Sole Proprietorship: Features, Merits and Demerits

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Said to be one of the oldest and traditional entities in India, a sole proprietorship is very common. For example, grocer, chemist, etc are all sole proprietors. In this article, we shall take a brief look at this business type, covering: 

 

  • What is a sole proprietorship? What are the characteristics of a sole proprietorship? 
  • What are the advantages of a sole proprietorship? 
  • What are the disadvantages of a sole proprietorship?

 

As the name suggests, a sole proprietorship is a business enterprise run by a single person. Therefore, at the head of the said business enterprise, there is one natural person who manages and owns the entire business affairs arising in that company and thus is known as a sole proprietor. In this article, we will briefly deal with the nuances of a sole proprietorship. 

We will cover the following topics: 

What is a sole proprietorship? What are the characteristics of a sole proprietorship? 

A sole proprietorship is a business managed and owned by a single man called the sole proprietor, or otherwise simply put in as “one-man business organization”. The concept of the company and the owner being two distinct legal entities does not hold true in the case of a sole proprietorship. The business and the man are the same, and it is not a separate legal entity. A sole proprietorship usually does not have to be incorporated or registered. Thereof, a sole proprietorship is considered to be the simplest form of business organisations and is often preferred in order to run a small or medium scale business. It is easy to set up and the cost is nominal. The peculiar features of a sole proprietorship are as follows: 

  1. Less legal formalities: There is no separate law or statute to govern a sole proprietorship, therefore, not many rules and regulations are applicable. The biggest plus point is that it does not require incorporation or registration of any kind. All you need to have for a sole proprietorship running is a license. Just like incorporation, even in the case of closure or termination of the business, there are no legal technicalities involved. Therefore, a sole proprietorship business is sure to be hassle-free.
  2. Unlimited liability: Because a sole proprietorship does not differentiate between a business and its owner, the liability is unlimited in nature. 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. This is often seen as a disadvantage. 
  3. Risk and profit: Because a sole proprietorship is marked by the unlimited liability of the proprietor, the owner becomes the sole risk bearer in the business. Since he is the only one financially invested in the company, he must also bear all the risks. If the business fails or suffers losses he will be the one affected. On the flip side, irrespective of the scale of profit, it all goes to the pocket of the sole owner. There is no obligation on him to share his profits with anyone as technically there is no one else but himself in the managerial positions of the company. 
  4. No separate identity: Speaking legally, one has to keep in mind that in case of a sole proprietorship, there is no difference between the identity of the business and the owner, it is one and the same. Therefore, the owner will be held responsible for all activities and transactions of the business. In legal terms, the business and the owner are one and the same. 
  5. Continuity: The continuity of the business is entirely depended on the life of the owner. If the owner dies, retires, imprisoned, or bankrupt. In most of such cases, the proprietorship will cease to exist and the business will come to an end. 

What are the advantages of a sole proprietorship?

  1. Full control: Complete control of the entire business, allowing for a quick decision-making process and full freedom to do business according to their wishes. 
  2. No legal formalities: Legal technicalities are minimum to the extent that there is no law which requires a sole 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. 
  3. Maximum benefits: The owner derives the 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. 
  4. No unnecessary procedures: Not many people are involved and thus it cuts out the procedures of hierarchy generally present in a company. Single-handedly managing your business enterprise has its own advantages like you are not answerable to anyone neither you are responsible to share your profit or ask someone to bear the loss for you. 

What are the disadvantages of a sole proprietorship?

  1. On the flip side of having all the profit to yourself, is that in the case of any loss suffered by the business, you are the only person who has to bear it. In legal terms, you have unlimited liability to make good the loss suffered by the enterprise. Therefore, if a business fails, in order to recover from the loss, you will have to keep at stake all your personal wealth and assets. 
  2. Moreover, because it is a one man company the capital investment is also comparatively low. In certain cases, the owner’s personal savings and money he can borrow may not be enough to expand the business. Banks and financial institutions are also wary of lending to sole-proprietorships for the risk involved and limited guarantors.
  3. There is a great deal of risk attached to the life of the business entity as it is entirely attached to its owner. Therefore, 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.
  4. It is often very unrealistic to assume that a sole proprietor is bestowed with all the required managerial abilities to effectively run the business. In some cases, he might not be able to acquire the expertise required for efficient and effective functioning.. Moreover, the nature of a sole proprietorship often ends with very limited resources thus limiting the capacity to hire competent people to help him out with certain technical tasks. 

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