Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Types of businesses: Sole Trader

  • 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.

To access more topics go to the Advanced Level Business Studies page

To access more topics go to the ZIMSEC Business Enterprise and Skills page

To access more topics go to the Cambridge AS A Level Business Studies page

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