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Sole Trader (Proprietorship Firm)

What Is Sole Trader (Proprietorship Firm)?

A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.

The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. It is a "sole" proprietorship in contrast with partnerships. A sole proprietor may use a trade name or business name other than his or her legal name.

Advantages :

- It is easy to organize this business. Only small amounts of capital are needed to start and run a business.

- It permits a high degree of flexibility to the owner since he/she is the boss of the business establishment.

- Due to the owner's unlimited liability, some creditors are more willing to extend credit.

- The owner receives all the profit of the business.

- No risk of fraud by a partner.

- It is easier if you are a good leader.

- You are your own boss.

- Quick decision making

Disadvantage :

Raising capital for a proprietorship is more difficult because an unrelated investor has less peace of mind concerning the use and security of his or her investment and the investment is more difficult to formalize; other types of business entities have more documentation. The enterprise may be crippled or terminated if the owner becomes ill. Since the business has the same legal entity as the proprietor, it ceases to exist upon the proprietor's death. Because the enterprise rests exclusively on one person, it often has difficulty in raising long-term capital.

- Has limited resources. Banks are reluctant to grant loans to proprietorship considering its small assets and high mortality rate.

- Unlimited liability for business debts. The single owner is responsible for paying all debts and damages of their business.

- If the firm fails, creditors may force the sale of the proprietor's personal property as well as their business property to satisfy their claim.

- When the owner dies, the continuation of the business is difficult, because a new owner must typically accept all liabilities of the business. bear risk and loss alone.

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Sole Trader (Proprietorship Firm)

Sole Trader

The owner receives all the profit of the business

Proprietorship Firm

Only small amounts of capital are needed to start and run a business.