Mushu fa

PERFORMANCE OF

SOLE Trader

{A CASE STUDY ANALYSIS}

NAME-reshma rivonkar

ROLL.NO-C11-350

DATE-06/09/2013

Chapter 1:

Meaning

Features

Advantages and disadvantages

Sources of finance available to sole trader

Procedure of registration

Tax benefits of choosing a sole proprietorship

SOLE TRADER

MEANINGA sole trader, also known as the sole proprietor or simply a proprietorship, it 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. One person starts the business, manages the business and shares the profit or loss in it.

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.

What is a Sole trader or Sole Proprietor Form of business?

The sole trader is the oldest and most popular type of business. It is a form of business where there is only one owner who manages and controls the business. A sole proprietorship is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners.A sole proprietorship essentially means a person does business in his or her own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.A sole proprietor may do business with a trade name other than his or her legal name. In some jurisdictions, for example the United States, the sole proprietor is required to register

the trade name or "Doing Business As" with a government agency. This also allows the proprietor to open a business account with banking institutions.

Features of Sole Proprietorship

The salient characteristics or features of sole proprietorship

are:

1. Formation and Closure: Sole proprietorship is very easy to

start as no legal formalities are required to start it (though in

some cases, one may require a license). There is no separate

law that governs sole proprietorship. It can easily be

dissolved (or closed) when the sole trader is interested. So,

there is ease in formation as well as closure of business.

2. Liability: The liability of the owner (i.e. sole proprietor) is

unlimited. It means that the owner is personally liable for

payment of debts if assets of the business are not sufficient

to meet all the debts. In other words, his personal property

may be sold to pay business debts in case the debts exceed

the assets of the firm.

3. Sole Risk Bearer and Profit Recipient: Sole proprietor is

the sole owner who is responsible for all the business affairs.

Any risk of failure of business is borne all alone by him.

Similarly, if the business is successful, he receives all the

business profits which become a direct reward for his risk

bearing.

4. Control: Sole proprietorship is a one man show, i.e. right

to run the business and to make all the decisions, lies

absolutely with the sole proprietor. He can carry out his

plans without any interference from others.

5. No Separate Entity: A sole proprietorship has no legal

existence, i.e. in the eyes of the law , no distinction is made

between the firm and the proprietor. As a result, owner is

held responsible for all the activities of the business.

6. Lack of Business Continuity: As owner and business are

one and the same entity, death, physical ailment or

insolvency of the proprietor has a direct and harmful effect

on the business. It may even lead to closure of the business.

ADVANTAGES OF SOLE TRADER

If entrepreneur starts sole proprietor form of business, then he has the following advantages.

1-Easy formation:

The formation of sole proprietorship business is very easy and simple. No legal formalities are involved for setting up the business excepting a license or permission in certain cases. The entrepreneur with initiative and certain amount of capital can set up such form of business.

2-Direct motivation :The entrepreneur owns all and risks all. The entire profit goes to his pocket. This motivates the proprietor to put his heart and soul in the business to earn

more profit. Thus, the direct relationship between effort and reward motivates the entrepreneur to manage the business more efficiently and effectively.

3-Better control:

The entrepreneur takes all decisions affecting the business. He chalks out the plan and executes the same. His eyes are on everything and everyone. There is no scope for laxity. This results in better control of the business and ultimately leads to efficiency.

4-Promptness in decision-making:

When the decision is to be taken by one person, it is sure to be quick. Thus, the entrepreneur as sole proprietor can arrive at quick decisions concerning the business by which he can take the advantage of any better opportunities.

5-Secrecy:

Each and every aspect of the business is looked after by the proprietor and the business secrets are known to him only. He has no legal obligation to publish his accounts. Thus, the maintenance of adequate secrecy leaves no scope to his competitors to be aware of the business secrets.

6-Flexibility in operations:

The sole proprietorship business is undertaken on a small scale. If any change is required in business operations, it is easy and quick to bring the changes.

7-Scope for personal touch:

There is scope for personal relationship with the entrepreneur and customers in sole proprietorship business. Since the scale of operations is small and the employees

work under his direct supervision, the proprietor maintains a harmonious relationship with the employees. Similarly, the proprietor can know the tastes, likes and dislikes of the customers because of his personal rapport with the customers.

