What Is Sole Proprietorship?
Sole proprietorship is the simplest, oldest and the most natural form of organization. Despite of so many changes in this form of an organization, the popularity of sole proprietorship has never come down.
Definition:- The organization in which all the business is owned and managed by a single person is known as Sole proprietorship or one man business. He is person who takes all the profits and suffers all the risks of the business. He mobilizes capital from various resources and invests it in the business. He uses his own skill and intelligence to manage the business and he is responsible for all the profits and losses of the business. Sole proprietorship is also known as sole tradership, individual proprietorship, individual enterprise and individual entrepreneurship.
Characteristics of Sole Proprietorship:-
1. In Sole proprietorship, single person has the ownership of the business.
2. The liability of the sole proprietor remains unlimited throughout the life span of the business.
3. The sole proprietor is free to choose any kind of business which he thinks will be profitable.
4. In this form of organisation, risk and ownership go side by side i.e. ownership and risk lies with the single person.
5. All the authority and responsibility of sole proprietorship vests in single person.
6. There are no specific laws to regulate this form of organisation. However, general laws such as labour laws, Contract act etc. are applicable to it.
7. Proprietor and proprietorship are one.
8. Whole capital is contributed by the single person.
9. There is not much scope of growth of the Sole proprietor’s business as whole business is controlled and managed by one person and it is not possible for single person to control the growing business alone.
10. There always remain a direct relationship between effort and reward.
Benefits of Sole Proprietorship:-
1. No legal formalities are required to form sole proprietorship form of organistaion.
2. As all the decisions are taken by single person so it facilitates prompt and quick decision making.
3. There is effective control in this form of organisation as a single person is the supreme judge of the business.
4. Relation between effort and reward motivates the proprietor to work hard.
5. There always remains flexibility in the operations of the business.
6. It is easy to maintain secrecy in sole proprietorship.
7. Direct contact with customers helps the proprietor in knowing the likings and disliking of customers.
8. Unlimited liability helps in more generation of capital.
9. A single person manages and controls the business so he does not need the services of specialists of the management which makes the management economical.
10. A sole proprietor gets much more tax benefits than in case of partnership and company.
11. Government has promoted Sole proprietorship form of organistation as it not only makes a person self employed but it also makes sole proprietor capable of giving employment to other persons.
12. Sole proprietorship is the form of oragnisation, which can be easily dissolved than partnership and company.
13. Direct contact with employees helps in motivation which results in increase in efficiency and productivity.
Limitations of Sole Proprietorship:-
1. Unlimited liability makes trader feel insecure and which ultimately hampers the growth and expansion of business.
2. In sole proprietorship, managerial abilities are limited.
3. Limited resources for the generation of capital is the another limitation of this form of organisation.
4. There always remains the uncertainty regarding the continuity of business as the sole trading business remains in existence till the proprietor exists.
5. Too much secrecy causes suspicion in the minds of the creditors.
6. Sometimes overburden of responsibility and authority results in hasty decisions.
7. This form of organistaion is not suitable for large scale businesses.
8. Limited resources of capital, unlimited liability and limited managerial ability limit the scope of expansion of business.
9. Due to limited managerial and financial resources and limited scale of operation, it fails to match the market forces.
10. Limited resources limit the credit worthiness of sole proprietor.
1. Small size, small capital and limited managerial abilities make sole proprietorship form of organisation suitable for local market.
2. This type of organisation is best suited where the customers require personal attentions.
3. The market where there is frequent changes in fashions and tastes of the customers.
4. The business where quick and prompt decisions are required e.g. share market or bullion market.
5. In seasonal business e.g. ice cream, ice, umbrella and garments etc.
6. Where there is less amount of risk is involved.