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
- 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.
- 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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