AS A Level Business: Sole Trader Business

• One popular form of business is a sole trader business
• It is also known as a sole proprietorship
• This is because there is only one owner (proprietor) who owns and usually runs the business

Characteristics/Features of a sole trader business

• It is a form of business where there is only one owner who manages and controls the business
• The owner of a business is also known as a proprietor and
• That is why this form of business is also known as a sole proprietorship which means the business has one owner
• It is a “sole” proprietor in the sense that the owner runs the business by himself/ herself i.e. it is a one-man business and the owner has no partners
• A sole proprietorship essentially means a person does business in his or her own name and there is only one owner
• A sole trader business and its owner are treated as one and the same at law
• For this reason limitations of liability enjoyed by a corporation do not apply to sole proprietors.
• All debts of the business are debts of the owner
• This means the owner can lose their personal property if they incur a debt which business funds cannot cover
• Because the business and the owner are the same it means that unlike with a limited liability company there is no continuity after the death of the owner
• A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who owns the business pays personal income taxes on the profits made
• However, the issue of taxes is complex and depends entirely upon the applicable laws of the county, province, region, country and state in which the business is found
• A sole proprietor may do business with a trading name other than his or her legal name
• This name might appear on official documents of the business as well as business premises
• It does not mean that the trader has limited liability
• The owner provides all the capital although they can supplement this by borrowing from financial institutions, family and friends
• The owner usually provides most of the labour required to run the business and family members and friends can also help
• Because of the limited amount of capital a single individual can raise and put up, sole traders businesses remain mostly small
• Examples include grinding mills, village shops, flower shops, coffee shops etc

Advantages

•  Has fewer legal formalities to comply with
• Can keep their accounts private.
• Requires little capital.
• Can offer personalized services to customers
• Can be open for long hours.
• Fewer government regulations.
• It is the easiest business to start.
• Sole trader enjoys the profits alone.
• Quick decision making as the owner retains all control and does not have to consult with anyone else.

Disadvantages

• There is a limit to an amount of capital that can be raised.
• There is no continuity after the death of the owner.
• They have unlimited liability which means the owner can lose their personal assets in settlement of a debt incurred by the business.
• Can be subject to estate taxes in the event of the owner’s death.
• There may be poor decision making because the owner cannot consult with anyone and there is little room for specialization.
• The owner incurs all the losses alone.

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