Long answer type questions. Define a Sole Trading concern. Explain its merits and demerits.

ANSWER:

A sole trading concern is a form of business that is owned, managed and controlled by a single person known as a sole proprietor. As the sole owner of the business, the proprietor becomes the single recipient of all the profits earned by the business and, in the same way, has to bear all the losses incurred.

Merits of a sole proprietorship:

i. Easy formation and closure: There are hardly any legal formalities for setting up a sole proprietorship. However, if the proprietor is dealing in drugs and liquor products, a licence has to be acquired. The procedure for closing down the firm is also hassle-free.

ii. Quick decision making: A sole proprietor enjoys complete control over the business. This makes decision making quick and easy.

iii. Direct incentive: A sole proprietor is the sole bearer of all the risks associated with the business and, at the same time, is the single recipient of all the profits earned. Thus, this direct link between efforts and rewards motivates the sole proprietor to operate the business efficiently and effectively.

Limitations of a sole proprietorship:

i. Limited capital: The financial resources that are available to a sole proprietor are limited to his/her personal savings and the borrowings that can be raised from relatives and friends. Thus, the amount of capital available to the proprietor is limited. This often prevents business expansion.

ii. Limited managerial abilities: A sole proprietor manages all the core functions such as purchasing, selling and planning. As a result, the benefits of specialisation are not available to the proprietor. Also, because of limited resources, a sole proprietor may not be able to employ specialised employees to handle specific business operations.

iii. Uncertain life: In the eyes of the law, a sole proprietor and his or her business are regarded as the same entity. In the event of death, insanity, bankruptcy or physical ailment of the proprietor, the life of the business is adversely affected.

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