8-Inexpensive formation and management:

The cost of formation of a sole proprietorship is the minimum because no cost is involved in its formation excepting the license fee in certain cases. The management of the business is also inexpensive as no specialists are normally appointed in various functional areas of the business which is the added advantages.

9-Free from Government control:

Sole proprietorship is the least regulated form of business. Regulated laws are almost negligible in its formation, day-to-day operation and dissolution.

10-Easy dissolution:

Like that of formation, the dissolution of the sole proprietorship is also very easy. Since the proprietor is the supreme authority and no regulations are applicable for closure of the business he can dissolve his business any time he likes.

11-Socially desirable:

New and small entrepreneurs can take up business on small- scale basis. There will be no scope for concentration of wealth in few hands. Sole proprietorship continues its operation in almost each and every area of business activity and caters to the need of the society. Further, it provides

ample opportunities for large-scale self-employment for rural and less skilled personnel. Thus, it is socially desirable.

DISADVANTAGES OF SOLE TRADERThe sole proprietorship business is not free from criticism. It suffers from certain limitations and drawbacks, because of its very nature and scope of operations. These points may be duly taken care of while entrepreneur adopting this mode of business.

1-Limited resources:

The financial resources of any small entrepreneur as an individual are limited. He mainly finances from his own savings or borrows from financial institutions, friends and relatives as per his capacity. Thus, limited resource is the major drawback of this form of business.

2-Limited managerial capability:

Modern business requires updated managerial skills in each and every sphere of activity. We cannot hope a single individual to possess all the managerial talents necessary to carry on a business efficiently. The limited financial resources of the sole proprietorship are a hindrance to hire the services of managers with expertise in different areas, thereby the growth of the business.

3-Unlimited liability:

Since the liability of the sole proprietor is unlimited, the private properties of the proprietor are also at risk. When the business fails, the private properties of the owner are utilized

to pay off the business debts. Thus, the entrepreneur must have to look this aspect carefully.

4-Uncertainty of continuity:

The continuity of the business is uncertain because the business may come to an end due to the incapacity or death of the proprietor. Even if at all the business passes on to the successor of the proprietor, it is unlikely that they may possess the business acumen like that of the proprietor. The discontinuance of the business is a social loss.

5-Less scope for economies of large-scale:

The economies of large-scale operation are enjoyed only by a large-scale enterprise, which the sole proprietorship business normal lacks. Therefore, there is less scope for availing the economies of large-scale.

6-Not suitable for large-scale business:

The limited financial resources, limited managerial capability of the proprietor, risk to the private property etc. makes the so proprietorship business unsuitable for large-scale business. This system of business cannot afford for large-scale operation

7-Difficult to maintain personal contact:

Even though there is scope for personal touch in sole proprietorship business, it is unlikely to happen when the business is undertaken in different areas. It is not so easy on the part of the proprietor to have personal contact with customers and suppliers at the same time.

Sources of finance available to a sole traderAs the size of business is small, finance needed is also limited;

1-Use of personal savings

This means the surplus money available with the proprietor himself. He uses his own savings for starting business. Such savings may be limited but bay be adequate to meet the initial financial needs of his business. A small retailer can start and manage business with his own savings.

2-Loan from relatives and friends

With the expansion of business, a proprietor may need more capital for his growing business. Here, bank loan may not be available. Naturally, he has to take loans from his relatives and close friends for short duration (for example, loan before festival season which can be repaid after the season is over). Such loan carries interest but the rate may be low and the proprietor can pay such interest out of the seasonal profits made.

3-Loan from Indigenous bankers

Sole proprietor can also take temporary loan from indigenous banker operating in his area. Such loan will be for short duration and the loan will carry high interest rate. Repayment and all will be decided as per negotiations with

the indigenous banker. The formalities in granting the loan also limited.

4-Credit facility from commercial/ co-operative bank

Sole proprietor can also take temporary loan from the local co-operative or commercial bank. It may be in the form of overdraft facility or cash credit arrangement. Here, the proprietor has to pay higher interest rate and security (for loan) acceptable to bank. Banks provide credit facility to all types of business organisation’s including sole proprietor.

