LESSON 04 SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS

LESSON 04

SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS

SOLE PROPRIETORSHIP

Sole proprietorship is a simple and oldest form of business organization.  Its formation does

not require any complicated legal provision like registration etc.  It is a small-scale work, as it is

owned and controlled by one person, and operated for his profit.  It is also known as “sole

ownership”, “individual partnership” and “single proprietorship”.

DEFINITION

Following are some important definition of sole proprietorship:

1. According to D.W.T. Staffod

“It is the simplest form of business organization, which is owned and controlled by one man.”

2. According to G. Baker

“Sole proprietorship is a business operated by one person to earn profit.”

CHARACTERISTICS

Following are the main characteristics of sole proprietorship:

1. Capital

In sole proprietorship, the capital is normally provided by the owner himself.  However, if

additional capital is required, such capital can be increased by borrowing.

2. Easy Dissolution

The sole proprietorship can be easily dissolved, as there are no legal formalities involved in it.

3. Easily Transferable

Such type of business can easily be transferred to another person without any restriction.

4. Freedom of Action

In sole proprietorship, single owner is the sole master of the business, therefore, he has full

freedom to take action or decision.

5. Formation

Formation of sole proprietorship business is easy as compared to other business, because it

dos not require any kind of legal formality like registration etc.

6. Legal Entity

In sole proprietorship, the business has no separate legal entity apart from the sole traders.

7. Legal Restriction

There are no legal restrictions for sole traders to set up the business.  But there may be legal

restrictions for setting up a particular type of business.

8. Limited Life

The continuity of sole proprietorship is based on good health, or life or death of the sole owner.

9. Management

In sole proprietorship, the control of management of the business lies with the sole owner.

10. Ownership

The ownership of business in sole proprietorship is owned by one person.

11. Profit

The single owner bears full risk of business, therefore, he gets total benefit of the business as

well as total loss.

12. Size

The size of business is usually small.  The limited ability and capital do not allow the

expansion of business.

13. Success of Business

The success and goodwill of the sole proprietorship is totally dependent upon the ability of the

sole owner.

14. Secrecy

A sole proprietorship can easily maintain the secrecy of his business.

15. Unlimited Liability

A sole proprietor has unlimited liability.  In case of insolvency of business, even the personal

assets are used by the owner to pay off the debts and other liabilities.

ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETORSHIP

ADVANTAGES OF SOLE PROPRIETORSHIP

Following are the advantages of sole proprietorship:

1. Contacted with the customers

In sole proprietorship a businessman has direct contact with the customer and keeps in mind

the like and dislikes of the public while producing his products.

2. Direct Relationship with Workers

In sole proprietorship a businessman has direct relationship with workers.  He can better

understand their problems and then tries to solve them.

3. Easy Formation

Its formation is very easy because there are not legal restrictions required like registration etc.

4. Easy Dissolution

Its dissolution is very simple because there are no legal restrictions required for its dissolution

and it can be dissolved at any time.

5. Easy Transfer of Ownership

A sole proprietorship can easily be transferred to other persons because of no legal restriction

involved.

6. Entire Profit

Sole proprietorship is the only form of business organization where the owner enjoys 100%

profit.

7. Entire Control

In sole proprietorship the entire control of the business is in the hands of one person.  He can

do whatever he likes.

8. Flexibility

There is great flexibility in sole proprietorship.  Business policies can easily be changed

according to the market conditions and demand of people.

9. Honesty

The sole master of the business performs his functions honesty and effitively to make the

business successful.

10. Independence

It is an independent form of business organization and there is no interference of any other

person.

11. Personal Satisfaction

As all the Business activities are accomplished under the supervision of sole owner, so he

feels personal satisfaction that the business is running smoothly.

12. Prime Credit Standing

A sole proprietor can borrow money more easily because of unlimited liability.

13. Quick Decisions

Sole proprietor can make quick decisions for the development and welfare of his business and

in this way can save his time.

14. Personal Interest

A sole proprietor5 takes keen intere4st in the affairs of business because he alone is

responsible for profit and loss.

15. Saving in Interest on Borrowed Capital

Sometimes, a sole proprietor borrows money to increase his capital, from his relatives, without

interest.

16. Saving in Legal Expenses

As there are no legal restrictions for the formation of sole proprietorship so it helps in

increasing savings as legal expenses are reduced.

17. Saving in Management Expenses

The owner of the business himself performs most of the functions so it r educes the

management expenses.

18. Saving in Taxes

The tax rates are very low on sole proprietorship because it is imposed on the income of single

person.

19. Secrecy

It is an important factor for the development of business.  A sole trader can easily maintain the

secrecy about the techniques of production and profit.

20. Social Benefits

It is helpful in solving many social problems like unemployment etc.

DISADVANTAGES OF SOLE PROPRIETORSHIP

The disadvantages of sole proprietorship can be narrated as under:

1. Continuity

The continuity of sole proprietorship depends upon the health and life of the owner.  In case of

death of the owner the business no longer continues.

2. Chances of Fraud

In sole proprietorship, proper records are not maintained.  This increases the chances of

errors and frauds for dishonest workers.

3. Expansion Difficulty

In sole proprietorship, it is very difficult to expand the business because of the limited life of

proprietor and limited capital.

4. Lack of Advertisement

As the sources of single person are limited so he cannot bear the expense of advertisement,

which is also a major disadvantage.

5. Lack of Capital

Generally, one-man resources are limited, so due to financial problems he cannot expand his

business.

6. Lack of Inspection and Audit

In sole proprietorship there is lack of inspection and audit, which increases the chances of

fraud and illegal operations.

7. Lack of Innovation

Due to fear of suffering from loss, a sole proprietor does not use new methods of production.

So, there is no invention or innovation.

8. Lack of Public Confidence

The public shows less confidence in this type of business organization because there is no

legal registration to control and wind up the business.

9. Lack of Skilled Persons

One person cannot hire the ser4vices of qualified and skilled persons because he has limited

resources.  It is also a great disadvantage.

10. Management Difficulty

One person cannot perform all types of duties effectively.  If he is a good accountant, he may

not be a good administrator.  Due to this, business suffers a loss.

11. Much Strain on Health

In this type of business organization there is much strain on the health of the businessman

because he alone handles all sorts of activities.

12. Not Durable

This type of business organization is not durable because its existence depends upon the life

of sole proprietor.

13. Permanent Existence

In this type of business there is a need of permanent existence of a businessman.  In case of

absence from business for few days may become the cause of loss.

14. Risk of Careless Drawings

In sole proprietorship owner himself is a boss.  There is no question to his decisions or

actions.  So, there is a risk of careless drawings by him.

15. Risk of Loss

In case of sole proprietorship a single person bears all the losses, whereas in the case of

partnership or Joint Stock Company all the partners or members bear the loss.

16. Unlimited Liability

In sole proprietorship there is unlimited liability.  It means, in case of loss personal property of

the owner can be sold to satisfy the claimants.  It is a great disadvantage.

From the above-mentioned detail, we come to the point that despite the above disadvantages,

sole proprietorship is an important form of business organization.  This is due to the fact that

its formation is very easy and due to unlimited liability the owner takes great care and interest

in the business, because in case of loss, he is personally responsible.  As he enjoys entire

profit, this factor also encourages him to work with great efficiency which promotes his

business.