What is Sole proprietorship?

A Sole proprietorship can be explained as a kind of business or an organization that is owned, controlled and operated by a single individual who is the sole beneficiary of all profits or loss, and responsible for all risks. It is a popular kind of business, especially suitable for small business at least for its initial years of operation. This type of businesses is usually a specialized services such as hair salons, beauty parlors, or small retail shops.

Features of Sole Proprietorship

  • Formation and closure
  • Liability
  • Sole risk bearer and profit recipient
  • Control
  • No separate entity
  • Lack of business continuity

Advantages of Sole Proprietorship

Some of the popular advantages of a sole proprietorship are.

  • Quick decision making– A sole proprietor has the freedom to make any decision. Therefore, the decision would be prompt as they don’t have to take the permission of others.
  • Confidentiality of information- Being only the owner of the business, it allows him/her to keep all the business information to be private and confidential.
  • Direct incentive- A sole proprietor directly has the right to have all the profit or benefits of a company.
  • Sense of accomplishment- He/she can have the personal satisfaction associated with working without any guidance or alone.
  • Ease of formation and closure- A single proprietor can enter the business with minimum legal formalities.

(A) SOLE PROPRIETORSHIP

  • It is that type of business organization which is owned, managed and controlled by a single owner.
  • The word “sole” means “only” and “proprietor” notes to “owner”.
  • A sole proprietor is the beneficiary of all profits.
  • All risks are to be borne by the sole proprietor.
  • The sole proprietor has unconditional and full control over its business.
  • Example:

    Beauty parlour, barber shop, general store and sweet shop run by a single owner.

(B) FEATURES OF THE SOLE PROPRIETORSHIP FORM OF ORGANISATION ARE MENTIONED BELOW:

(1)FORMATION AND CLOSURE

  • This type of business organization is formed by the owner himself.
  • No legal conventions are obliged to start the sole proprietorship form of organization.
  • In some instances, the legal formalities are required or the owner should have a particular license or a certificate to run the business.
  • The owner can close the business at his own discretion.
  • Example:

    Goldsmith or a person running a medical shop should have a license to run this type of business.

(2)LIABILITY

  • In the sole proprietorship business, the sole owner has unlimited liability.
  • In this case, the owner is himself liable to pay all the liabilities. If he takes a loan for its business then he will be liable for all the debts.
  • Hence, he is personally liable for all the debt which can be recovered by his personal estate when funds are insufficient.
  • Example:

    A loan taken by the owner of the sweet shop is solely responsible for the repayment of the loan to the bank.

(3)SOLE RISK BEARER AND PROFIT RECIPIENT

  • A sole proprietor is only the one who bears all risks which are related to its business.
  • All the profits or losses which are earned from the business are to be enjoyed by the sole owner.

(4)CONTROL

  • As all the rights and responsibilities lie with the sole proprietor that is why he controls all the business activities.
  • No one can interfere in the business activities of a sole proprietor.
  • Hence, only the sole proprietor can modify his plans accordingly.

(5)NO SEPARATE ENTITY

  • According to the accounting system, the owner and the business are considered as two separate entities.
  • But the law does not make any distinction between the sole trader and its business.
  • Hence, without the sole trader, the business has no identity because he is the only person who performs all the business activities.

(6)LACK OF BUSINESS CONTINUITY

  • Death, imprisonment, physical ailment, insanity or bankruptcy of the sole proprietor will directly affect the business or it may cause shutting down of the business.
  • In the case of the beneficiary, successor or legal heir of sole proprietor, he can run the business on behalf of the proprietor.

Q.1 WHAT ARE THE MERITS OF THE SOLE PROPRIETORSHIP FIRM?

OR

WHAT DO YOU UNDERSTAND BY SOLE PROPRIETORSHIP FIRM? EXPLAIN ITS MERITS. {NCERT}

ANSWER:

SOLE PROPRIETORSHIP FIRM

  • It is owned, managed and controlled by a sole owner or sole proprietor.
  • A sole proprietor is the person who is the beneficiary of all profits earned in the business and bears all risks related to business.