5-Trade Credit

This temporary credit facility is available to sole proprietor provided, he is running business in an orderly manner and supplier has favorable opinion about the proprietor the benefit of cash discount will be available only when the payment for goods purchased is made within the time limited.

Procedures of registration of sole trading concern

Sole proprietorship allows you to run and own your business as an extension of your personal finances rather than as a separate entity. If you want to establish a small firm in India without the complications of corporation formation and registration, a sole proprietorship will allow you to do so. Sole proprietorships are the most common type of business in India because of the easy procedure for establishing them.

Registration

Sole proprietorship firms in India do not submit company registration to the national government. National company registration is only required of corporations. You may wish to form a sole proprietorship rather than a corporation simply to avoid the complicated bureaucracy of national registration.

Depending on the state and city that your firm operates in, you may be required to register with local government. Most local governments do not require registration, but some do, so check your local government's commerce website or visit the local commerce building to find the procedure you should follow.

Although your sole proprietorship firm does not need to register as a company with the Indian government, you may wish to submit an employer registration. Employer registration is an optional service that allows you to use the government's infrastructure to search for employees. If you are having trouble finding employees, this is a valuable resource.

Taxes

India taxes the profit from your sole proprietorship as personal income, and you do not need to complete any additional forms to pay these taxes. Depending on the nature of your business, though, you may need to pay additional types of taxes, which you will have to complete registration for. Sales tax is the most common example of this. To register your business as a goods provider you must visit your local government commerce building and complete a short form.

Local Laws

The national government tries to remain hands-off for sole proprietorships to encourage the creation of new businesses, but you must always thoroughly check the local business laws before establishing a sole proprietorship in India. The procedures for registration of the firm can vary greatly between different cities. In addition, many local laws limit the types of business that can be done by sole proprietorships, and which apply additional taxes to sole proprietorships.

The impact of local laws can change drastically depending on the type of sole proprietorship that you are running. A goods dealer in a storefront should expect different regulations and taxes than a consultant operating from his home. Be sure to check the rules relevant to your business.

Tax Benefits of Choosing a Sole Proprietorship As Your Business Structure

Before starting a business, it is worthwhile to consult a tax accountant or business attorney. If you are unsure of the best type of legal structure for your business, you may need a professional to help you determine the most advantageous way to set up your business.

Every type of business structure offers specific tax advantages and disadvantages. Here are some of the tax and financial benefits to establishing your business as a sole proprietorship:

1-Easier Tax Returns to File: Tax returns for sole proprietorships are the simplest to prepare, are filed on the sole proprietors (business owner’s) tax returns. If you can prepare your personal tax returns, chances are pretty good you can easily prepare your own business taxes for a sole proprietorship. Filing tax returns on sole proprietorships involves preparing a simple, one- to tow-page IRS form; the Schedule C. In most cases, you do not even have to provide lengthy data and the income and expenses you list on a Schedule C are fairly crude.

2-Free from Mandatory outside Audits:

If you do not have to pay someone to do your business taxes for you, the savings could easily amount to several hundred dollars. You will also not have to pay for an independent audit, which can run into the thousands of dollars.

3-No Tax Penalties for Dissolving the Business: if you wish to dissolve the company, there are any special requirements to do so. In other types of business structures, there are legal requirements that govern how you close out a business. Some of these requirements can have tax implications that are not imposed on sole proprietorships.

4-You Can Steer Money to Drive Your Own Deductions: As a sole proprietor you own and manage your business. This means you determine spending, borrowing, and reap all the profits yourself (unless you have investors).You can hire and fire and determine salaries of employees. Having this freedom to make decisions indirectly affects your taxes because you can make any adjustments in cash flow and payroll needed to keep your business finances in check. For example, if your profits are high and you need more tax

write-offs, you alone get to decide how to off-set your income.

5-Big Tax Savings on Healthcare Reimbursement Arrangements: Savvy sole proprietors can also use Healthcare Reimbursement Arrangements (HRAs) to get access to healthcare with the added benefits of double tax deductions.

6- Boss Your Kids Around and Get Tax Deductions For It! Sole proprietors can hire their own minor children and not pay any payroll taxes until they turn 18. There are some restrictions, but they are few. Other employees typically trigger payroll taxes of at least 7.65% of wages paid.

