What is Sole Proprietorship?
A Sole proprietorship is a business, owned, controlled and managed by a single individual. A Sole Proprietor reaps the financial rewards and is responsible for all risks and liabilities while conducting the business. It is suitable for individually managed occupations like salons or small retail shops.
Features of Sole Proprietorship
The main features of a Sole Proprietorship are as follows:
- Legal Formalities – No legal formalities are required to either commence or to shut down a sole proprietorship. But the owner must have a special license or certificate to run the business for specific occupations. For example, a sole proprietor planning to start a pharmacy must have a pharmacist’s degree.
- Unlimited Liability – The sole proprietor is liable for the success or failure of their financial transactions. In case the proprietor takes a loan and fails to repay it, the creditors can attach the business owner’s property to recover the loans.
- Risk and reward – A sole proprietor has complete ownership over the profits or losses from their firm’s operations.
- Control – The rights and responsibilities of a sole proprietorship lies solely with its owner. No other person can interfere in the business activities of a sole proprietor without prior permission.
- Separate Entities – The owner and their business are separate entities in most forms of business organisations except sole proprietors. The entity has no identity without the proprietor since that person carries out the day-to-day activities of the business.
- Continuity of business – The existence of a business is related to its owner. Events like death, insolvency, imprisonment, terminal illness, etc., of the sole proprietor can adversely affect the business or force it to shut down permanently. If there is a legal heir or beneficiary to the sole proprietor, that person can run the entity if the proprietor cannot continue.
Advantages and disadvantages of Sole Proprietorship
There are several benefits as well as limitations of running a sole proprietorship. We will discuss some of those points below:
- Swift decisions – A sole proprietor has complete responsibility in terms of making business decisions. It results in faster decision-making for the business as there is no need to consult multiple parties for every minor issue.
- Confidentiality – A sole proprietor can keep all business-related information to themselves as the business’s only decision-maker. The law does not bind them to make the accounts of a sole proprietorship public.
- Profit-sharing – A sole proprietor has complete ownership of profits arising from business operations. They are not obligated to share profits with anyone else.
- Fulfilment – Since a sole proprietor is responsible for both risks and rewards of their business, even a minor success can give a greater feeling of pride and satisfaction than other business forms.
- Lack of Resources – It is challenging to raise vast amounts of capital in a sole proprietorship compared to a partnership or company. This form of business runs mainly on personal savings and borrowings made by its owner. Lack of adequate finances can become an obstacle in growing the business.
- Dependence on owner – The owner and their business are a singular entity in a sole proprietorship. While this has several advantages, the continuity of this form of business depends solely on the owner’s well being. In case of death, insolvency, imprisonment, etc., it can shut down if there is no successor or heir to continue the business.
- Unlimited Liability – If the proprietor cannot pay debts arising out of business from its assets, his/her personal property is also at stake. This results in sole traders taking zero or very minimal risks to ensure the survival of the business.
- Management – The proprietor has to perform most or all the activities related to the business like purchase, client relationships, sales, marketing, accounting, etc. They may employ others to help in business operations, but limited finances may prevent the owner from getting full-time staff and give them attractive remuneration. As such, the proprietor may have to carry out all activities without much assistance from others.
Sole proprietorship is a fascinating form of business, but it comes with its own set of limitations. It is suited to certain occupations and it allows complete control over decision making and profit-sharing. Still, there is also a risk of considerable liabilities in case of failure of a business.