Advantages and Disadvantages of Operating as a Sole Trader - Essay Example

E-Business Environment Name Institution E-business Environment A sole trader is a business that is controlled and owned by a single individual who takes all the profits, decisions, and responsibilities of the business they run. Although, they are capable of employing workers, a sole trader does not have a separate authorized existence from the owner. The owner is personally liable for the debts incurred by the business, and may at times have to pay the liabilities out of his own pocket. Advantages of Operating as a sole trader The advantages of operating as a sole trader are numerous taking into account that the owner is in full control of the daily business operations, and determines how large they wish to grow the business. It is easier to establish and run, and only requires the owner's consent to start. It has few legal requirements, for instance the owner needs to inform the Inland Revenue Authority that he or she is self employed within the first three months after starting the business. A sole trader is not required to complete the numerous accounting information and forms that limited liability companies have to produce. However, their accounts ought to be developed as they prepare for the yearly self-assessment tax revisit where they should declare their annual tax liability and profits. Since there is no staff at hand, the owner enjoys all the profits realized by the business, and most of the financial information is kept private. Unlike in limited liability companies where the files and accounts of each year are kept at the company’s house. The owner does not need to register the company anywhere, and the business can operate anything they feel will suit their customers needs. The process of decision making is fast as it is only the owner who decides what to do, where the business is heading, whether to or not undertake certain works, and when or where the business will work. The owner is closer to customers and provides a personalized approach and enhanced customer service since they are in contact with each other. Sole trader operation is a cheaper business option to set up, and the simplest to administer in comparison with other business structures. There, may be no set-up costs incurred unless a name is required for the business. Moreover, the only administration system needed is a bookkeeping or accounting system which provides a statement revealing the business expenses, revenues, profits, and losses. Disadvantages of Sole trader Operation Unlimited liability This is the main disadvantage of sole traders in that the owner of the business is liable if the business incurs debts. In case of the business fails, the creditors may recover their dues not only from the business resources, but also from the owner's personal belongings. Adverse business conditions or poor decisions to lead to severe financial burden to the owners. This is the reason why sole traders are less prone into taking risks for expansion or innovation of their business. Limited resources A sole trader’s resource is limited to their personal saving and loans from friends and other institutions. Banks, together with other lending institutions, may waver to extend long term loans to sole traders. Inadequate resources are among the crucial reasons why the size of small businesses seldom much, but would forever remain as small enterprises. Limited business life The law sees the sole trade business, and the owner as one and the same thing. Insolvency, illness or death of the owner affects the business and can lead to its permanent closure. Limited managerial ability The owner presumes the various managerial responsibilities such as selling, purchasing, auditing, and financial. It is impossible to find a person who well versed in all areas. The decisions made may not be balanced at all times, and also due to the limited resources sole traders may be incapable of employing and retaining ambitious and talented employees. Organizational change is a common concept found among many businesses. Change plays a significant role in making the sole trade business more productive. A sole trader who wishes to expand his business to other regions should consider various factors, which can affect the business performance and production in the market. Implementing and planning out strategies is an extremely essential factor that the owners must consider before expanding the business. This portrays the business image to the external environment and can positively or negatively affect the business operations. The external environmental factors that the owners should take into consideration before expansion include; Social factors The owners should take into account the effects of changes in demography to consumers buying patterns. Legal factors These include the legal pressures that force the business to change and comply with the law, for example the business response to environmental Legislations. Economic factors The owners must consider issues such as the booms and slumps of the economic activities, changes in interest rates, and inflation rates since these affect the business operation. Technological factors The owners should consider new developments in technology to ensure that the services they provide is modern and satisfies the consumer demand. These could involve the development of web based methods of advertising and selling their products to reach a wider market. The shortcomings of using diesel cars relate to their environmental impact. Engines that are driven by diesel tend to release particulates such as nitrogen oxides and soot, which contribute to the formation of smog. The presence of a high carbon content in diesel allows it to emit more carbon dioxide as compared to gasoline. The high fuel economy of diesel decreases the quantity of