Lecture Notes: Forms of Ownership - Sole Traders

Introduction

• Second video in a series of three on forms of ownership.
• Focus on sole traders (also known as sole proprietorships).
• Emphasizes understanding from the first video as foundational.

Key Characteristics of Sole Traders

• Informality:
  • Not legally registered.
  • Considered informal businesses.
• Ownership & Control:
  • Owned and managed by one person.
  • Sole decision-maker.
  • Provides capital and performs most labor.

Advantages of Sole Traders

• Ease of Establishment:
  • No need for formal registration.
  • Quick and easy to start.
• Profit Retention:
  • Owner retains all profits.
• Personal Contact:
  • Direct interaction with consumers.
  • Ability to quickly respond to customer needs and demands.

Disadvantages of Sole Traders

• Unlimited Liability:
  • Owner is personally liable for all debts.
  • Personal assets at risk if business debts are unpaid.
• High Workload:
  • Owner manages all business functions.
  • No paid vacations; income depends on continuous work.
• No Continuity:
  • Business ceases to exist without the owner.
• Tax Implications:
  • Personal income tax applies.
  • Tax rate increases with income (up to 45%).

Summary

• Advantages Recap:
  • Quick to start, full profit retention, no formal documentation required.
  • Lower initial personal tax rate compared to fixed company tax rate.
• Disadvantages Recap:
  • High personal risk, workload, and no business continuity.
  • Potentially high personal tax rate as business grows.

Conclusion

• Sole proprietorship is a good starter form of ownership.
• Consider shifting to other forms as business grows for tax and liability benefits.
• Next video will focus on partnerships.