Sole Proprietorship

       Sole Proprietorship is a popular form of business organization and it is the most suitable form of organization for small businesses. It is one of the oldest, simplest, and common form of business organization. Sole proprietorship form of business is established, financed, owned, and managed by a single person who is known as, Sole Trader or Sole Proprietor. The sole trader bears all the risks and he alone is responsible for all the profit and losses of his business. He may borrow funds and employ people to help him but the ultimate authority and responsibility lie in his hands. Therefore, Sole trader business is a one-man show.

Definition of Sole Proprietorship by L.H. Haney 

     The individual proprietorship is the form of business organization at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure.

Definition by B.O. Wheeler

      The sole proprietorship is that form of business ownership which is owned and control by a single individual. He receives all the profits and risks all of his property in the success or failure of the enterprise.

Characteristics of Sole Proprietorship

1. Ownership: Sole proprietorship business is fully owned by a single person. The person contributes the total capital from his own wealth or from borrowed funds.

2. Control: The sole trader alone takes all the decisions pertaining to the business. He is not required to consult anybody. 

3. No Separate Entity: A sole proprietorship has no legal identity separate from that of its owner. The law makes no difference between the owner and his business. The business and the owner exist together. If the owner dies or becomes insolvent the business is dissolved.

4. Unlimited Liability: The proprietors have unlimited liability. The owner is personally liable for all the debts of the business. In case the assets are not sufficient to meet its debts then the personal property of the owner could be sold for repaying the debt.

5. No Proft-sharing: The sole trader alone is entitled to all the profits and losses of the business. He bears all the risk and therefore he receives all the profits which become a reward for his risk-bearing.

6. No legal Formalities: No legal formalities are required to start, manage, and dissolve sole trader business.

Formation of Sole Proprietor Business

          Sole Proprietor Business can be started by the initiative of a single person. He prepares the plan of the business and arranges the necessary finance. No legal formalities are required in the formation of the sole proprietorship business. Any person can start a business whenever and wherever he likes. However, the sole trader must be a person competent to enter into a contract. The business to be carried on must be allowed by law. In some cases, a licence from the competent authorities may be needed for starting the business. For example, a person desirous of starting a chemist shop is expected to get a license from the local Government.

        The first step in the formation of a sole trader business is the selection of a particular line of business. This decision depends on the demand for a particular product, the availability of necessary resources, and the scope of earning profits. The selection of a proper place is another important decision. The requirements of customers and the nearness to the market should be considered. 

         Sole trader business can be wind up at any time without legal formalities. The owner has to simply settle the claims of his creditors and wind up the business.

Objectives of Sole Proprietorship

1. Sole Proprietorship business helps people to create work for themselves. A person can start his own small business instead of looking for a job.

2. If a person is having surplus funds and if that is not enough for big business, then he may start sole proprietorship business instead of keeping the funds idle.

3. A sole trader comes in direct contact with his customers. Therefore, he can better understand and serve customers. 

4. Sole trader business helps in the distribution of income and wealth among a large number of people. It avoids monopoly and concentration of wealth in a few hands.

5. Sole proprietorship firms provide ancillary service to big firms.

Merits of  Sole Proprietorship

1. Easy Formation: A sole trader can be set up easily and quickly. A sole trader can select a business of his choice and start the business without taking permission from anyone. The registration of the firm is not required. Only a license may be needed in special cases like for chemists and liquor shops. 

2. Quick Decision Making:  The sole trader himself can take all the decisions related to his business. He need not consult others for their approval. Quick decisions and prompt actions help to improve the efficiency of business operations. The sole trader can take on the spot decisions which will, therefore, not let any opportunity slip away.

3. Confidentiality of Affairs: The sole trader is not bound by law to publish his accounts. A sole trader can keep all the information related to his business confidential and maintain secrecy.

4. Flexibility: A sole trader business is normally small in size and simple in structure. So, it can be adjusted easily whenever necessary. The sole trader can expand or reduce his business operations to suit the changing conditions in the market.

5. Minimum Government Regulation: Sole proprietorship business is free from Government regulations. No legal formalities are involved in the working of sole proprietorship except tax laws and labour laws.

6. Easy Dissolution: It is very easy and simple to dissolve a sole proprietorship business. No specific legal formalities or regulations are involved in dissolution.

Demerits of Sole Proprietorship

1. Limited Resources: The financial resources of a sole trader are limited to his personal funds and borrowing from others. Bank and other lending institutions may hesitate to extend a long term loan to a sole proprietor.

2. Limited managerial ability: A person cannot be expert in each and every function of the business. All the qualities that are required for success in business are rarely found in one individual. The proprietor may not be able to give sufficient time to all the activities. He may commit an error while taking the judgment. Thus, decision making may not be balanced in the absence of experts.

3. Unlimited Liability: The proprietor is personally liable for all the losses of his business. In case the business fails, then the creditors can recover their dues not only from his business assets but also from the personal assets of the proprietor.

4. Uncertain life: The life of a sole proprietorship business is dependent on the life of the proprietor. The business may come to end due to the illness, insolvency, and death of the proprietor. His successors may not be capable enough to carry on the business successfully. The owner and his business are inseparable as the business has no separate legal status.

5. Limited scope for expansion: Due to limited financial and managerial resources, there is little scope for expansion and growth in sole proprietorship.