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 service such as hair salons, beauty parlours, or small retail shops.
Definition of 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, barbershop, general store and sweet shop run by a single owner.
Features of Sole Proprietorship:
(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.
- 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.
- 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.
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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.
Limitations of a Sole Proprietorship:
Some of the primary limitations of a 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.
Advantages of a Sole Proprietorship:
Some of the important advantages of a 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 fulfillment of goals of the business and he gets motivated.
- Hence, getting profits or long term benefits gives him a feeling of personal satisfaction.
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?|
c. both A & B
d. none of the above
|Q.3- No separate entity is the feature of ___________|
|a. cooperate society
b. sole proprietorship
|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)
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