Long answer type question.
Define Sole Trading Concern and explain its merits and demerits.
Sole trading concern refers to the form of business that is managed and controlled by one owner.
The following are the merits of a sole trading concern.
i. Ease of formation and closure: There are hardly any legal formalities required while forming and shutting down a sole proprietorship firm; hence, its formation is relatively easy.
ii. Quick decision making: A sole proprietor enjoys complete control over the business. This makes the decision-making process quick and easy.
iii. Minimum government regulations: There is minimum interference by the government, as this business form is not governed by any laws and acts.
iv. Direct incentives: The profits and losses wholly belong to the proprietor. Hence, he/she enjoys direct incentives for operating the business.
v. High degree of flexibility: There exists a high degree of operational flexibility, as all the decisions are taken by the proprietor alone. Thus, for any variation in business plans, the proprietor enjoys complete flexibility.
The following are the demerits of sole trading concern.
i. Limited capital: The financial resources that are available to a sole proprietor are limited to his/her personal savings and the borrowings that he/she can raise from relatives and friends.
ii. Limited managerial abilities: A sole proprietor manages all the core functions. Being a sole owner, he/she has limited skills, imagination and energy. As a result, he/she cannot perform all managerial functions single-handedly.
iii. Uncertain life: The life of the business is adversely affected in the event of death, insanity, bankruptcy or physical ailment of a sole proprietor.
iv. Unlimited liability: The liability of a sole proprietor is unlimited. If the proprietor fails to pay the debts of the business, his/her personal property can be used to pay the debts.
v. Unsound business decisions: A sole trader takes all decisions himself/herself. As a result, the probability of taking wrong decisions is quite high.
Meaning: - Sole trading concern is the oldest form of commercial organisation. Sole means one person. So a trading concern is an organization where all business activities are controlled and managed by one man. He is also solely responsible for the debt and risk of the firm. The following are some of the features of a sole trading concern.
Definition: “A sole trader is a person who trades on his own account rather than in partnership or as a member of a company.” (Michael Greener)
A sole trading concern has the following merits over other forms of commercial organisation:
- Ease in formation: - a sole trading concern is considerably easy to start and to conduct its activities. There are least formalities in the formation of a sole trading concern. A sole trader may also close down the business as per his own will.
- Complete control: - The sole trader can have complete control over business operations. He can take his own decision regarding the business activities. No need to consult with any one
- Business Secrecy: - The sole trader can maintain complete business secrecy. He needs not to publish any accounts and reports to any body. Competitors cannot easily get business secrets and information of the sole trader’s activities.
- Flexibility in operation: - Sole trader enjoys maximum flexibility. He can take right decision at the right time depending upon the situation. At any time, he need not have to consult with anyone because he is a single owner of his business.
- Minimum Government Control: - Sole trading concern is less affected by government control. This is because, there are almost no legal formalities are required to start or close down a business.
- Close conduct with the customers: -The Sole trader can develop close contacts with his customers. This is because; he deals regularly with the customers. By developing personal contacts with his customers, the sole trader can come know the likes, dislikes, preferences and tastes of the customers. This helps to increase the sales turn over.
- Proper utilisation of resources: -The sole trader will make proper utilisation of resources (men, money, materials, etc.) this is because, the sole trader enjoys all the profits.
In spite of several advantages/merits, the sole trading concern suffers from a number of disadvantages. The main disadvantages are:
- Limited Capital
- Limited Managerial skills
- Lack of continuity:
- Unlimited liability
- Limited Bargaining power
- No Legal status
- Limited Expansion:
The above important demerits are briefly explained as under.
- Limited Capital: - The main drawback of sole trading concern is the limitation of capital. The sole trader can manage limited amount of capital from his own savings. He may also get some funds from his friends and relatives. The limitation of capital often restricts the size of the sole trading concern.
- Limited Managerial skills: - Normally, a sole trader manages the business on his own. The sole trader may not have all the abilities or skills to manage all by himself. Now a day, ther, ther is a need for specialized managerial staff. The sole trader may not able to appoint a skilled managers or staffs this is because of his limited capital.
- Lack of continuity: -The sole trading business lacks continuity. If the sole trader cannot run his business due to ill health or if he dies, the business comes to an end. This is because the successors may not be interested to run the business or they may lack the necessary business skills.
- Unlimited liability: - The liability of the sole trader is unlimited. This means he is alone responsible for all the risks and debts of the firm. In the eyes of law, there is no distinction between the private property and business property of the sole trader.
- Limited Bargaining power: -the sole trader often lacks bargaining power. This is because he purchases on a small scale from the wholesalers; secondly, he may not have the skill of bargaining. Thus he may not be able to obtain competitive terms from his suppliers.
- No Legal status: - Legally, the sole trader and his business concern are one and the same in the eyes of law. The sole trader and his business cannot be separated from each other. So the sole trader lacks legal status. But a joint stock company enjoys a separate legal status.
- Limited Expansion: -The Sole trading concern is restricted in its growth. This is because of limitation of capital and lack of managerial skills that are necessary for the expanding organisations.