What is Sole Proprietorship?

A Sole proprietorship can be explained as a kind of business or an organization that is owned, controlled and operated by a single individual who is the sole beneficiary of all profits or loss, and responsible for all risks. It is a popular kind of business, especially suitable for small business at least for its initial years of operation. This type of businesses is usually a specialized service such as hair salons, beauty parlours, or small retail shops.

Definition of Sole Proprietorship:

• It is that type of business organization which is owned, managed and controlled by a single owner.
• The word “sole” means “only” and “proprietor” notes to “owner”.
• A sole proprietor is the beneficiary of all profits.
• All risks are to be borne by the sole proprietor.
• The sole proprietor has unconditional and full control over its business.
• Example: Beauty parlour, barbershop, general store and sweet shop run by a single owner.

Also Check: Difference Between Sole Proprietorship and Partnership

Features of Sole Proprietorship:

(1) Formation and Closure

• This type of business organization is formed by the owner himself.
• No legal conventions are obliged to start the sole proprietorship form of organization.
• In some instances, the legal formalities are required or the owner should have a particular license or a certificate to run the business.
• The owner can close the business at his own discretion.
• Example: Goldsmith or a person running a medical shop should have a license to run this type of business.

(2) Liability

• In the sole proprietorship business, the sole owner has unlimited liability.
• In this case, the owner is himself liable to pay all the liabilities. If he takes a loan for its business then he will be liable for all the debts.
• Hence, he is personally liable for all the debt which can be recovered by his personal estate when funds are insufficient.
• Example: A loan taken by the owner of the sweet shop is solely responsible for the repayment of the loan to the bank.

(3) Sole Risk Bearer and Profit Recipient

• A sole proprietor is only the one who bears all risks which are related to its business.
• All the profits or losses which are earned from the business are to be enjoyed by the sole owner.

(4) Control

• As all the rights and responsibilities lie with the sole proprietor that is why he controls all the business activities.
• No one can interfere in the business activities of a sole proprietor.
• Hence, only the sole proprietor can modify his plans accordingly.

(5) No Separate Entity

• According to the accounting system, the owner and the business are considered as two separate entities.
• But the law does not make any distinction between the sole trader and its business.
• Hence, without the sole trader, the business has no identity because he is the only person who performs all the business activities.

(6) Lack of Business Continuity

• Death, imprisonment, physical ailment, insanity or bankruptcy of the sole proprietor will directly affect the business or it may cause shutting down of the business.
• In the case of the beneficiary, successor or legal heir of sole proprietor, he can run the business on behalf of the proprietor.

You might want to know: What is Entrepreneurship?

Advantages of Sole Proprietorship:

Some of the popular advantages of a sole proprietorship are.

• Quick decision making– A sole proprietor has the freedom to make any decision. Therefore, the decision would be prompt as they don’t have to take the permission of others.
• Confidentiality of information- Being only the owner of the business, it allows him/her to keep all the business information to be private and confidential.
• Direct incentive- A sole proprietor directly has the right to have all the profit or benefits of a company.
• Sense of accomplishment- He/she can have the personal satisfaction associated with working without any guidance or alone.
• Ease of formation and closure- A single proprietor can enter the business with minimum legal formalities.

Limitations of a Sole Proprietorship:

Some of the primary limitations of a sole proprietorship are as follows:

(1) Limited Resources

• Resources of a sole proprietor are limited to his savings and borrowings from the relatives.
• Banks also hesitate or deny giving the long term loans or extend the limit of long term loans due to the weak financial position of the business.
• Lack of all these resources results in hindrance in the growth of the sole proprietorship business
• Above mentioned are the reason why the business generally remains small.

(2) Life of a Business Concern

• The owner and its business is the same entity and due to lack of successor or heir, the life of the business is limited.
• Due to death, insolvency, illness of a proprietor gives a detrimental impact on the business which results in closure of the business.

(3) Unlimited Liability

• The major demerit of a sole proprietorship is that the owner has unlimited liability.
• If the sole owner becomes fails to pay the debts, due to the failure of a business, the creditors would not only claim from business assets but also from his personal estate.
• Taking a large amount of loan is too risky and also put the burden on the sole owner of the business.
• Hence, this is the reason why sole traders do not intend to take the risk for the survival and growth of the business.

(4) Limited Managerial Ability

• The sole proprietor has to accept all the responsibilities to carry out its business.
• Sometimes the proprietor has to perform all the managerial functions like sales, purchase, marketing, selling, dealings with clients, etc.
• He may not be able to employ and retain aspiring employees.

Advantages of a Sole Proprietorship:

Some of the important advantages of a sole proprietorship are as follows:

(1) Quick Decision Making

• A sole proprietor exercises his right in making business choices.
• It is easy for a sole trader to make decisions quickly, as he is the sole receiver of all the profits.
• There is no need to share profits with anyone because he is the only investor who has invested money in the business.

(2) Confidentiality of Information

• A sole proprietor has the authority to make his decisions regarding business activities.
• Since a sole owner is the only decision-maker of the business, he keeps all the business-related information confidential.
• Hence, a sole trader is not bound by law to bring out its accounts in the eye of the public.

(3) Direct Incentive

• A profit is a reward for bearing risk by the proprietor in its business.
• A sole proprietor is the only person who gains all the benefits arising from the business.
• Hence, getting profits motivates the sole proprietor to give more efforts to get more benefits and higher growth in the business.

(4) Sense of Accomplishment

• A small success of the business gives the feeling of fulfillment of goals of the business and he gets motivated.
• Hence, getting profits or long term benefits gives him a feeling of personal satisfaction.

Multiple Choice Questions:

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