Characteristics of Sole Proprietorship

Mon, 09/28/2015 - 04:26 -- Umar Farooq

Sole proprietorship is the simplest and oldest form of business organization. It is as old as civilization. This form of organization is owned by one person. He works as a financer, manager, employer, decision maker. In case of profit, he enjoys the whole profit and in case of loss he bears the whole loss. In simple words we can say that it is a one man show. Sole proprietorship is very common in all over the world. Some of its examples are Retailers, Corner shop, Bakery, Hardware Store, Garments outlet, Shoe Store, Doctor's clinic etc. Following are the main characteristics of sole proprietorship business organization

Business Ownership

Being one man show the sole owner manages and controls all the affairs of the business independently, without the interference of any other person. He is the planner policies and decision maker for the success of his business.

No Legal Status of the Business

Sole Proprietorship has no separate legal entity from its owner. Owner and business is same thing in the eyes of law and public. Obligations of the business must be considered as the obligations of the sole owner. Similarly life of the business depends upon the life of the proprietor. It means in case of mishaps in the life of sole proprietor, may end the life of the business.

Unlimited Liability

According to legal status, business liabilities must be considered as the liabilities of the owner. Hence, the liability of the owner is unlimited. It means in case of insolvency, personal property of owner can be sold for the recovery of its debts.

Taxation Liability

Being a separate business entity, proprietor is not required to file taxes under employee identification number. Business income is considered as the personal income of the proprietor for taxation. Hence, owner is liable to pay taxes to Income Tax Department, if income becomes taxable

Accounting Status of the Business

Sole proprietorship also known as entity principle. According to this principle, owner and business are two different entities for record keeping purpose. Record of transactions must be kept separately from the personal transactions of the owner, in order to check the true results of business operations.

Secrecy

There are many factors behind the success of business like production techniques, sales, marketing and distribution strategies etc. The secrecy of business factors are very important in order to remain competitive in the market. Because the ownership is in the hands of single person, hence there are less chance of opening its secretes.

Flexibility

Sole proprietorship is very simple to change the nature of business according to change in market trends due to entire control and less resources. For example, a person who is doing the business of fast food may involve in the business of cloth at night.

Risk

The sole proprietorship bears all the business risk. Unlike partnership and corporations, it has less restrictive regulations. Sole proprietor is not bound the charter the business though he is required to register business name its operations and activities.