Question

Explain the Merits and Demerits of Sole Trading Concern?

Answer 1

Introduction: - Sole trading concern is popular not only in India but also in foreign countries also. The sole trading concern is the oldest and simplest form of a commercial organization having one owner. Sole means one person, so a sole trading concern is an organization where all the business activities are controlled and managed by one man. And he is also solely responsible for all the debts and risks of the firm.

Definition: - “The sole proprietorship is an informal type of business owned by one person”. (Prof. James L. Lundy)

Merits of Sole Trading Concern are as Follows:

1. Easy Formation: - It is very easy to establish Sole Trading Concern because very few legal formalities are involved in formation. This business can be started without getting registered. Due to simple formation, there is a direct relationship between efforts and rewards.

2. The benefit of Secrecy: -The owner and manager being the same person, the sole trader does not need to disclose his business secrets with any third person, neither does he need to publish his accounts, nor he is answerable to the third party.

3. Direct Motivation: -The proprietor himself is the owner as well as the manager, there is a direct relationship between the efforts and rewards he puts in and the profits he makes. Since all the profits or losses are directly vested with himself, the sole trader is more aware of the efforts put in and can thus grow very fast.

4. Quick Decisions: - Sole trader takes quick decisions on various matters relating to business operations. As this business has owner and decision-maker, the proprietor can take quick decisions and implement them immediately without consulting others.

5. Lower Cost: -The sole trader has complete control over the business and he is also a manager himself. He controls all aspects of the business organization, so he ensures that there are less waste and better control on the expenses incurred as all expenses go out his own pocket.

6. Development: -The risk and rewards are directly connected with only one person and due to the reason that he is completely responsible and involved with every aspect of his business. The sole trader takes extra effort to update his skills and learns through his experience constantly.

7. Flexibility in Operations: -Since only one person has to make decisions, the owner or sole trader can be very flexible. Being the only decision-maker of business, he can make a quick change in the decision as per the changing circumstances. This is very important for the success of any business.

8. Limited Government Control: -The activities of a sole trader are regulated by government and law to the minimum extent. Sole trading business is not required to get registered. There are no laws for operation, functioning or dissolution of sole trading concern.

9. Credit Standing: -Close contacts with customers help a sole trader to build up goodwill for himself. Banks and institutions can give loans easily due to the unlimited liability of the owner depending on his own assets.

10. Efficiency: -As he is directly gaining from profits and is directly liable and responsible for losses, the proprietor runs his business with maximum efficiency with least wastages of time, efforts and resources.

Demerits/Limitations of Sole Trading Concern are as follows:

1. Limited Managerial Ability: -The sole trader, though capable cannot be expected to have complete knowledge like other types of business. Neither can he give equal attention to all aspects of the business as a professional nor expansion of the business. Being alone owner, he has to look after every phase of business.

2. Limited Amount of Capital: -As only one person is the owner and provider for all the resources required for the business, a proprietary concern has a limitation on the amount of capital. The owner can get in his own money borrow from various sources. Such as banks or friends and relatives, but still, he cannot expand his business.

3. Unlimited Liability: -The greatest disadvantages of the sole trader are an unlimited liability. Higher risk due to the unlimited liability causes the proprietor to be over cautions; he may be personally the sufferer if things go wrong. This can affect the growth of the business negatively.

4. Not Suitable for large scale operation: -Sole Proprietorship is not suitable for large scale business operations. Due to a small scale, the business cannot be extended beyond a certain limit.

5. Lack of Stability: -There is continuous uncertainty in running a sole trader. If anything happens unexpectedly, the entire organization can collapse. Not being a legal entity, it is linked directly to the owner, i.e. there is no difference between the sole owner and his business. The organization can be dissolved with the death or insolvency of the owner occurs.

6. Absence of Specialization: -A Sole Trader himself is the owner, manager, supervisor, and controller of his business. Moreover, due to small scale business and division of labor and specialization, he cannot conduct business efficiently.

7. Unprofessional Decisions: -As a sole owner he is not answerable to any person. He may end up making decisions that may be based on limited knowledge. This can result in poor business policies likely to fluctuate without any reason and result in huge losses.