Sole-Trader: Definition, Characteristics and Other Details (2024)

“A sole-trader is a person who carries on business exclusively by and for himself,he is not only the owner of the capital of the undertaking, but is usually to organise and manage and takes all the profits or responsibility for losses.”

Introduction:

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.

The creditors are entitled to have claim even on his private property. The sole-trader moulds the fate of the concern. It is the competence of the proprietor which determines the future of the business. His powers are unlimited and his decisions are final. He is, in fact, the sole organiser, manager, controller and master of his business.

The sole-trader must, however, be a person competent to enter into a contract. The business to be carried on should also be allowed by law. In some instance, a person may be expected to take a license from competent authorities before starting a business. These formalities should be completed before hand. Normally, no other legal formality is essential for starting a sole-trade business as in the case of a company or a co­operative.

Any person can start or wound up a sole trade business any time. This type of business is a one man show and the capacities of that person may certainly be limited. He may not be able to deal with every situation himself; so there may be chances of committing mistakes. Since the liability is unlimited and is to fall on one person, he should have a cautious approach.

Definitions:

Some important definitions are discussed to have a clear view of sole trade form of organisation:

(i) L.H. Haney:

“The individual entrepreneurship is the form of business organisation on the head of which stands an individual as the one who is responsible, who directs its operations and who alone runs the risk of failure.” According to Haney, the business is in the hands of one person who is not only responsible for its management but also for its risks.

(ii) James Stephenson:

“A sole-trader is a person who carries on business exclusively by and for himself,he is not only the owner of the capital of the undertaking, but is usually to organise and manage and takes all the profits or responsibility for losses.” James Stephenson emphasis that sole-trade business is carried on by one person with his own funds and according to his managerial capabilities. He is also responsible for the success or failure of this business.

(ill) S.R. Davar:

“The sole-trader is a person who carries on business of his own, that is, without the assistance of a partner. He brings in his own capital and uses all his labour. He also gets himself assisted by others to whom he pays a salary by way of remuneration.”

According to Davar a sole-trader uses his resources only and does not get the help of a partner. With the increase in work he may employ some persons for his help who get salary for their work. The adding of a partner will even change the form of organisation because it will become a partnership concern then.

A sole trader is a person who sets up the business with his mm resources, manages the business himself by employing persons for his help and alone bears all the gains and risks of the business.

Characteristics of Sole Proprietorship:

(i) 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.

(ii) 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.

(iii) 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.

(iv) Motivation:

One person is the sole owner of the business. He takes all profits and bears losses, if any. There is a direct relationship between efforts and reward. If he works more, he will earn more. He is motivated to expand his business activities. He will not like to enter speculative business because the risk involved is more.

(v) 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.

(vi) Proprietor and proprietorship are one:

Legally, the sole trader and his business are not separate entities. Loss in his business is his loss and liabilities of the business are his liabilities.

(vii) Owners and business exist together:

In sole-trade business there is no separate existence of the business with the owner. The business and owner exist together. The business is dissolved if the owner dies, becomes insolvent or is removed from the scene.

(viii) Limited area of operations:

A sole-trade business has generally a limited area of operations, the reason being the limited resources and managerial abilities of the sole trader. He can arrange limited funds only and will be able to supervise a small business. Since all decisions are to be taken by the proprietors, so the area of business will be limited with his management abilities.

(ix) Free from Legal Formalities:

A sole trade business can be started without performing any legal formalities. It does not require any formation or registration.

(x) Discretionary start and end:

A sole trader can start the business as per his will and similarly can dissolve it as per his discretion.

(xi) Freedom in Selection of Trade:

A sole trader is free to decide the type of business activity he wants to start. He is not supposed to consult anybody for taking such decisions.

(xii) Distribution of Profits:

A sole trader is the single owner of the business, he takes all the profits himself. He puts all his efforts into the business and takes all the fruits of his labour.

Objectives of Sole-Trade Business:

A sole-trade business is set up by one person with his own resources.

This form of organisation is set up for the following objectives:

(i) 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.

(ii) 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.

(iii) 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.

(iv) Create Self-employment Opportunities:

By setting up a sole trade business, the owner has created an employment for himself. Instead of looking for jobs outside, this is a form of organisation which helps people to create work for themselves.

(v) 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.

(vi) 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.

Formation of Sole-Trade Business:

A sole-trade business is such a form of organisation which requires no formalities to set it up. Any individual can set up a business whenever he likes. There is no legal requirement to form a sole trade business. However, if some business requires a prior sanction of the government then such formalities will have to be completed.

The usual decisions for setting up every business are taken care of in sole-trade business also. The first thing to be decided is the selection of a particular line of business. To take this decision, the demand potential of a product if it is a manufacturing unit or presence of consumers if it is a retail business has to be assessed first.

Then the requirement and availability of resources has to be assessed. Generally, sole-traders depend upon their family resources for setting up a business. With the expansion of banking facilities at most of the places, sole-traders have now started availing credit facilities to expand their work. The selection of a proper site is very important in a sole-trade business.

Since most of the retail trade is in the hands of sole-traders, the selection of a place for setting up the business is very important. The requirements of customers should be taken into account while selecting a business site.

