What do you understand by a sole proprietorship firm? Explain its merits and limitation?
What do you understand by a sole proprietorship firm? Explain its merits and limitation?
In a sole proprietorship form of business, the business is owned, managed and controlled by a single individual who is known as the sole proprietor. As the sole owner of the business, the proprietor becomes the single recipient of all the profits earned by the business and, in the same way, has to bear all losses.
Merits of Sole Proprietorship
A sole proprietor enjoys the following benefits.
(a) Ease in formation and closure of business: There are hardly any legal formalities to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor is dealing in drugs and liquor products, then a licence has to be acquired. The procedure for closing down a sole proprietorship firm is also hassle-free and easy.
(b) Quick decision making: A sole proprietor enjoys complete control over the business. This makes decision making quick and easy.
(c) Direct incentive: A sole proprietor is the sole bearer of all types of risks associated with the business and, at the same time, is the single recipient of all the profits and gains earned in the business. Thus, this direct link between efforts and rewards motivates the sole proprietor to operate the business efficiency and effectively.
Limitations of Sole Proprietorship:
The following are a few limitations of a sole proprietor firm.
(a) Limited capital: The financial resources that are available to a sole proprietor are limited merely to this person’s personal savings and borrowings that can be raised from relatives and friends. Thus, the amount of capital available to a sole proprietor is limited, which often prevents him or her from expanding the business.
(b) Limited managerial abilities: A sole proprietor manages all the core functions such as purchasing, selling and planning. As a result, the benefits of specialisation are not available to a sole proprietor. Also, because of limited resources, a sole proprietor may not be able to employ specialised employees to handle specific business operations.
(c) Uncertain life: In the eyes of the law, a sole proprietor and his or her business are regarded as the same entity. In the event of death, insanity, bankruptcy or physical ailment of a sole proprietor, the life of the business is adversely affected.
In a sole proprietorship form of business, the business is owned, managed and controlled by a single individual who is known as the sole proprietor. As the sole owner of the business, the proprietor becomes the single recipient of all the profits earned by the business and, in the same way, has to bear all losses.
Merits of Sole Proprietorship
A sole proprietor enjoys the following benefits.
(a) Ease in formation and closure of business: There are hardly any legal formalities to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor is dealing in drugs and liquor products, then a licence has to be acquired. The procedure for closing down a sole proprietorship firm is also hassle-free and easy.
(b) Quick decision making: A sole proprietor enjoys complete control over the business. This makes decision making quick and easy.
(c) Direct incentive: A sole proprietor is the sole bearer of all types of risks associated with the business and, at the same time, is the single recipient of all the profits and gains earned in the business. Thus, this direct link between efforts and rewards motivates the sole proprietor to operate the business efficiency and effectively.
Limitations of Sole Proprietorship:
The following are a few limitations of a sole proprietor firm.
(a) Limited capital: The financial resources that are available to a sole proprietor are limited merely to this person’s personal savings and borrowings that can be raised from relatives and friends. Thus, the amount of capital available to a sole proprietor is limited, which often prevents him or her from expanding the business.
(b) Limited managerial abilities: A sole proprietor manages all the core functions such as purchasing, selling and planning. As a result, the benefits of specialisation are not available to a sole proprietor. Also, because of limited resources, a sole proprietor may not be able to employ specialised employees to handle specific business operations.
(c) Uncertain life: In the eyes of the law, a sole proprietor and his or her business are regarded as the same entity. In the event of death, insanity, bankruptcy or physical ailment of a sole proprietor, the life of the business is adversely affected.
