What is Sole Proprietorship? Its meaning and definition..

Meaning of Sole Proprietorship

The sole proprietorship is a form of business organisation that is owned and controlled by a single individual. He may manage the business by himself or may get the assistance of others such as a consultant, manager, other employees etc. The crux of his form of organisation is that there is a complete fusion of ownership and management in the hands of one person. It is the oldest and simplest form of organisation. The sole proprietorship form is also known as ‘single proprietorship’, ‘sole ownership’, ‘sole trader’ and individual proprietorship.

Characteristic of Sole Proprietorship

1.    Individual Ownership
        The sole proprietorship is owned by an individual. He has to invest the entire capital to the business. The capital may be either owned or borrowed. As he invests the entire capital, he is the full owner of the business.

2.    Individual Control
       The entire control of the business is also vested with him. It is his entire responsibility to manage the business. He has to take decisions about everything whether it be managerial, technical, financial or marketing. The success or failure of the organisation totally depends on his efficiency.

3.    Undivided Risk
       As the entire ownership and control rests with one individual, the risk is also rests with him. Like partnership, risk is not shared by others and the individual must be prepared to take up the entire risk of running the organisation.

4.    No sharing of Profit
As the individual takes the entire risk of running the business, the entire profit also goes to him only which is the reward for his efficiency and risk-taking. He need not share profit with anybody.

5.    Unlimited liability
In case of loss in business, again It is he who has to bear it entirely. The liability is not limited to his investment in business but extends to his personal properties also. That is why, it is said that the liability of the sole proprietorship is unlimited.

6.    Minimum Government Regulation
       There is practically no Government regulation for sole proprietorship. There are no legal requirements except competence to enter into certain contractual agreements and the payment of registration fee, license fee to local administration.


1.    Easy to form and dissolve
                   The sole proprietorship is the simplest form of business ownership. No big formalities are involved in setting up this type of organisation. There are no statutory provisions or legal formalities to be observed to establish this type of concern. Only a formal license form local body is required. Dissolution of the business is also equally simple. There are no legal formalities in this regard except satisfying creditor’s claims.

2.    Quick decisions and prompt action
                    A sole trader is a supreme judge in his own organisation and he can take quick decisions and prompt actions on any business matters such as extension of business, pricing, delivery of products etc. He need not consult and one, discuss with anybody regarding the affairs of his organisation. Quick decisions enable a sole trader to take advantage of business opportunities.

3.    Flexibility in operation
                    The sole trading organisation is highly flexible as it is capable of adjustment to the requirements of changing business conditions.

4.    Secrecy
                    The sole trader can maintain secrecy about business matters and hence he will be able to take full advantage of any new ideas that occur to him. He need not fear that competitors will take advantage of his new ideas.

5.    Direct motivation
                     The sole trader gets the entire reward for his hared efforts. This acts as a powerful incentive to manage his business efficiently. It encourages and induces him to put forth his best in the management of the business.

6.    Personnal element
                     The sole trader can easily establish personal rapport with his customers and employees. This will help him understand and satisfy their individual needs.

7.    Lower Cost
                     The business of sole trader concerns is managed and controlled by the sole trader himself or with the help of his relatives and hence the costs of management are comparatively less.

8.    Favourable credit standing
                     Since, the owner is personally liable for all debts of the proprietorship; he will enjoy a favourable rating among creditors. When creditors know that a proprietor has valuable personal assets, they can anticipate satisfaction of their claims from these sources.

9.    Freedom from Government regulations
                     It is the least regulated form of organisation. The burden of tax is less in sole proprietorship compared to other forms of business organizations.

10.  Social significance
                     The sole trader ship provide more opportunities for self employment and wider distribution of the gain of industrial development and prevents monopolies. Above all, it helps to develop the personality of the individual – the quality of self-reliance, self-confidence, responsibility, initiative etc.


1.    Limited Managerial Skill
                The managerial ability of the proprietor may be limited. He may not be an expert in all business matters and sometimes his decision may go wrong.

2.    Limited Capital
                The individual proprietor suffers from the limitation of financial resources. He can depend only on his own savings and his borrowing capacity is bound to be limited. Hence, the sole trader cannot undertake further expansion and development due to want of capital.

3.    Limitations of size
                Since of sole proprietary business is conducted on a small scale, modernization and diversification of plans of business become difficult.

4.    Uncertainty of duration
                The business comes to an end if anything happens to the proprietor. Such a situation, arising out a lack of continuity proves disastrous for institutions who have business relations with such a business.

5.    Unlimited liability
                 The liability of the sole trader is unlimited. In case of debts, not only the assets of his business but also his private assets will be used to pay off the debts.

6.    Absence of legal status
                 The sole trader organisation has no corporate life or any separate legal status. The organisation and the owner are inseparable from one another. In the absence of independent legal life, the sole trader organization has no stability or continuity of life.

Suitability of the Sole Proprietorship form

            This form of enterprise is suitable in the following cases:
1.    Where the quantum of capital needed is small and the risk is not heavy.
2.    Where quickness of decisions is very important.
3.    Where the direct contact with the customers is essential.

                            The majority of household and personal service concerns retails shops and professional firms are generally owned by individual proprietors. Thus, individual proprietorship has its own scope of activity and continues to exist in spite of the development of bigger organizations like partnership and joint stock companies.