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 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.

Also Check: Difference Between Sole Proprietorship and Partnership

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.

(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.

You might want to know: What is Entrepreneurship?

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.
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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

Answer : d

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

Answer : c

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

b. sole proprietorship

c. government

d. partnership

Answer : b

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)

Answer : d

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

Answer : b

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

b. Limited resources

c. Unlimited liability

d. Both (b) & (c)

Answer : d

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