What do you understand by sole trader organization? State merits and limitations of sole trader organization.
Sole trader organization is the oldest form of organisation, and the most common form of small business is the sole trader organisation. It is also called proprietorship. It is very simple and easy to form. The only work of the individual is to decide upon the type of busin ess that he wants to begin and arrange the necessary or required capital. He can use the capital from his own savings or can even borrow from relatives and friends. He can use a rented building or his own residence to start off the business. In such a form of organisation, the person himself manages his own business.
He can take the help of his family members or employ some others, if necessary. Even if he takes the advice from others to run his business, his own decision will be the final one. All the profits earned by the business are enjoyed by him and he is the only one to bear the loss, if occurs. In other words, he enjoys full control over the affairs of the firm.
Main features of sole trader organization aIts a one man ownership, no separation of ownership and management, no separate entity, all profits to proprietor, individual risk, unlimited liability and less legal formalities.
Merits of Sole Trader Organization :
Easy formation: It is the easiest and simplest to form. To start this form of organization, no legal formalities are to be observed. Expenditure is not much in such a process of formation.
Direct motivation: All the profits of the business are enjoyed by the sole proprietor. This motivates him directly to work hard so as to earn more profits. He is free to involve in the business.
Full control: He has got full control over the functioning and working of the business. He is there to manage the whole business and take decisions all by himself.
Quick decision: Such a form does not involve partners, so he is not required to consult others or depend upon others for decision making. He can take quick decisions on various matters.
Flexibility in operations: One can easily bring changes, if required because it is a small organization. It is difficult to bring changes in a large organization.
Secrecy: Since the proprietor alone manages the business, secrets are known only to him. Secrecy level is at the highest degree in this form of organization. He is not required to publish his accounts.
Personal touch: For a proprietor, it is easy to maintain personal rapport with the customers. He can keep a record of their likes, tastes and dislikes. Employees work directly under him, in such a form, of organization.
Easy dissolution: Since no partners are there, he is free to withdraw from the business or sell it at any time he wants. Such a form is often used to test business ideas because of its ease information and withdrawal.
Limitations of Sole Trader Organization:
Limited resources: Capital and resources of a sole trader are limited because he has to depend upon his money and earnings and can even borrow from his friends and relatives.
Limited managerial capacity: Being a sole trader, his decisions may not be balanced. Knowledge and skills in various fields say production, finance etc. are required. But a proprietor may not have proper knowledge and skills in all these areas.
Not suitable for large-scale operations: Such a form of organization is suitable for small business due to the limited resources.
Unlimited liability: Sole trader has an unlimited liability. He cannot take risk and cannot expand his business. This is because, if a loss occurs, he himself has to bear it.
Less stability: Business continues and remains stable till the person, who is the proprietor, remains alive. When the man dies, there i,s a likelihood of closure of the business.
No check and control: No outsider can ask him anything about his acts and deals as the business depends solely on him. No checks and controls are there on the sole trader.
Less scope of economies of scale: Because of limited resources, sole trade generally operates on small scale. He cannot enjoy benefits of large-scale production because this may raise the cost of business operations.