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.
MERITS OF SOLE PROPRIETORSHIP
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.
LIMITATIONS OF SOLE PROPRIETORSHIP
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.
