Sole trader

This is the oldest and simplest type of business organisation. Its main characteristic is that one person is responsible for providing the financial resources and for making the decisions. In practice finance for such a firm is likely to come from one or more of the following: savings of the owner and his family, loans from friends, bank loans and credit. Even so finance from such sources will be channeled into the firm via the owner and he alone will be responsible for repaying it. The owner may choose to delegate authority and responsibility for decision-making to others, but in the final analysis the business stands or falls by his decisions, either direct or through others chosen by him. It is unlikely that the owner of such a firm will be a specialist in more than one aspect of the business and this is a major weakness. He may be well versed in matters concerning production but have little knowledge of the personnel function; he may be very good at marketing his products but uninformed on financial aspects His strengths in one area will be offset by his weaknesses in others. Another important drawback faced by the sole-trader is that there is no legal distinction between himself and his business; that is. he faces unlimited liability for any debts arising out of the running of the firm. In order to meet them he could be called upon to liquidate personal assets such as his house, car or other belongings. (One way round this problem is to transfer such items to his wife). A third disadvantage is limited finance. Even though adequate funds may be found relatively easily to launch a business, there may come a time in the life of the firm when further expansion is impossible or at best limited, due to insufficient finance. The sole-trader may exhaust his capacity to raise further funds from external sources and growth of the business will depend upon ploughed-back profits. Fourthly, the continuance of this type of organisation is uncertain. If the proprietor's health suffers or if he dies, the fortunes of the business too are likely to suffer in the first place and in the second the business itself comes to an end. Where the firm is in a trade in which economies of scale are available, it is unlikely that these would be enjoyed to any great extent by the sole-trader, the scope of his operations being limited by finance, as stated previously. Therefore he may find it difficult to compete with larger production units.

However there are advantages. The owner is personally in charge - he is the boss. Strength lies in union of ownership and control; there is powerful self- interest and an obvious link between the owner's income and successful management. Although he bears all the losses, by the same token he enjoys all the profits. The firm may benefit from close personal contact within the business and between it and its suppliers and customers. Decisions can be taken immediately a problem arises; there is no need to consult colleagues or superiors, no need to await a decision from a board of directors. Morale, motivation and employer-employee relations are likely to be good as most firms of this type are small in terms of numbers employed and employees can identify their own interests with those of the firm itself.

This form of organisation is typically found in farming, retailing and road haulage.