Sole
proprietorship
Features
Salient characteristics
of the sole proprietorship form of organisation are as follows:
(i)
Formation and closure: Hardly any legal formalities are required to start a sole
proprietary business, though in some cases one may require a license. There is
no separate law that governs sole proprietorship. Closure of the business can
also be done easily. Thus, there is ease in formation as well as closure of
business.
(ii)
Liability: Sole proprietors have unlimited
liability. This implies that the owner is personally responsible forpayment of
debts in case the assets of the business are not sufficient to meet all the
debts. As such the owner’s personal possessions such as his/her personal car
and other assets could be sold for repaying the debt.
(iii)
Sole risk bearer and profit recipient: The risk of failure of business is
borne all alone by the sole proprietor. However, if the business is successful,
the proprietor enjoys all the benefits. He receives all the business profits
which become a direct reward for his risk bearing.
(iv)
Control:
The right to run the business and make all decisions lies absolutely with the
sole proprietor. He can carry out his plans without any interference from
others.
(v)
No separate entity: In the eyes of the law, no distinction is made between the
sole trader and his business, as business does not have an identityseparate
from the owner. The owner is, therefore, held responsible for all the
activities of the business.
(vi)
Lack of business continuity: Since the owner and business are one and the same entity,
death, insanity, imprisonment, physical ailment or bankruptcy of the sole
proprietor will have a direct and detrimental effect on the business and may
even cause closure of the business.
Merits
Sole proprietorship offers
manyadvantages. Some of the important onesare as follows:
(i)
Quick decision making: A sole proprietor enjoys considerable degree of freedom in
making business decisions. Further the decision making is prompt because there
is no need toconsult others. This may lead to timelycapitalisation of market
opportunitiesas and when they arise.
(ii)
Confidentiality of information: Sole decision making authority enables the proprietor to
keep all the information related to business operations confidential and
maintain secrecy. A sole trader is also not bound by law to publish firm’s
accounts.
(iii)
Direct incentive: A sole proprietor directly reaps the benefitsof his/her efforts as
he/she is the sole recipient of all the profit. The need to share profits does
not arise as he/she is the single owner. This provides maximum incentive to the
sole trader to work hard.
(iv)
Sense of accomplishment: There is a personal satisfaction
involved in working for oneself. The knowledge that one is responsible for the
successof the business not only contributes toself-satisfaction but also
instils in theindividual a sense of accomplishmentand confidence in one’s
abilities.
(v)
Ease of formation and closure: An important merit of sole
proprietorship is the possibility of entering into business with minimal legal
formalities. There is no separate law that governs sole proprietorship. As sole
proprietorship is the least regulated form of business, it is easy to start and
close the business as per the wish of the owner.
Limitations
Notwithstanding
various advantages, the sole proprietorship form of organisation is not free
from limitations. Some of the major limitations of sole proprietorship are as
follows:
(i)
Limited resources: Resources of a sole proprietor are limited to his/her personal savings
and borrowings from others. Banks and other lending institutions may hesitate
to extend a long term loan to a sole proprietor. Lack of resources is one of
the major reasons why the size of the business rarely grows much and generally
remains small.
(ii)
Limited life of a business concern: In the eyes of the law the proprietorship and the
owner are considered one and the same. Death, insolvency or illness of a
proprietor affects the business and can lead to its closure.
(iii)
Unlimited liability: A major disadvantage of sole proprietorship is that the
owner has unlimited liability. If the business fails, the creditors can recover
their dues not merely from the business assets, but also from the personal
assets of the proprietor. A poor decision or an unfavourable circumstance can
create serious financial burden on the owners. That is why a sole proprietor is
less inclined to take risks in the form of innovation or expansion.
(iv)
Limited managerial ability: The owner has to assume the responsibility of varied
managerial tasks such as purchasing, selling, financing, etc. It is rare to
find an individual who excels in all these areas. Thus decision making may not
be balanced in all the cases. Also, due to limited resources, sole proprietor
may not be able to employ and retain talented and ambitious employees. Though
sole proprietorship suffers from various shortcomings, many entrepreneurs opt
for this form of organisation because of its inherent advantages. It requires
less amount of capital. It is best suited for businesses which are carried out
on a small scale and where customers demand personalised services.
