Sole Proprietorship

The term 'sole' means single and 'proprietorship' means ownership. So, only one person is the owner of the business organisation. This means, that a form of business organisation in which a single individual owns and manages the business, takes the profits and bears the losses, is known as sole proprietorship form of business organisation.

Thus, "Sole Proprietorship" from of business organisation refers to a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.

Characteristics of Sole Proprietorship

  1. Single Ownership: The sole proprietorship form of business organisation has a single owner who starts the business by bringing together all the resources.

  2. No Separation of Ownership and Management: The owner manages the business as per own skill and intelligence. There is no separation of ownership and management as the case with company form of business organisation.

  3. Less Legal Formalities: The formation and operation of a sole proprietorship form of business organisation does not involve any legal formalities. Thus, its formation is quite easy and simple.

  4. No Separate Entity: The business unit does not have an entity separate from the owner. The businessman and the business enterprise are one and the same, and the businessman is responsible for everything that happens in his business unit.

  5. No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same time, the entire loss is also borne by him. No other person is there to share the profits and losses of the business. He alone bears the risks and reaps the profits.

  6. Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his business assets are not enough to pay the business liabilities, his personal property can also be utilized to pay off the liabilities of the business.

  7. One-man Control: The controlling power of the sole proprietorship business always remains with the owner.

Merits of Sole Proprietorship

  1. Easy to Form and Wind Up: It is very easy and simple to form a sole proprietorship form of business organisation. No legal formalities are required to be observed. Similarly, the business can be wound up any time if the proprietor so decides.

  2. Quick Decision and Prompt Action: Nobody interferes in the affairs of the sole proprietary organisation. So he or she can take quick decisions on the various issues relating to business and accordingly prompt action can be taken.

  3. Direct Motivation: In sole proprietorship form of business organisations, the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently.

  4. Flexibility in Operation: It is very easy to effect changes as per the requirements of the business. The expansion or curtailment of business activities does not require many formalities as in the case of other forms of business organisation.

  5. Maintenance of Business Secrets: The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts.

  6. Personal Touch: Since the proprietor himself handles everything relating to business, it is easy to maintain a good personal contact with the customers and employees. By knowing the likes, dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly, as the employees are few and work directly under the proprietor, it helps in maintaining a harmonious relationship with them, and run the business smoothly.

Limitations of Sole Proprietorship

  1. Limited Resources: The resources of a sole proprietor are always limited. Being the single owner it is not always possible to arrange sufficient funds from his own sources. Borrowing funds from friends and relatives or from banks has its own implications. So, the proprietor has a limited capacity to raise funds for his business.

  2. Lack of Continuity: The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.

  3. Unlimited Liability: There is no separate entity of the business from its owner. In the eyes of law the proprietor and the business are one and the same. So personal properties of the owner can also be used to meet the business obligations and debts.

  4. Not Suitable for Large Scale Operations: Since the resources and the managerial ability is limited, sole proprietorship form of business organisation is not suitable for large-scale business.

  5. Limited Managerial Expertise: A sole proprietorship from of business organisation always suffers from lack of managerial expertise. A single person may not be an expert in all fields like, purchasing, selling, financing etc. Because of limited financial resources, and the size of the business it is also not possible to engage the professional managers in sole proprietorship form of business organisations.

Suitability of Sole Proprietorship

The sole proprietorship is suitable where the market is limited, localized and the customers give importance to personal attention. It is also considered suitable where the capital requirement is small and risk involved is limited. It is also considered suitable for the production of goods which involve manual skill like handicrafts, filigree work, jewelry, tailoring, hair cutting, etc.