No matter what type of business structure you form you will have to report your salary, profits and losses, and other financial information on tax returns. An advantage to forming a sole proprietorship is that although your business income counts as your personnel income, any losses your business takes may also be deductible for you. Business deductions for a sole proprietorship generally can reduce your personal taxes as well.

Chapter 2

A CASE STUDY

ROHINI GENERAL STORES

Rohini General Stores is a FOOTWEAR shop started in the year 1980.

It is situated near the station road, Curchorem Goa. The owner of this shop is Mr. Kishor R. Kudalkar. It is a showroom for footwears. Initially in the year 1980 , he invested his own capital of Rs.80,000 to start the business. He has registered his shop with municipality and sales tax registered in curchorem , Income tax office South Goa. He does not have any godown. He buys goods from R.K Traders , Vinayak Traders ,R.K Footwear , etc.

He sells footwear products like paragon, vikeshi, Bata, Lancor, Action and so on.

He buys goods on 1 month credit basis. Whatever old stock remains he sells it. He has employed 3 workers in the shop and pays them Rs.5000 p.m. He insured his goods against fire. Type of insurance is United Fire. He sells goods at a profit margin of 15-20 %. He has one fix person as accountant and he’s being paid Rs. 5000 p.m

Before he had a garment shop. He closed down that business and he started a footwear shop. Now he is doing a good business. So far he has not expanded his business of footwear. His shop is situated near the market area hence he

is able to grab more customers. He has many competitors like Sitara shop , Shoe Palace.

He gives his customers 10 days to exchange their goods after which he does not accept.

He is purchasing good quality footwear and has variety of choices and therefore more customers get attracted towards his shop. His working hours is from 9.00 a.m to 8.00 p.m.

During festival season he is providing discount on his footwears. During festivals like Raksha Bandan , Ganesh chathurthi etc he is also keeping other items such as rakhi’s ,fire crackers and so on in order to earn more income.

The owner of the shop was not ready to give the accounts so he orally told me his yearly accounts. He purchases Rs.1,80,000 worth of goods. His yearly turnover comes to Rs.21,00,000 per annum.

According to the oral information given by him ,

I have tried to prepared his Profit and loss account

Profit and loss a/c

Particulars Rs Particulars Rs

ToOpening stockToPurchasesTo Freight and cooliesTo G.P

4,00,000

18,00,000

14,0001,86,000

By salesBy closing stock

21,00,000

3,00,000

24,00,000 24,00,000To printing and stationeryTo salary To travellingTo electricityTo insuranceTo telephoneTo accountant chargesTo N.P

150005000 p.m800080002000 p.m200 p.m5000

1,42,800

By G.P 1,86,000

186000 186000

INTERPRETATION:

The given account is appearing in the books of Rohini General stores.The given account is a profit and loss account

The business had a opening stock of Rs.4,00,000. He purchased 18,00,000 worth of goods during the year and paid 14,000 as freight and coolie charges.

He made a yearly turnover of Rs 21,00,000

And had a closing stock of Rs 3,00,000

His gross profit is quite satisfactory.

He paid expenses like printing and stationery, salary, travelling, electricity charges , insurance ,telephone, and accountant charges.

His net profit for the year is 142800

Overall, the business has made profits which means it is working in efficient manner

CONCLUSION AND SUGGESTIONS:

“ Innovation distinguishes between a leader and a follower.”

The Owner of Rohini General Store is truly a leader and not a follower. He made a right decision to close down the garments shop because he was not earning much in that business, so he believes in innovations and hence he went into a different line of business.

The owner said, “I don't know if I am a good or a bad entrepreneur. All I know is that when I believe in something I fight for it.

It is concluded that sole proprietorship is a popular form of business among other form of business units due to it’s :

Complete secrecy of information Undivided profit Self control

Reference : Personal interaction with Mr. Kishor Kudalkar http://en.wikipedia.org/wiki/Sole_proprietorship http://www.preservearticles.com/201101153393/

advantages-and-disadvantages-of-sole-proprietor-form-of-business.html

http://www.ehow.com/way_5380794_procedure-proprietorship-firm-registration-india.html

http://womeninbusiness.about.com/od/taxinformation/a/6-tax-solprops.htm

http://studycorner.in/index.php/features-of-sole-proprietorship/