SOME OF THE IMPORTANT ADVANTAGES OF SOLE PROPRIETORSHIP ARE AS FOLLOWS:

(1)QUICK DECISION MAKING

  • A sole proprietor exercises his right in making business choices.
  • It is easy for a sole trader to make decisions quickly, as he is the sole receiver of all the profits.
  • There is no need to share profits with anyone because he is the only investor who has invested money in the business.

(2)

CONFIDENTIALITY OF INFORMATION

  • A sole proprietor has the authority to make his decisions regarding business activities.
  • Since a sole owner is the only decision maker of the business, he keeps all the business related information confidential.
  • Hence, a sole trader is not bound by law to bring out its accounts in the eye of the public.

(3)DIRECT INCENTIVE

  • A profit is a reward for bearing risk by the proprietor in its business.
  • A sole proprietor is the only person who gains all the benefits arising from the business.
  • Hence, getting profits motivates the sole proprietor to give more efforts to get more benefits and higher growth in the business.

(4) SENSE OF ACCOMPLISHMENT

  • A small success of the business gives the feeling of fulfilment of goals of the business and he gets motivated.
  • Hence, getting profits or long term benefits gives him a feeling of personal satisfaction.

Q.2 WHAT ARE THE LIMITATIONS OF THE SOLE PROPRIETORSHIP FIRM?

OR

WHAT DO YOU UNDERSTAND BY SOLE PROPRIETORSHIP FIRM? EXPLAIN ITS DEMERITS. {NCERT}

ANSWER:

SOLE PROPRIETORSHIP FIRM

  • It is owned, managed and controlled by a sole owner or sole proprietor.
  • A sole proprietor is a person who is the beneficiary of all profits earned in the business and bears all risks related to business.

SOME OF THE PRIMARY LIMITATIONS OF SOLE PROPRIETORSHIP ARE AS FOLLOWS:

(1) LIMITED RESOURCES

  • Resources of a sole proprietor are limited to his savings and borrowings from the relatives.
  • Banks also hesitate or deny giving the long term loans or extend the limit of long term loans due to the weak financial position of the business.
  • Lack of all these resources results in hindrance in the growth of the sole proprietorship business
  • Above mentioned are the reason why the business generally remains small.

(2) LIFE OF A BUSINESS CONCERN

  • The owner and its business is the same entity and due to lack of successor or heir, the life of the business is limited.
  • Due to death, insolvency, illness of a proprietor gives a detrimental impact on the business which results in closure of the business.

(3) UNLIMITED LIABILITY

  • The major demerit of a sole proprietorship is that the owner has unlimited liability.
  • If the sole owner becomes fails to pay the debts, due to the failure of a business, the creditors would not only claim from business assets but also from his personal estate.
  • Taking a large amount of loan is too risky and also put the burden on the sole owner of the business.
  • Hence, this is the reason why sole traders do not intend to take the risk for the survival and growth of the business.

(4) LIMITED MANAGERIAL ABILITY

  • The sole proprietor has to accept all the responsibilities to carry out its business.
  • Sometimes the proprietor has to perform all the managerial functions like sales, purchase, marketing, selling, dealings with clients, etc.
  • He may not be able to employ and retain aspiring employees.

Q.3 DEFINE SOLE PROPRIETORSHIP.

ANSWER:

It is that type of business organization which is maintained, operated and controlled by a single owner.

Q.4 STATE ANY TWO FEATURES OF SOLE PROPRIETORSHIP FIRM.

ANSWER:

(1) No separate entity.

(2) Lack of business continuity.

MULTIPLE CHOICE QUESTIONS

Q.1- Identify the different types of business organizations:

a. joint Hindu family business

b. cooperative societies

c. sole proprietorship

d. all of the above

Q.2-Which of the following might be the reasons to shut down the business?

a. imprisonment

b. death

c. both A & B

d. none of the above

Q.3- No separate entity is the feature of ___________

a. cooperate society

b. sole proprietorship

c. government

d. partnership

Q.4- Which of the following is the advantage of a sole proprietorship:

a. Limited resources

b. Direct incentive

c. Quick decision making

d. Both (b) & (c)

Q.5-Confidentiality of information is the greatest advantage of _________

a. Joint stock company

b. Sole proprietorship

c. Both (a) & (b)

d. None of the above

Q.6- Identify the disadvantage of a sole proprietorship:

a. Quick decision-making

b. Limited resources

c. Unlimited liability

d. Both (b) & (c)