By The End Of The SuBtopic, Learners Should Be Able To;
State the forms of business organisations.
Define sole trader.
Explain reasons for the formation of a sole trader business.
Describe the formation of a sole trader business.
Discuss the advantages and disadvantages of Sole trader businesses.
There are many forms of business organisations, these are classified according to their structure, formation and operations. Some of the main forms of business organisations include;
Sole trader/ Sole proprietor
Public limited company
Private limited company
Sole trader business is also known as sole proprietor or one person’s business.
Sole proprietor is a person who starts a business and operates it on his or her own or with the help of family members.
It is a simple way of starting a business as it requires less capital.
Examples of sole trader businesses include;
Reasons for the formation of a sole trader business
1. Less startup capital
Any person can startup a sole trader business as it requires less startup capital, for example, one can startup a sole trader business selling cheap products like sweets, vegetables and fruits which require less startup capital.
2. Need to utilise family labour
In a sole trader business, the sole proprietor can benefit from using family labour.
This will reduce labour costs as in most cases family members assist in the running of the business without being paid for their labour services.
3. Need to be in full control of the business
A sole trader has full control of the business as he or she runs the business and makes all the decisions.
4. The need to make profit and enjoy all the profits of the business
Like any other businesses, a sole proprietorship is formed with the aim of making profit.
One may decide to form a sole proprietor business to enjoy all the profits made by the business by himself.
5. Sole trader is the easiest way of starting a business
Most people prefer to operate a sole proprietorship business as there are less legal formalities required in setting it up.
There is less paperwork involved in the formation of this type of a business.
In Zimbabwe one is only required to obtain a trading licence to start trading as a sole trader.
Formation of a sole trader business
There are less legal formalities required when setting up a sole trader business.
Any person is free to operate as a sole trader as long as the business is operated within the laws of the country.
Before commencing business operations the following aspects must be in place;
Capital refers to resources (money or assets) used to start a business.
To start any kind of business one needs to have capital.
A sole trader can raise capital through personal savings (from salary, sale of personal property), inheritance, borrowing from friends and relatives.
Capital is needed to buy assets, goods for resale or raw materials to produce goods.
2. Selection of a particular line of business or product.
Before starting a sole trader business, one has to choose a product or the kind of business that he or she wants to do or trade on.
A sole trader should choose a product that is on demand.
- refers to goods and services.
- is the amount or quantity of a product that customers are willing and able to buy at a given price and at a given point in time.
The chosen product or its resources must be locally available and should enable the trader to a make profit.
- are raw materials or elements that are used to make a product, for example, flour for baking buns.
- is the benefit or gain that one gets from trading.
3. Location of the business.
One must choose a location where to carry out his or her business.
The business must be located close to the market or consumers.
Location - refers to a place.
Market - refers to a place where buying and selling takes place or the customers who will buy goods or services.
Consumers - are end users of products.
4. Trading name.
A trade name is a name that one chooses to operate with. This can be a personal name (such as Makanda General Dealer, Tapiwa Store or Pukayi Watch Repair) or a suggested name.
In some cases one may name the business after what he or she wants consumers to know about the business, other than his or her own name. This can be the shop location or the type of goods he or she sells.
For example one can name the shop,” Corner store" to depict the location of the shop or "Zvakachipa Store", to create an impression that the shop sells cheap products.
In such a case the trader might need to register the desired name with the local (municipality) government.
5. Trading licence.
Trading licence is known as an operating licence or permit.
It is a requirement that one has to obtain a trading licence before commencing an business operations.
For example, a person desiring to start a Pharmaceutical shop or a surgery is expected to obtain a licence from the local government.
6. Professional or skills certificate.
Some individuals may decide to startup businesses that are based on their talent, skill or qualification.
These people are required to display their professional or skills certificate in their places of work, for example, a medical doctor is required by law to display his or her medical certificates in his surgery and carpenter is also required to display his skills certificate(s) in his or her workshop.
Advantages of a sole trader business
A sole trader caters for the needs of the people by providing specialist services to the customers, for example, Zara Bakery Shop can provide cakes, bread, muffins and wedding cakes to its customers according to their specifications.
A sole trader is in full control of the business.
The sole trader makes all the business decisions - he or she is not mandated to consult anyone when making operations decisions.
The business is easy to start as it requires little capital, for example, a hair dresser may require $250 as start-up capital (to rent a chair in a salon, to buy products for processing hair and other gadgets to use in his or her business).
The sole trader enjoys all the profits of the business by him/herself.
There are less legal formalities in setting up a sole trader business , usually a trading licence is the only document required in order to start trading.
Operating as a sole trader is easy because the business is usually small in terms of the amount of stock, number of employees, capital and customers.
The expenses of a sole trader are relatively small.
A sole traders have direct contact with customers - this strengthen sole trader-customer relationship.
Disadvantages of a sole trader business
The sole trader experiences unlimited liability as all personal assets are at risk of being attached to cover business debts.
There is lack of continuity in the event that the sole trader dies or retires.
There is high risk of the business failing due to poor decisions made by the owner. The sole trader relies only on his or her own decisions.
Lack of access to loans from banks and other financial institutions due to lack of assets to pledge as collateral security.
The sole trader often work long hours in order to maximise on profits.
The business closes when the sole trader is away on holiday or off sick which may result to losses.