Meaning of Sole Proprietorship
The word “sole” means “only” and “proprietor” means “owner”. So, a sole proprietor is the person who is the only owner of a business. Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks.
Features
- Formation and closure:
Very few legal formalities are required to start a sole proprietary business. Though in some cases a license may be required, there is no separate law that governs sole proprietorship. Closure of the business can also be done easily.
- Unlimited Liability:
Sole proprietors has unlimited liability. It means that the owner is personally responsible for payment of debts in case the assets of the business are less than his debts. His personal property can be sold for repaying the business liability.
- Sole risk bearer and profit recipient:
The risk of failure of business is borne all alone by the sole proprietor. But, if the business is successful, the proprietor enjoys all the benefits. His profits become a direct reward for his risk bearing.
4. Control:
The right to run the business and take all decisions is in the hands of the sole proprietor. He can carry out his plans without any interference from others.
5. No separate entity:
In the eyes of the law, no distinction is made between the sole trader and his business, as business does not have an identity separate from the owner. The owner is, held responsible for all the activities of the business.
6. Lack of business continuity:
As the owner and business are one and the same entity, death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct effect on the business and can cause closure of the business.
Merits of Sole Proprietorship
- Quick decision making:
A sole proprietor enjoys large degree of freedom in making business decisions. Further the decision making is prompt as there is no need to consult others. This may lead to timely use of market opportunities when they arise.
- Confidentiality of information:
Sole proprietor is in a better position to keep all the information confidential and maintain secrecy. A sole trader is also not bound by law to publish firm’s accounts.
- Direct incentive:
A sole proprietor directly enjoys the benefits of his efforts as he is the sole recipient of all the profit. The need to share profits does not arise as he is the single owner. This results in encouragement to him to work hard.
- Sense of accomplishment:
There is a personal satisfaction involved in working for oneself and realizing that the person himself is responsible for the success of the business this ultimately leads to confidence in one’s abilities.
- Ease of formation and closure:
There is possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. It is easy to start and close the business as per the wish of the owner.
Limitations of Sole Proprietorship
- Limited resources:
Resources of a sole proprietor are limited to his personal savings and borrowings from others. Banks and other lending institutions hesitate to extend a long-term loan to a sole proprietor. This is one of the major reasons why the size of the business remains small.
- Limited life of a business concern:
In the eyes of the law the proprietorship and the owner are considered one and the same. Death, insolvency or illness of a proprietor adversely affects the business and can lead to its closure.
- Unlimited liability:
Sole proprietor has unlimited liability. If the business fails, the creditors can recover their dues not only from the business assets, but also from the personal assets of the proprietor. That is why a sole proprietor is less willing to take risks in the form of innovation or expansion.
- Limited managerial ability:
The sole proprietor has to assume the responsibility of different managerial tasks like purchasing, selling, financing, etc. It is difficult to find an individual who is expert in all these areas Also, due to limited resources, sole proprietor is not able to employ and retain talented and ambitious employees.
Suitability of Sole Proprietorship
It requires less amount of capital. Sole proprietorship is particularly common in areas of personalised services such as beauty parlours, hair salons and small-scale activities like running a retail shop in a locality.