Sole Proprietorship Business Meaning Characteristics Advantages

Mon, 09/21/2015 - 02:02 -- Umar Farooq

Meaning

In Sole proprietorship business organization entrepreneur (individual) introduces his own capital, uses his own skills to manage and responsible for the results profit or loss. Unlike Limited Liability Company LLC or Corporation it does not need to be registered with the state. If you are starting a new business as a sole proprietorship, registration is not necessary however there might be some complication for startup business like business license, registration with local authorities or any permit laws if needed. Owner should also have consider income tax and business debt issues because he is the one paying all his debts.

It is the easiest  way to set up a sole proprietorship business which is also known as individual entrepreneurship. The individual invests and manages the entire affairs of the enterprise. He takes all the decisions whether managerial, financial or operative and all other. Be owns and controls. He is responsible solely for the entire operating results. A sole proprietorship name might be the name of owner or under any fictions name for example “Mano Saloon”. It is just a trade name and there is no issue of separate business entity.

Definition

“It is a business unit whose ownership and management are vested in one person. The individual assumes all risks of loos or failure of the enterprise and receives all profit from its successful business operations” Paterson and Plowman

Characteristics

  1. Individual ownership.
  2. Individual control.
  3. Individual management—the monarch.
  4. Undivided sole responsibility of business obligations and operating results.
  5. To a larger extent no government regulation While setting business on the basis of sole proprietorship

Advantages and Disadvantages of Sole Proprietorship

Advantages

Ease in formation. When starting sole proprietorship, no legal formalities are required to be gone through. Because of this it is easy to form such a business organization. J. L Lundy has said that "becoming a proprietor is as simple as buying newspapers for 3 cents and selling them on a street corner for a nickel (five cents)", thus, by investing 3 cent a newspaper, the purchaser (in this case the sole proprietor), earns two cents.

Any person who decides to start a business enterprise of any kind and enjoying the capacity to run it skillfully enters into business contact, sets up the organization and goes ahead with the operation. However, in some type of businesses license may be required to be obtained under the law of the land. That formality can also be easily completed.

Personal Care. Solo proprietor is the monarch of his business enterprise. He, looks after his business himself. He can easily take care of all wastages, losses etc. and takes corrective measures. He can take care of his customers personally and serves his customers with all care catering according to their taste and temperaments, likings and disliking.

Motivation. He is a motivated proprietor. He knows for all profits and losses. He is solely responsible, therefore, he does his utmost to avoid all lapses and works hard to earn as much as his capacity persists him.

Coordination is Facilitated. Certainly a sole owner can easily and effectively coordinate his efforts with success. He is the sole decision maker. He can, therefore, co-ordinate not only his own efforts but the efforts of his employees also which, thus, ensures a better team work.

Prompt Decision Making. It is another advantage of form of organization. Since the sole-proprietor need not consult anyone in decision making he can be prompt enough in whatever he has to decide. This helps him in taking advantage of the opportunities which come in his way.

Flexibility of the Organization. Whenever any change is required in the business in the form of organisation the sole proprie­tor can easily effect the required change without any hue and cry. Policies and situations, can promptly be changed in such a form of business organization.

Secrecy of Business Affairs. Since the entrepreneur is the master, he takes full advantage of any idea coming in his way. He implements the ideas and plans with risking the chances of their leakage to his competitors. He has no obligation to publish his accounts. He can thus, maintain top secrecy.

Social Usefulness. A sole business can be organized on a small scale. It is because of this it provides an opportunity to all for self-employment and at the same for wider distribution of the gains of industrial development. It prevents monopoly. It reduces economic concentration. It helps in proper and satis­factory distribution of goods and services as well as wealth and income.

Preferential treatment by the Government. In the form of subsidies, concessions, loan, interest, tax rebate etc and other facili­ties the government usually accords preferential treatment to the entrepreneur.

Disadvantages

We should not keep in mind only the merit but sole proprietorship can also suffer from different types of problems.

Limitation of Management. Management requires many skill.An individual naturally suffers from such an important skill. He may be knowledgeable. He may be well-trained and have suffi­cient ability. But despite all these he may compare with two or more than two persons. Surely on the count sole proprietor may lack one thing or the other. Since he is not an expert in all matters, therefore, it is not necessary that all his decision are balanced. This can lead to a high rate of failure. Divided supervision give rise to limited span of supervision. It is rather impossible to keep one's eyes wide open, ears well within all listening limits, rose within all smelling bounds and sufficiently, alert mind. This limits his span of supervision which mars his managing ability to a larger extent. After all an individual is only at individual with his limitations, prejudices, likings and dislikings. Due to all this surely the management of the business enterprise suffers.

Unlimited liability of Business Owner. The liability of the sole proprietor is unlimited. His business assets are liable to pay his business liabilities. But even after such a payment the entrepreneur cannot escape the responsibility of making payment of his debt (if it is not satisfied even after all its business assets have been realized) from his personal assets. His private property is also committed to his business liabilities. This discourages the ex­pansion of business. This certainly is a serious drawback which is inherent in this form of business ownership and management.

Lack of Business Continuity. One man show is good, but it does not work Always. Since the sole proprietorship depends solely on one man for its entire operations its continuity is always in danger. The entrepreneur may be seriously ill. He may go in severe condition or become insolvent. In all these case the business enterprise ceases to operate. This cause instability to the business. This instability causes social loss.

Limitation of Size. Usually the sole proprietor suffers from uneconomic size. He can face lack of Finances or Managerial ability when the business becoming larger in size. Opportunities are everywhere but could not be availed off because of lack of initiative, drive, ability finances etc. Because of these reasons the sole proprietorship business may not be able to achieve what in facts it wants to achieve.