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After working for many years under a famous designer of bridal garments, Ashmita wanted to branch out on her own. She knew there was a gap in the wedding industry that she could fill with her skills—that of a bespoke embroidery and restoration service for vintage wedding sarees and lehengas. After resigning from her position at the designer label, she spent the greater part of a year learning how to start a business. Once she was ready, Ashmita became a sole trader. She founded her own venture, timing it to coincide with the second half of the year, when India starts gearing up for the wedding season.
Ashmita quickly realized that as the owner of a fledgling sole trader business, she’d initially have to do a lot of the work by herself, be it sourcing fabrics, keeping track of all costs, handling marketing, supply and the brand’s social media, or arranging photographs of brides wearing her creations at their weddings. But Ashmita was up to the challenge; she consulted professionals and allocated more resources towards the core elements of her business such as fabric sourcing, website design and online advertising. By paying close attention to the fundamental needs of her venture, Ashmita not only managed to hone her own creative skills but also expanded the business, employed a talented team and flourished as a leader.
As a sole trader, Asmita was able to fulfill her entrepreneurial dream. Indeed, most enterprising young people who’ve ever asked the question, “What is a sole trader business?” can, with guidance, do what Ashmita did. Let’s explore the subject a little bit more.
What Is A Sole Trader?
But before we go any further, it’s important to first understand what a sole trader is and then examine the definition of sole trade. So what is a sole trader business? Simply put, a sole trader or a sole proprietor is a self-employed entrepreneur who exclusively owns and runs their own venture. In other words, the sole trader will be entitled to all of the business’s assets and profits after taxation. However, the liability of a sole trader is also unlimited; they’ll have to bear all losses as well. A sole trading business, as the sole traders definition points out, is an organization with a single individual taking care of all business activities. The legal identity of this venture or sole trader business isn’t separate from the owner; this is why many say that an individual who is a sole trader is the business.
To make the definition of sole trade clearer, it must be remembered that such a business isn’t financially difficult to set up. But the legal responsibility of every aspect of the business will lie with the sole trader. Such an individual calls all the shots about the inception and the running of the venture and has the freedom to hire employees as and when required. What’s more, the business model for a sole trading concern is relatively simpler and more versatile. In this regard, individuals who are considering sole proprietorship must also reflect on the nature of the commercial activities they wish to carry out. This will determine whether they go forward as entrepreneurs or businessmen/businesswomen.
Now that we’ve covered the definition of sole traders and also answered the question, “What is a sole trading concern?” let’s look at the various ways in which being a sole trader may benefit entrepreneurs or hinder them.
Advantages Of Being A Sole Trader
Sole proprietorship is accompanied by risks, but it also has several perks, making it a preferred model for many small business owners. Let’s take a look at a few of these advantages.
1. Complete Control
The biggest perk of a sole proprietorship is the freedom to be the only decision-maker about the direction in which the business will go. The prospect of being one’s own boss is among the most significant reasons for people leaving salaried jobs to start their own ventures. Moreover, a sole trader has greater decision-making freedom than someone in, say, a partnership structure, which necessitates joint decision-making most of the time.
2. Easy To Establish
A sole trading concern is the easiest and relatively inexpensive business structure to put in place. The expenditure is minimal; legal expenses mostly extend to getting the required permits and licenses. This factor makes sole proprietorship attractive to startup owners and those who run home-based enterprises.
3. Keep All Profits
A major benefit of being a sole trader is being able to keep all the profits after taxes have been paid. This wouldn’t have been possible in a partnership structure or in a limited company, where the profits of the business would have to be shared with stakeholders and investors.
4. Flexibility
During taxation, a sole trader who incurs financial losses in the early stages can deduct the losses against other means of income. This facet makes sole proprietorship a preferred route for people who intend to make a gradual switch from being salaried professionals to self-employed individuals. Moreover, sole proprietorship also allows one to expand the business over time if revenue generation increases. In such a scenario, turning the venture into a limited company might make it more tax-efficient, and the process won’t be riddled with complications.
5. The Next Step Can Be Incorporation
To illustrate this point, let’s take the case of the virtual shopping site, eBay. Before it became eBay, it was a sole proprietorship called Auction Web and belonged to Pierre Omidyar. The company had already sold over a million items and hired several employees before its name was changed to eBay in the late 1990s, after which the business was incorporated. eBay might never have become what it did if Omidyar hadn’t first started it as a sole trader. Entrepreneurs regularly go the sole proprietorship route as a way to move on to starting a limited liability company.
Having outlined all the advantages, it’s important to remember that the drawbacks of being a sole trader must also be taken into account. Let’s dive into them.
Disadvantages Of Being A Sole Trader
Even though sole proprietorship holds out several benefits for young entrepreneurs, they need to weigh their options carefully as the disadvantages are significant as well. What are some of them?
1. Unlimited Personal Liability
There’s no way around this. The liability of a sole trader is unlimited. Given that sole proprietorship doesn’t hold out a legal distinction between the business and its owner, the latter will be held personally and fully liable for the organization’s debts. Thus, if the business incurs steep losses or if litigation is filed against the sole trader for damages caused by accident or owing to negligence while carrying out business activities, their personal assets will be at risk.
2. Not Considered Legitimate Enough
Another problem is that sole proprietorships are oftentimes not viewed through the same lens of legitimacy or considered as professional as a partnership company or a limited company. As a result, several corporations, consultant bodies and government organizations are reluctant to do business with sole traders. Another reason for this reluctance is that taxation bodies often tend to regard sole proprietors working with larger organizations as employees instead of independent contractors.
3. Getting Funding Is Difficult
Sole proprietorship severely limits investor opportunity, as it’s exclusively owned. This inability to sell a stake in the organization makes it tough to raise capital. Investors and banks will think twice before injecting money into a sole proprietorship owing to their skepticism about repayment in case the venture fails.
4. Tough To Sell
The nature of a sole trading concern makes it difficult for the owner to sell. Given that there is no separation between the business’s assets and those of the owner, getting a clear valuation of the business becomes tricky. Moreover, customer loyalty in the case of a sole proprietorship usually tends to be for the original sole trader. This sometimes tends to make sole proprietorships an unattractive prospect for buyers. One way to tackle a problem like this is to develop the skills to make impactful sales.
5. It Can Get Lonely
While sole traders do have employees–sometimes several–and must lead with empathy, as the business owners they’ll still be taking all the main decisions. As a result, the business owner is the only one with accountability. Such a position is a lonely one to be in; there’s no one to brainstorm or share ideas with, and one bad move could spell doom for the organization. While doing business with other people does necessitate sharing power and control, the promise of a collaborative work environment of equals, where ideas and accountability are shared, might be worth the sacrifice.
Having considered all these factors, sole proprietorship is a significant step to take in an entrepreneurial journey. Deciding whether or not to become a sole trader will require a lot of thought and reflection on the part of entrepreneurs. Harappa’s Big-Picture Thinking pathway is designed to help learners make that choice. With the help of Thrive Skills such as Instinctive Adaptability and Critical Thinking, ambitious professionals will be able to rapidly move between ideas and easily detect patterns, trends and connections. Under the guidance of an outstanding faculty who teach techniques like The Bi-Focal Approach and The Problem-Solver’s Mindset, learners will be taught to think holistically, consider multiple perspectives, balance thought and action and respond easily to change. Sign up for the Big-Picture Thinking pathway and develop a holistic approach to finding solutions!
