A sole trader kind of business simply shows that it involves a business run by a single person; sole trading business is common in our environment. This article will see us define what a sole trader is, the features of a sole trader, sources of funds for a sole trader, its benefits and problem.
Definition of a Sole Trader (Sole proprietorship)
The definition of a sole trader is almost the same from different authors:
A sole trader is a person who enters business working for him/herself. He/she puts in the capital to start the enterprise, works either on his/her own or with employees and, as a reward receives the profit. Carol (1993:6)
A sole trader is a form of business enterprise in which one man owns and manages the business. Denso (2004:2).
A sole trader goes by other names such as “one-man business”, or “sole proprietor”.
Sole trading is mostly found in the retailing business. This type of business is the oldest type of business in most parts of the world. Up to the 19th century, most production companies were owned by individuals. It is one of the commonest types of business you see around. You see them around the cities and villages.
The sole trader starts his business with his capital and labor (sometimes he may borrow money from friends or relatives assisted with labor by the same people). He organizes the business himself and takes all the profit or loss that arises.
The sole trader, therefore, represents many things at the same time. He is a capitalist because he alone owns the business and receives the profit.
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He is a laborer because he performs most or all the work in the business; he is an entrepreneur because he takes in his stride the risk of financial loss. He is also a manager because he takes decisions and controls the operation of the business.
Features of a Sole Trader (Sole proprietorship)
- Ownership: A sole trader as the name implies is owned by one person.
- Liability: The liability of the one-man business is unlimited. I.e., if the owner is indebted, both, the business asset and his asset can be sold to offset the debt.
- Sources of Capital or Finance: The capital outlay is provided by the owner. This source of funds could be through Personal savings; Intended capital; Credit; Borrowing from relatives; Banks etc.
- Legal Entity: It is not a legal entity. By law the business and the owner are regarded as one person. They are not different, unlike corporate business; a company is a legal entity, different from the owners.
- Motive: It is believed, that a sole trader is into business to make a profit.
- Method of Withdrawing Capital: The owner can withdraw his capital anytime from the business without consulting with anybody.
- No Board of Directors: Because he is the owner, no board of directors.
- Its Nature: It is the simplest and the commonest type of business unit you can think of.
Sources of Funds of a Sole Trader (Sole proprietorship)
1. Personal Savings
I have met a friend who was a civil servant for about thirty-five years. After his service, he opened a shop where he sells paint at his retail shop. When I engage him in a discussion, he said at a time in his working life he decided to save ten thousand Naira (N10, 000) monthly and that is the money he used in setting up his business.
We have a lot of sole traders who got money from this method to set up their business.
2. Borrowing Particularly from Friends and Relatives
It is common, among Igbo business traders that once their brothers are willing to do business, they give him a helping hand by borrowing some amount of money to start his business, when he starts making a profit, he will pay.
This borrowing is not limited to brothers alone; friends and relatives equally help out in this situation for people to start up a one-man business.
3. Credit Purchase from Manufacturers or Whole Sales
Sole traders get financed through credit buying from the manufacturers or a wholesaler by selling goods to sole traders at credit the wholesalers are financing a sole trader.
4. Donations from Friends and Relatives
Friends and relatives can dash your money purposely to help you continue with your business.
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Advantages of a Sole Trader (Sole proprietorship)
- It requires small capital: Can be established quickly and easily with small cash, there are no organization fees and the services of lawyers to draw up terms are not generally required. It is the commonest and cheapest form of business organization.
- Easy to establish: This is because it requires no formalities and legal processes attached to establishing the business and is subject to very few government regulations as no business of balance sheet to the registrar of companies is required.
- Ownership of all profit: The sole trader does not share the profit of the business with anyone.
- Quick decision-making: The sole trader can take quick decisions since he has no parties to consult or a boss whose permission he must get. He takes action as soon as circ*mstances arise or as soon as he conceives an idea, such flexibility could be very vital to his success.
- Easy to withdraw his assets: Proprietorship can be liquidated as easily as it is begun. All he needs to do is to stop doing business. All his assets, liabilities and receivables are still his.
- Single-handedly formulates all policies: He determines the firm‟ policies and goals that guide the business internally and externally and work towards them. He enjoys the advantage of independence of actions and personal freedom in directing their affairs.
- Boss: He is free and his boss but at the same time continues to satisfy his customers.
- It is flexible: The owner can combine two or more types of occupation as a result of the flexibility of his business e.g. a barber can also be selling mineral and musical records.
- Personal Satisfaction: There is great joy in knowing that a person is his own master. The sole trader has a great deal of that. He also knew that the success and failure of the business completely lie with him. This gives him the incentive to make his business as efficient as possible.
- Cordial Relationship, with workers and customers: Because the sole trader is usually small, the owner can have a very close relationship with his workers to the extent that domestic/personal issues can be discussed and addressed.
- He also knows first-hand from customers what their wants are. It also enables him to know which of the customer’s credits are worthy. This kind of relationship is usually beneficial to all parties.
- Tax saving: Unlike in companies the profits of the sole trader are not taxed, the owner only pays his income tax.
- Privacy: The sole trader is not under any legal obligation to publish his accounts for public consumption as in joint stock companies.
Disadvantages of a Sole Trader (Sole proprietorship)
- Bear All Losses and Risks Alone: Business is full of risks and uncertainties and unlike other forms of business organizations where risks and losses are shared among partners, the owner of the one-man business does not share these risks and losses with anybody as it does not share the profits of the business with anybody.
- Limited Financial Resources: The greatest single cause for the abandonment of one -man business form is the desire for expansion and the resultant need for additional capital which is not forthcoming because the capital used in running the business comes from only one man and is limited to the extent of his fortune. His inability to raise more capital limits its plan of expansion.
- Unlimited Liability: Unlimited liability means that in the event of failure of the business, the personal assets of a person can be claimed to pay the debts of the business. For a sole trader, it means that everything he owns is subject to liquidation to set the ability of the business if the business fails.
- Lack of Continuity: When the sole proprietor retires or dies, the business may end like that. Though his children or relatives may attempt to continue with the business, most often than not they lack the zeal, and or, the ability to operate efficiently. The imprisonment or bankruptcy of the sole proprietor spells similar doom for the business.
- Absence of Specialization: As stated earlier the sole proprietor does so many things by himself. As a result of this, he may not handle aspects of the work efficiently. This negatively affects the prospects of the business.
- Limitation on Expansion: Because of limited capital, the sole proprietor may not be able to increase the size of his business no matter how ingénue he is. As enumerated earlier, the sole proprietor has few sources of capital.
Except for banks, he may not get any substantial capital for expansion frantically; his ability to borrow from banks depends on his collateral which may not be enough for bank funding.
In summary, a sole proprietorship is a business owned by one person who raises his finance from himself, relatives and friends. He has freedom in his business, but failure could be fatal because he will have nothing to hold on to.
The one-man business is easy to establish. It is one of the most popular businesses. Benefits of this type of business include being the sole owner of all profit, takes decisions and so on.
While the business is limited by a lack of finance, lack of expansion. Despite all these sole trading is worthwhile a business because you are your boss.
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