Question

Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation. Why? Give merits of sole proprietorship.

Answer 1

Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation. This is because of the following merits of sole proprietorship-

1. Ease of formation and dissolution:The sole proprietorship is the simplest form of business ownership. There is hardly any formality involved in setting up this type of organization. This ownership organization is not governed by any special Act.However, general laws like Law of Contracts, Sale of Goods Act, etc., are applicable. Dissolution, or sale of business, is equally convenient in most cases. Satisfaction of creditors’ claims is usually the only restriction in winding up the business.

2. Simplicity of operation and flexible management:A sole trader need not consult anyone, refer to others, discuss with anybody, or take the opinion of any person, before he decides the affairs of his organization. In addition to this, the owner is not required to submit the results of the business to the prescribed authorities. Quick decision and prompt action enable him to take advantage of business opportunities.

3. Sole claim on profits:The sole trader is the only person to whom the profits belong. This always acts as a stimulant to personal incentive.

4. Favorable credit standing:Since the owner is personally liable for all debts of the proprietorship, this form often enjoys a favorable rating among creditors. When creditors know that a proprietor has valuable personal assets, they can anticipate satisfaction from these sources if the business fails or debts remain unpaid.

5. Preferential treatment by Government:Not only that it is free from government regulations, it also gets subsidies, concessions, and a host of facilities from the government being socially useful, it gets loans on concessional rates, liberal repayment schedule, etc.

6. Social usefulness:The sole proprietorship is often organised as a small business. Thus, it affords opportunities of the widest possible dispersal of ownership, more opportunities for employment — self and public, wider distribution of the giants of industrial development, prevention/reduction in the formation of monopolies, etc.

7. Tax advantage:A sole proprietor pays income tax the same as any individual, and the business is not taxed. Under the Income Tax Act, 1961, an individual assessed does not pay any tax if his or her income does not exceed a particular limit (called tax exemption limit), and beyond this the tax is levied on the basis of income slabs. As such, the burden of tax on smaller amount of profit is less in sole proprietorship as compared to other forms of ownership organization.

Because of these advantages found in a small business, William Basset once remarked, “The one-man control is the best in the world, if that man is big enough to manage everything.”