Sole Proprietorship – Easy Notes-22



Business Organisation

Sole Proprietorship

Sole Proprietorship - Easy Notes-22

Sole Proprietorship

  • Sole proprietorship refers to a form of organization where a business is owned, managed, and controlled by a single individual who bears all the risks and is the only recipient of all the profits merits of this form of an organization include quick decision making, direct incentive, personal satisfaction, and ease of formation and closure.
  • But this form of the organization suffers from the limitation of limited resources, the unstable life span of business, unlimited liability of sole proprietor, and his /her limited managerial ability.
  • A sole proprietorship is a popular form of business organization and is the most suitable form for small businesses, especially in their initial years of operation. This form of business is particularly common in areas of personalized services such as beauty parlors, hair saloons, and small-scale activities like running a retail shop in a locality.

sole proprietorship

Features of Sole Proprietorship

1. Formation and closure

There is no separate law that governs sole proprietorship. Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a license. Closure of the business can also be done easily. Thus, there is an ease in formation as well as the closure of business.

2. Liability 

Sole proprietors have unlimited liability. This implies that have to bring in Rs. 20,000 from her personal sources even if she has to sell her personal property to repay the firm’s debts.

3. Sole risk bearer and profit recipient

The risk of failure of a business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk-bearing.

4. Control

The right to run the business and make all decisions lies absolutely with 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 the business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business.

6. Lack of business continuity

The sole proprietorship business is owned and controlled by one person, therefore death, insanity, imprisonment, physical ailment, or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause the closure of the business.

Merits of Sole Proprietorship

A sole proprietorship offers many advantages. Some of the important ones are as follows:-

1. Quick decision making

A sole proprietor enjoys a considerable degree of freedom in making business decisions. Further, the decision-making is prompt because there is no need to consult others. This may lead to timely capitalization of market opportunities as and when they arise.

2. Confidentiality of information

Sole decision-making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. A sole trader is also not bound by law to publish the firm’s accounts.

3. Direct incentive

A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise as he/she is a single owner. This provides a maximum incentive for the sole trader to work hard. 

4. Sense of accomplishment

There is personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instills in the individual a sense of accomplishment and confidence in one’s abilities.

5. Ease of formation and closure

An important merit of a sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.

Limitations of Sole Proprietorship

Not standing various advantages, the sole proprietorship form of organization is not free from limitations. Some of the major limitations of a sole proprietorship are as follows:-

1. Limited resources

Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks and other lending institutions may hesitate to extend a long-term loan to a sole proprietor. Lack of resources is one of the major reasons why the size of the business rarely grows much and generally remains small.

2. The limited life of a business concern

The sole proprietorship business is owned and controlled by one person, so death, insanity, imprisonment, physical ailment, or bankruptcy of a proprietor affects the business and can lead to its closure.

3. Unlimited liability

A major disadvantage of a sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor. A poor decision or an unfavorable circumstance can create a serious financial burden on the owner.

4. Limited managerial ability

The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas.

Thus decision-making may not be balanced in all cases. Also, due to limited resources, sole proprietors may not be able to employ and retain talented and ambitious employees.

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