Which is the oldest form of business organisations? Well, it is a sole proprietorship. It is also the most common type of business entity found in India. All the businesses you see around you, your local grocer, the chemist, the doctor are all probably sole proprietors. Let us look at some features of a sole proprietorship.
Sole Proprietorship in simple words is a one-man business organisation. It is the type of entity that is fully owned and managed by one natural person (not a legal person/entity) known as the sole proprietor. The business and the man are the same, it does not have a separate legal entity.
A sole proprietorship usually does not have to be incorporated or registered. It is the simplest form of business organisations and the ideal choice to run a small or medium scale business. Let us look at some important features of a proprietorship.
Features of Sole Proprietorship
Sole Proprietorship in simple words is a one-man business organisation. It is the type of entity that is fully owned and managed by one natural person (not a legal person/entity) known as the sole proprietor. The business and the man are the same, it does not have a separate legal entity.
A sole proprietorship usually does not have to be incorporated or registered. It is the simplest form of business organisations and the ideal choice to run a small or medium scale business. Let us look at some important features of a proprietorship
1] Lack of Legal Formalities
A sole proprietorship does not have a separate law to govern it. So there are not many special rules and regulations to follow. It does not require incorporation or registration of any kind. In most cases, only a license is required to carry out the desired business.
And just like in its formation, there is hardly any legal process involved in its closure. Overall it allows for ease of doing business with minimum hassles.
2] Liability
Since there is no separation between the owner and the business, the liability of the owner is also unlimited. So if the business is unable to meet its own liabilities, it will fall upon the proprietor to pay them. All of his personal assets (like his car, house, other properties etc) may have to be sold to meet the liabilities of the business.
3] Risk and Profit
The owner is the only risk bearer in a sole proprietorship. Since he is the only one financially invested in the company, he must also bear all the risk. If the business fails or suffers losses he will be the one affected.
However, he also enjoys all the profits from the business. He does not have to share his profits with any other stakeholders since there are none. So he must bear the full risk in exchange for enjoying full profits.
4] No Separate Identity
In legal terms, the business and the owner are one and the same. No separate legal identity will be bestowed upon the sole proprietorship. So the owner will be responsible for all the activities and transactions of the business.
5] Continuity
Just as we saw above the business and the owner have one identity. So a sole proprietorship is entirely dependent on its owner. The death, retirement, bankruptcy. insanity, imprisonment etc will have an effect on the sole proprietorship. In most of such cases, the proprietorship will cease to exist and the business will come to an end.
Advantages of Sole Proprietorship
- A proprietor will have complete control of the entire business, this will facilitate quick decisions and freedom to do business according to their wishes.
- Law does not require a proprietorship to publish its financial accounts or any other such documents to any members of the public. This allows the business a great deal of confidentiality which is sometimes important in the business world.
- The owner derives maximum incentive from the business. He does not have to share any of his profits. So the work he puts into the business is completely reciprocated in incentives.
- Being your own boss is a great sense of satisfaction and achievement. You are answerable only to yourself and it is a great boost to your self-worth as well.
Disadvantages of Sole Proprietorship
- One of the biggest limitations of a sole proprietorship is the unlimited liability of the owner. If the business fails it can wipe out the personal wealth of the owner as well and affect his future business prospects too
- Another problem is the limited capital a sole proprietor has access to. His own personal savings and money he can borrow may not be enough to expand the business. Banks and financial institutions are also wary lending to proprietorships
- The life cycle of a sole proprietorship is undecided and attached to its owner. If the owner is incapacitated in any way it has a negative effect on the business, and it may even lead to the closure of the business. A sole proprietorship cannot carry on without its proprietor.
- A sole proprietor also has limited managerial ability. He cannot be an expert in all the fields of the business. And limited resources may mean that he cannot even hire competent people to help him out. This may lead to the business suffering from mismanagement and poor decisions.