Though customers want to purchase their day to day necessities at their nearest place but they will prefer to visit the main shopping centre to purchase durable goods like T.V., fridge, washing machine, music system etc. The business is set only after considering various factors. Sole-trade business can be closed at any time by the proprietor. As in case of other forms of organisation, no legal formalities are required to be performed for winding up of this business. Both formation and winding up of sole-trade business is an easy affair.

Legal Position of Sole-Trade Business:

Following points will explain the legal position of a sole-trade business:

(i) There is no specific law under which this business requires registration etc. A Joint Stock Company has to be incorporated under Companies Act, 1956, a partnership firm is governed by Partnership Act, 1932, a sole trade business is not governed by any such statute. So this business can be started and dissolved at the discretion of the owner without reference to any statutory provisions.

(ii) The sole-trade business will be subject to the general laws of the land. If there is a provision of getting a licence for setting up a particular business, then the sole trader will also get the licence before setting up such a business. A person desirous of starting a wine shop is expected to get a licence from the State Government. A sole trader wanting to enter this business will certainly be expected to comply with this law.

(iii) The sole trader and his business are one and the same thing. The business exists only with the sole trader. If he disappears from the scene due to death or some other reason, then the business will also be dissolved. The proprietor and his business have one personality.

(iv) The liability of the sole trader is unlimited. If a business is dissolved then no distinction is made between business and private assets and business and private loans of the sole trader.

Suitability of Sole Proprietorship:

The amount of capital and managerial skill required for a particular business influences the decision about form of organisation. When the scale of operations is small then capital requirements will be less and sole proprietorship is the most suitable form of organisation.

With the improvement of industrial technology and devising of new production methods, the needs for capital have increased. Other forms of organisation like partnership and joint stock company have also become popular. There are certain types of businesses where sole proprietorship is still the most suitable form of organisation. This form of organisation is also suitable under certain circ*mstances.

These circ*mstances are as follows:

(i) Where market is local:

When market for a product is limited only to a particular place, scale of business operations will be small. The amount of capital required will be less and the ordinary managerial skill will be sufficient. Under such situations, sole proprietorship will be most suitable. Most of the retail trade is controlled by sole traders.

(ii) When personal contact with customers is required:

There may be a need for personal contact with customers. The customers may have their likings and preferences for particular things. Under these situations sole proprietorship form of organisation will be suitable. A doctor and a lawyer will be required to have direct contact with his patients and clients. A customer may have his own liking for getting his clothes stitched. So, in all these cases sole proprietorship will be more useful.

(iii) Speculative business:

In speculative business the demand and prices of products change quickly. The businessman is required to take prompt decision. A sole proprietor can take immediate decisions as warranted by the situations. He need not consult anybody else. So he can decide the things himself. No other form of organisation will be as suitable for speculative business as sole proprietorship.

Social Desirability of Sole Proprietorship:

The limitations of sole proprietorship have necessitated the development of other forms of organisation. The wide spread use of other forms of organisation has not eliminated sole proprietorship; rather it continues to be most popular form of organisation in every country. This form of organisation has a social desirability too.

Its social necessity is because of the following reasons:

(i) Employment to large number of persons:

This form of organisation is started by one person but he takes other persons for his help. The number of sole traders is very large in all countries and they employ many persons as their helpers. So, sole proprietorship is able to provide employment to a large number of persons.

(ii) Need of less capital:

This form of organisation can be undertaken by the persons of all means. A person with small resources can start a business at a small scale. A vegetable seller can start his business with few hundred rupees and get his capital back at the end of the day. So, this type of form encourages people to take their independent business.

(iii) Less risk:

Generally, sole proprietorship is started at a low scale and investments made are also less. A person can even change his line of business if it is not suitable because it is less risky to do so.

(iv) Providing goods at low prices:

The consumers are provided goods at low prices under this type of form. The number of sole traders being large, they have stiff competition from one another and consumers are provided goods at competitive rates. The overhead expenses of the business are, generally, less; so it enables the sole traders to sell goods at low prices.

(v) Equal distribution of income:

This form of organisation acts as a constraint on the monopolistic tendencies of other forms of organisation. The large number of persons enters the business; so this results in equal distribution of income. Every person is able to invest his savings and get an equitable return on it. When the business is in the hands of few persons, then it results in concentration of wealth in the hands of some persons only.

(vi) Helpful to small producers:

The sole traders purchase goods from small producers and sell them to the consumers. A number of inter-mediators are eliminated from the channel of distribution. The part of profit earned by mediators in the shape of commission is partly left with the producers and partly passed on to the consumers in the shape of low prices.

(vii) Helpful to consumers:

The consumers are helped by some traders in making their purchases. The sole traders open their shops in streets so that consumers are able to make purchases from nearby shops. The goods are supplied even at the door step by hawkers, etc.

(viii) Acts as training centres:

A sole trade business provides an opportunity to learn the techniques of business. The investments being less so one can afford to learn by trial and error method. By bearing various pros and cons of a business one can expand it later on. So, this is a good form of organisation to get business training.