Advantages and Disadvantages of Sole Tradership

Sole proprietorship is a form of business enterprise in which an Individual owns the business, assumes all risks and operates the firm for his own personal Interest. Sole proprietor here is the sole owner, manager, controller, financier and risk bearer. He wears many hats, of financial planning, marketing, development, business strategies, risks, etc.

The individual runs the business alone though he may obtain the assistance of paid employees. The sole tradership is very popular with small scale business such as tailoring, hair dressing, retailers, accounting, legal profession etc., etc. the sole proprietor forms of business ownership is very popular In Pakistan. Its prospects here are also quite bright. The main advantages which the sole-trader enjoys are as under:

A person can undertake any lawful business activity for profit motive easily. The person has to develop an idea, set the goals and then develop it into a profitable operation. According to J.L. Lundy, becoming a sole proprietor is as simple as buying newspapers and selling them in street. It is, therefore, attractive for its low start up cost.

The sole proprietor has full authority to manage his business as he likes. He prepares the plan, invests his money. Supervises the business and enjoys the profit. He is the king of his business.

The sole trader receives full profits of the business. He also bears the full risks of loss.

The full authority rests with the single proprietor in this business. He can make prompt decisions in carrying out. policies, changing the methods of production, reducing-or increasing the prices of the commodities, delegating responsibilities, etc., etc. He can also take quick action for increasing the production activities of the workers by giving those incentives. The operational expenses are kept at the minimum.

If the proprietor has a sound goodwill and personal assets, he enjoys an excellent credit rating among the creditors. He establishes his credit worthiness in the market.

As long as the proposed business is legal, anyone can organize it without gain9 through any special formality.

Legally, the sole trader and his business are not separate from each other. The proprietor and his business have one personality. All assets are his assets. Loss in business is his loss. Liabilities of his business are his liabilities.

A sole trader, being the organizer himself, maintains a high standard of secrecy of profits, in technique of production, special formula, etc.

The sole proprietorship’s profits are taxed as personal income of the owner. Thus a sole proprietorship does not pay any special super tax or double tax.

A sole trader is in close touch with his customers. He knows the tastes of his customers and provides them the necessary goods which they need this creates his good will in the market.

The sole trader can start any lawful business. He has also the right to close the business as and when he likes.

The ownership of sole trading business passes on from generation to generation. The sole tradership, thus, enables the son to reap the benefits of goodwill of his father.

The sole proprietorship helps in reducing concentration of wealth in a few hands. it gives wider distribution of business ownership in the country.

The sole trading business provides business careers to a large number of persons with small means.

In sole trading business, the personal qualities of a proprietor like initiative, self reliance have full scope for development.

Sole proprietorship besides being useful to the individual owner, is also beneficial for the society. For instance (1) it makes an individual financially independent who becomes an asset and not a burden to the society. (2) It develops social virtues like Initiative, strong will, independent thinking and courage to face odds in him.

There are certain serious disadvantages which a sole trader has to face in operating this form of business. These limitations in brief, are as follows:

The most serious drawback of sole Proprietorship is the burden of unlimited liability. In case, the claims of’ the Property of the sole proprietor may be taken to pay the business debts. For Creditors against a business exceed the value of its assets, then the personal Example, Mr. Hamid, a sole proprietor has business assets of Rs. 30 Iakh but his liabilities are Rs. 35 lakh. In the event of liquidation, the creditors can force Mr. Hamid cut of business. They can acquire his personal assets such as Cat; personal property etc in order to make up the balance of Rs. Five Iakh. This fact considered one of the most serious weaknesses of the one man business. They can acquire his personal assets such as Cat personal property etc in order to make up the balance of Rs. Five Iakh. This fact often discourages people from getting loan on business Unlimited liability is considered one of the most serious weaknesses of the one man business.

An individual proprietor faces difficulty in expanding the sole trading business. Most of the capital which is invested in the business comes from the personal savings of the proprietor. The financial institutions are reluctant to advance long terms loan to the owner of a sole proprietorship. As a result the single owner of a business however rich he may be, finds It difficult to expand the business and avail of the economics of large scale production.

In managing this type of business, the sole trader has to rely upon his own skill and judgment for operating the business, Most of the proprietors do not possess all the management skills required for financing marketing, purchasing, producing, supervising of the business. Some of them may be production minded, others may be qualified for selling of the product. The sole proprietor being unable to perform alt the duties and functions of management efficiently, limits the size of a business according to his capacity.

The continuity or permanence of a sole proprietorship is normally difficult to maintain. If the proprietor dies, falls sick, gets imprisonment, is disabled and there is no suitable successor to him, the business is adversely affected The business may be closed, sold or liquidated.

As the sole proprietor normally faces difficulty in acquiring capital, he has to face operational problems which are not sacute in other forms of business ownerships. For instance, sole proprietors usually have inadequate buildings, substandard machinery, poor location and lay out of the factory, inability to purchase raw material in large quantity to avail of the discount, etc., etc.

A sole proprietorship has to suffer from the long illness of the proprietor. The business in his absence comes to a standstill.

The sole trader is not in a position to hire the services of experts like qualified accountants, salesmen, etc. The sole trading business, therefore, is deprived of the services of experts.