Sole Trader Business | Advantages | Disadvantages | Suitability
Table of Contents
Advantages of Sole Trader Business
The advantages of sole trader business are the following:
1. Easy to form: It is very easy and simple to form and organize a sole trader’s business. There are no legal formalities.
2. Simple to manage: It is a small organization. It can be managed easily by the owner himself.
3. Profit incentive: Sole trader enjoys all the profits for himself; This profit motive is an incentive to work hard.
4. Quick decisions: Since he is the sole organizer, he can take quick decisions. He can act promptly according to the changes in the market.
5. Contact with customers: He is the owner and manager of the concern. He will be in a position to study the tastes and needs of customers personally since he establishes good contacts with them.
6. Business secrets: He can maintain the business secrets for himself. Maintenance of secrecy is an important matter in any type of business organization.
7. Smooth running: As he is the sole proprietor there will not be differences of opinions or disputes. It helps smooth running of the concern.
8. Efficiency and economy: The organization is a small one. He can have close supervision. He can reduce the costs of the management and all sorts of waste. Business can be run efficiently.
9. Flexibility: Changes in the business can be adopted at any time. Flexibility is facilitated by small investment. It can be shifted from place to place very easily.
10. Family training: He takes the help from the members of his family in maintaining business. His children get training in the business activities.
11. Self employment: Small scale units can be easily started. Nationalized banks are also helping in this direction.
12. Social advantages: It provides opportunities to a number of individuals. Many can become entrepreneurs with limited resources.
13. Tax advantages: Income tax is imposed on the personal income of the sole trader, but not on the profits of the concern. Hence it is advantageous.
Limitations or Disadvantages of Sole Trader Business
Sole trader business suffers from certain serious limitations (disadvantages) also:
1. Limited capital: Use of limited capital means limited profits only. If there is any necessity to expand business there may not be sufficient resources.
2. Limited skill: As there is only one man the managerial ability is limited.
3. Limited borrowing capacity: The borrowing capacity of a sole trader is limited to the extent of his financial position.
4. Unlimited liability: The creditors can recover their loan amount not only from the properties of the business but also from his personal properties. So his liability is unlimited.
5. Hasty decisions: The sole trader takes all decisions for himself. So there may be hasty and thoughtless decisions.
6. Short life: If the sole trader does not have children, or if his children are not interested in continuing the business, the business would come to an end. There is no guarantee of continuous existence in this type of business.
7. No division of labor: As it is a small unit, it is not possible to introduce division of labour in the management.
8. Dependence on employees: If there is expansion of business, it is inevitable for the proprietor to depend on the paid managers.
9. Limited area of operation: The business is small. So the activities cannot go beyond a certain area.
10. Lack of large scale economies: Sole trader’s business is small scale only. He cannot do his business on large scale due to lack of financial resources. So he cannot enjoy large scale economies of production, buying or selling.
Suitability of sole trading concern
A sole trading concern may carry its business successfully under the following circumstances.
1. Where business is carried on small scale;
2. Where capital requirement is less;
3. Where prompt and quick decisions are required;
4. Where risk is less;
5. Where personal element plays an important role;
6. Where market is local;
7. Where secrecy in business is a must;
8. Where freedom of the businessman is involved;
9. Where business is seasonal;
10. Where there is no need for specialization.
In spite of all the limitations, a sole trading concern is a popular form of organization in all parts of the world. Thus, we can say that it has its own place in the field of business even today. Its future is bright.
