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Unit 2 – Forms of Business Organisation

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Sole Trader
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Unit 2 – Forms of Business Organisation

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 Single ownership – Business is wholly owned by individual. Owner will

supply the capital from his own wealth

 1 Man control – Entire decision making is in the hands of owner. Both

ownership and management is vested in the hands of sole trader

 No legal entity – Sole trade has no legal entity separate from his business.
Business and owner as consider as one and the same.

 Unlimited liability – Proprietor is personally liable for the debts of the

business.

 If assets of the firm are insufficient to meet the liability then sole
proprietor need to pay the debts out of his personal assets.

 No profit sharing – Sole proprietor is entitle for entire profit as well as losses
of the business.

 Small Size – Due to limited capital and managerial ability normally sole
proprietor operates at small size in terms of volume or operation of the
business.

 No legal formalities - There are no legal formalities to start, manage or

dissolve the sole proprietorship business.

Formation -

 Individual prepared the blueprint of the business and arranges the finance.
 No legal formalities for formation of the business. In some cases licence from
competent authorities may be needed.
 Sole Proprietor must be person competent to enter into contract.
 Business to be carried on must be allowed by law.
 Decision to start a particular line of business depends upon –
 Demand for product
 Availability of resources
 Scope for earnings profits
 Business can be closed at any time without legal formalities. Sole proprietor
simply has to settle the claims of creditors and wind up the business.
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Unit 2 – Forms of Business Organisation

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 Easy formation –
 No legal formalities and expenditure for establishment as well as
dissolution of the business.
 There is no need to associate with others and enter into any agreement
 No registration required except licence in certain special cases.
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Unit 2 – Forms of Business Organisation

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 Motivation to work –
 Owner is alone entitled for all the profits.
 There is direct relationship between efforts and rewards.

 Quick Decision making –

 Free to take & implement the decisions. It will improve the efficiency of
the business

 Independent control –
 Sole proprietor enjoys complete freedom for action.
 He has absolute control over his business.
 There is no interference from outside.

 Secrecy of his business affaires –

 No requirement to publish the accounts or share the secrets of the
business with anybody.

 Personal touch –
 Can establish the personal contacts with customers as well as
employee.
 He can canter the requirement of each and every customer.

 Flexible operations –
 Because small size and simple managerial/ organisational structure he
can adjust whenever it is necessary.

 Economy –
 Proprietor is owner as well as manager of the business. Does not
appoint specialist for various functions.

 Minimum govt. regulation –

 He is free from govt. regulations
 There are no legal formalities in working of the sole proprietorship
except tax and labour laws.

 Easy dissolution –
 No specific formalities and regulation for dissolution of the business.

 Social utility –
 Opportunities for gainful self-employment with limited money and skills.
 Honourable living for those who doesn’t want to work under others.
 Equitable distribution of income and wealth
 Development of personal qualities
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Unit 2 – Forms of Business Organisation

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 Equal opportunities to everyone.

 Limited capital resources –

 Limited funds and borrowing capacity

 Limited managerial ability –

 One can’t be expert in each every function of the business
 Proprietor may not denote sufficient time to all the activities
 Organising & managerial ability is limited.
 Errors of judgement & decision making

 Unlimited liability –
 Personally liable for losses and debts of the business.
 Fear of loss of personal property makes proprietor cautious and
conservative in his approach, decision making and in terms of taking
risk.
 Risk is unlimited.

 Uncertain life –
 No continuity of existence.
 Owners and business are inseparable. Business may come to an end
due to death, illness, inability or insolvency of sole proprietor

 Limited scope for expansion –

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Unit 2 – Forms of Business Organisation

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 Limited scope for expansion due to limited managerial and financial
resources
 Can’t take advantage of economies of scale
 Can’t attract trained, talents and skilful employees.
 Not suitable large scale operation.