greenhouse gas emissions throughout the car’s lifetime. Certain fuel additives, like detergent and smoke suppressants, have been invented to decrease the effects of diesel fuel. These smoke suppressants are organic composites that minimize the amount of soot released by the diesel engines, but on the contrary they also enhance the number of microscopic particles emitted into the atmosphere together with sulfate emissions. Diesel is among the largest air pollutants known worldwide, and will continue to be an environmental problem. Diesel discharges contribute to cancer development; respiratory and cardiovascular health effects; water and soil pollution; visibility reduction; and global climatic changes (Chang, 2011, p. 1). To counter these problems, control programs have been instituted to reduce diesel fleet emissions. Changes in the fuel content, such as reduced sulfur and aromatics, have revealed improvements in the diesel car engines. Technological changes such as modification of engines, catalytic treatment, and exhaust gas recirculation have also resulted in crucial emission reductions. Modern technologies such as fuel cells and hybrids have also shown fundamental promises in reducing gas emissions from diesel sources (Bjornstad, 2010, p. 1). The companies involved in the diesel car manufacture managed to counter the negative image on their products by advancing their technologies. Diesel fuel has been made more clean and a possible alternative to petroleum. Diesel engines are more powerful and have reduced noise than they used to be in the past. The increased diesel fuel economy is an additional advantage in the development of diesel Automotives (Lloyd & Cackette, 2001, p. 1). Vehicle Carbon monoxide Carbon dioxide Hydrocarbons Nitrogen oxides Particulate matter Diesel car without a catalyst 2 85 3 31 100 Petrol car without a catalyst 100 100 100 100 ------ Petrol car with a catalyst 42 100 19 23 ------- The Law of diminishing returns This is a concept in economics stating that if a factor of production, such as capital or labor, is increased, with the other factors kept constant, the generated output per unit of the additional input will eventually diminish. The law of diminishing returns explains that extra capital, extra labor, extra land, or extra machinery may necessarily not increase the output as is expected. A good is seen when, the supply of raw materials is increased to a production line. This may result in additional production as the workers utilize all their spare capacity. However, once they have exhausted all their capacities, continuous increase in raw materials without a corresponding rise in the number of workers would not yield an increase in production output (QFINANCE, 2012, P. 1). Fixed costs in economics refer to the expenses incurred by the business that are independent of the goods and services produced by the company. They include rents paid per month, building, and machinery. They are often known as overhead costs. Variable costs, however, those costs that vary as the level of production changes. These costs rise at a constant rate as capital and labor. Variable costs include utilities, wages, and production materials. When a company’s income statement is being analyzed, it is essential to take into consideration that increasing costs are not always a sign of trouble. Whenever there is a rise in sales more units have to be produced, which means an increase also on the cost of variable production. This signifies that expenses rise as revenues increase accordingly. Variable costs usually factor in the calculation of break-even points and profit projections for businesses or projects. Some costs may vary in a piecewise manner following a change in output, and therefore, would not remain constant per unit output. For example, a manager’s salary does not vary with the quantity of units produced. However, when the production falls or reaches zero, layoffs may occur. This shows that all costs become variable in the long run. A good investor should make an educative forecast on how the business will respond to the various operating conditions, and among the key determinants is the ratio of variable costs to fixed costs (Peavler, 2012, p. 1). Maximizing profit is the process of recognizing the significant way of attaining the highest return rates from a production model. Numerous approaches are applied by organizations and businesses in the quest for high profit margins. The most significant approach requires the business to look closely at the production costs, the price of each unit, and the present levels of demand and supply. The process involves a detailed examination of all aspects of the business operation, the market place recent status, targeted customers' needs, and the market share held by competitors. External relations are also a crucial factor which firms must take into consideration for it to be successful. This determines how the business interacts with other business, community, and the external environment (Geek, 2012, p. 1). References Erik Bjornstad. (2010). Most Common Diesel Fuel Problems. Retrieved from. http://ezinearticles.com/?Most-Common-Diesel-Fuel-Problems&id=5085791. Lloyd and Cackette. (2001). Diesel Engines: Environmental Impact and Control. Retrieved from. http://www.ncbi.nlm.nih.gov/pubmed/11417675. QFINANCE. (2012). Law of Diminishing Returns. Retrieved from. http://www.qfinance.com/dictionary/law-of-diminishing-returns. Rosemary Peavler. (2012). Fixed and Variable Costs. Retrieved from. http://bizfinance.about.com/od/pricingyourproduct/qt/Fixed_Variable_Costs.htm. Vivian Chang. (2011). Diesel Fuel is More Economical, but Comes With Side Effects. Retrieved from. http://thetartan.org/2011/2/21/scitech/diesel. Wise Geek. (2012). What is Profit Maximization? Retrieved from. http://www.wisegeek.com/what- is-profit-maximization.htm. Read More