employment: This form is socially desirable because it gives self employment
opportunities to large number of people government also helps small businessman by
giving them finance and subsidies.

12. Personality development: To start business under this form, the proprietor can develop
and include certain qualities like self reliance, responsibility, initiative social contact etc.
13. Hereditary ownership: This form can be hereditary also as proprietor passes the
ownership of business to legal heir i.e. heir sons. So many a times it is seen that
proprietor form enjoy continuity due to liking factor of the legal heirs.
14. Training school for business :A child learns the lessons of life in his school in the same
way if any one wants to be a successful business man, this form provides better platform
to get necessary training and to develop confidence.
15. Other advantages: (1) Better utilization of resources. (2) Supply of goods in stray and
remote areas. (3) Better co-ordination of staff because of small business volume. (4)
Because of keen competition each proprietor supplies better quality of goods and services
to maintain his goodwill in the market.
Disadvantages:
1.

Limited capital: The financial resource for proprietary organization is comparatively

limited and his borrowing capacity from bank, friends and relatives is also limited this
results into lack of expansion.

2. Limited managerial ability: His organizing, supervising and managerial ability is limited
as he is overburden with all business activities. This affects the business efficiency. Due to
limited managerial ability he cannot expand is business beyond certain limit.
3. Unlimited liability: The liability of sole trader is unlimited i.e. he cannot actively
undertake new ventures due to fear of his business. So there is no difference between his
business assets and personal assets.
4. Limited span of supervision: When sole trader conducts his business through different
branches, he cannot effectively supervise all activities of his business .Thus his span of
supervision adversely affected and cannot take all he customers.
5. No stability: On his insolvency, death or became insane, the proprietor business comes to
an end. Thus life of sole trading concern is not guaranteed by law.
6. Uneconomical size: Sole proprietor does not enjoy the economies of large scale
operations because his volume is small and does not enjoy strong market influence.
7. No division of labour: As all activities are controlled and managed by one person, there is
no scope of division of work and no specialization. This results in to inefficient
management.
8. No legal status: It has no independent legal entity i.e. proprietor and his business unit are
inseparable. Thus risk taking ability is limited and hardly he goes for risk venture.
9. Weak bargaining power: Sole trader does not enjoy strong market influence i.e. his
bargaining power is weak. This is mainly because of small size of business, local business
and competition and uneconomic size. So proprietor as a buyer and seller does not enjoy
the benefits of large market share.
10. Limited growth: Sole trader can not expand his business beyond certain limit i.e.
expansion beyond certain limit is not possible because of local market and limited
managerial ability.

11. Limited scope of promotion: Employees working in sole trading concern have limited
scope for promotion at highest post because sole trader does not allow in decision making
process and tries to intake them work as slave so limited scope for their career and
personality development.
12. Risk of judgment: Due to quick decision, there is a possibility of wrong action and if
judgment goes wrong the proprietor suffer from heavy losses.
13. Monotony and hard work: Sole proprietor is overburden with all the business activities.
During full season he works for maximum hours which results into monotony and ill
health. As he is a jack of all but master of none which adversely affects his business
efficiency.

Q. Explain the reasons for the survival of sole trading concern

Ans: Despite the growing popularity of large scale business like partnership and joint stock
company, the sole trader is still prevalent and popular in the business world because of following
REASONS
1.

Individual tastes: In some business proprietor has to produce and supply goods according
to individual tastes of the buyer. Large organization cannot pay close attention to
individual tastes likes and dislikes but this can prove effectively by sole trader. E.g. Small
retail shop, garment industry.

2. Self employment: This form survives because it offers self employment opportunities to
large number of people in towns and cities as well as in rural areas.
3. Human inertia: Some proprietors do not like to expand their business beyond certain
limit because of their attitude, they are satisfied with their existing scale and moderate
profit and because of fear of loss of freedom.
4. Variety and quality: Where quality, perfection and variety are important, sole proprietors
can give detailed attention for such reason also mostly small firm survives e.g. .garment
industry.
5. Changes in fashions: Sole proprietors are in a position to make necessary changes in
policies of production and marketing to supply goods and services of latest fashions.
6. Nature of market: Mostly sole proprietors operate their business in local market so they
can make profit easily in local market at limited capital and risk.
7. Speculative Business: Share holders and small jobbers in stock exchange ( share market)
deals in shares profitable because their business is speculative in nature requires quick
decision.
8. New source of power: Nowadays people are getting cheap source of production like diesel
engines and hydro- electricity. So with small capital small traders can start their business
independently and survive.
9. Components and spare parts: Big firms depend on small firms for necessary tools, spare
parts and components. These components are produced and marketed by small firms at
reasonable prices.

10. High degree of craftsmanship: sole trading becomes successful because of greater degree
of selective craftsmanship e.g. furniture and jewellery business.
11. Government support: Nowadays government provides necessary financial technical and
marketing assistance to small business set up at concessional rate. so this is also a strong
reason for survival of small firms in democratic country like India.
(Notes by Miss Trishna Barodia)