What is Sole Proprietorship?
When the ownership and management of a business are in the control of one individual, it is known as a sole proprietorship or sole trader-ship. In every country, every state, every locality Sole Proprietorship is seen everywhere.
For example, the shops or stores that one sees in his/her locality i.e. the vegetable store, the sweets shop, the grocery store, the chemist shop, the Paanwala, the stationery store, the STD/ISD telephone booths, etc. come under sole proprietorship.
It is not necessary that a sole trader-ship business must be a small one but, it is also possible that the volume of activities of such a business unit may be quite widespread or large. In general, since such a business is owned and managed by one single individual, often the size of the business remains small.
Characteristics of Sole Proprietorship
- Ownership of Business
- Managing Business Activities
- Supply of Capital
- Lawful Standing
- Unlimited Liability
- Stability of Business
- Legal Formalities Involved
Ownership of Business
One single individual got legal title to the assets and properties of the business and the business enterprise is owned by the individual. The sole proprietor bears the entire risk or loss of the firm and the entire profit arising out of the business goes to the owner.
Managing Business Activities
The sole proprietor is the sole decision maker for managing all the aspects of the business. As the manager of the business is the owner of the enterprise he enjoys the absolute right to plan for the business and execute them without any interference from anywhere or from any person.
Supply of Capital
The entire capital requirement of the business is endowed with the owner and if required in addition to his own capital he may raise more funds from outside through loans from banks or other financial institutions and through borrowings from close relatives or friends.
The proprietor and the business enterprise are one and the same in the eyes of the law and enjoy no separate legal existence. The business assets and the private assets of the sole proprietor are the same. The business comes to an end in the absence of the owner.
So far as the liability of the sole proprietor is concerned he carries the entire responsibility of business and hence the liability is unlimited. The personal property of the sole proprietor can be used to meet liabilities in case he fails to pay for the business obligations and debts arising out of business activities.
Stability of Business
The capacity, competence, and life span of the proprietor determines the stability and continuity of the sole proprietor business.
Legal Formalities Involved
No legal formalities need to be followed in setting up, functioning, and dissolution of a sole proprietorship business. Only for setting up a particular type of business few legal restrictions may be there and need to be followed.
For example, to open a chemist shop, the individual must have a license from the Government; to open a restaurant, the sole proprietor needs a license from the local municipal authority.
Advantages of Sole Proprietorship
These are some important advantages of sole proprietorship:
- Easy Formation
- Flexibility in Operations
- Maintenance of Business Secrets
- Better Control on Business
- Prompt Decision Making
- Direct Incentive
- Better Care of Consumer Needs
- Employment Opportunities
- Social Benefits
- Distribution of Wealth in Society
The major advantage of a sole Proprietorship form of business is no formalities or uncomplicated formalities are needed. Any person who wishes to start such a business can easily do so in many cases without any legal formalities.
Flexibility in Operations
To bring changes in any process or system of business the owner can do it as many times as required as he is not required to get permission or approval from others. One-man ownership and control make it possible for a change in operations to be brought about as and when necessary. In addition to this, the owner is not required to submit the results of the business to the prescribed authorities.
Maintenance of Business Secrets
The owner of a sole proprietorship business enjoys another important advantage, that is, he is in a position to maintain absolute secrecy regarding his business activities as he is not expected to report about the performance of his business.
Better Control on Business
Since the Sole Proprietor has all authority in formulating plans, organizing, and coordinating various activities he as an owner has full control over his business. He develops and implements effective control mechanisms.
Prompt Decision Making
Quick and timely decision-making becomes possible as the sole trader makes all the decisions himself which enables the owner to take care of or grab available opportunities immediately and also help in identifying and formulating immediate solutions to problems.
The owner can easily see the incentives available to him for carrying the risk of doing business. Therefore, the owner is directly motivated to put in his best efforts as he alone is the beneficiary of the profits earned. The sole trader is the only person to whom the profits belong. This always acts as a stimulant to personal incentive.
Better Care of Consumer Needs
Personal Attention to Consumer Needs is possible for sole proprietors. One generally finds the sole proprietor taking personal care of consumer needs as he normally functions within a small geographical area. Due to the limited scope of business customer care is facilitated.
The Sole Proprietor form of business promotes and motivates entrepreneurial skills among individuals. A sole Proprietorship form of business facilitates self-employment and also generates employment for many others.
As the sole proprietor is the master of his own business; and enjoys absolute freedom in making decisions, he can use his skill and capabilities for maintaining and developing his/her business. Through this, he is able to satisfy his high self-esteem needs and able to earn self-respect in society.
Such a process will gradually help him acquire several social qualities like self-determination, self-reliance, independent thought, initiative, action, hard work, etc, Thus, he sets an example or becomes a benchmark for others to follow.
Distribution of Wealth in Society
A sole proprietorship form of business is generally in the form of a small-scale business, there is an opportunity for many individuals to own and manage small business units. Hence, it leads to the widespread dispersion of economic wealth and diffuses the concentration of business in the hands of a few capitalists.
Disadvantages of Sole Proprietorship
The disadvantages of sole proprietorship are given below:
- Unlimited Liability
- Limited Capital/Financial Resources
- Limited Capacity of Individual
- Uncertainty of Duration
All the liabilities of the business are recovered from the personal assets of the owner as the owner and firm are not different in sole proprietorship form of business. This unlimited liability aspect of business restricts the sole trader from taking more risk and increases the volume of his business.
Limited Capital/Financial Resources
For the growth of sole proprietorship, the inadequacy of finance is a major handicap. The ability to raise and borrow money by one individual is always limited hence such a business remains a small-scale business.
Limited Capacity of Individual
As one individual is responsible for managing the business this form of business organization faces several limitations such as an individual has limited knowledge and skill; his capacity to undertake responsibilities restricted by his limited knowledge and skills; his capacity to manage and make decisions in all the areas of business is restricted, and his capacity to take or to bear the risks of business are also limited.
Uncertainty of Duration
The life of the proprietor and the existence of a sole trader-ship are linked together. The illness, death insolvency, or bankruptcy of the owner brings an end to the business. The continuity of business operation is, therefore, uncertain as it is closely related to the existence of the owner.