Sole proprietorship is a form of business ownership where the ownership and management of the business are in control of one individual. A sole proprietorship is also an unincorporated business that is run by an individual. In the case of professional services, it is usually called “sole practitioner” (such as freelance consultant, etc.).
Sole proprietorship businesses are very common in every locality. Indeed, a lot of the shops and stores you see in your locality — the grocery store, the vegetable store, the chemist shop, the stationery store, the mechanic’s workshop, etc. usually are sole proprietorships.
It doesn’t mean, however, that a sole proprietorship business must be a small one. The volume of activities of such a business unit may be quite large. But, since it is owned and managed by a single individual, the size often remains small.
The individual owner of a sole proprietorship is taxed under the Revenue Authority’s self-assessment system, where income tax is calculated after allowing for deductions for legitimate business expenses and personal allowances.
Characteristics of a Sole Proprietorship
Ownership: A sole proprietorship business is owned by one individual, and the individual alone has legal title to the assets and properties of the business. The entire profit arising out of business goes to the individual sole proprietor. Similarly, he alone bears the entire risk or loss that may arise in the course of running the business.
Management: The owner of a sole proprietorship business is generally its manager also, and he’s the sole decision maker as well. He has absolute right to plan for the business and execute them without any interference from anyone or anywhere.
Source of Capital: The entire capital required for the business is provided by the individual owner. In addition to his own capital he may raise more funds from outside by way of borrowing money from family and friends, and through loans from banks or other financial institutions.
Legal Status: The sole proprietor and the business enterprise are one and the same in the eyes of the Law. There is no difference between the business assets and the private assets of the business owner. The business ceases to exist in the absence or demise of the owner.
Liability: The liability of the sole proprietor is unlimited. This means that, in case the sole proprietor fails to pay for the business obligations and debts arising out of business activities, his personal property can be used to meet those liabilities.
Stability: The stability and continuity of the firm depend upon the capacity, competence and the life span of the proprietor.
Legal Formalities: There are no legal formalities necessary in the setup, functioning and dissolution of a sole proprietorship business. However, there may be a few legal restrictions when setting up some particular types of business. For example, to open a restaurant, the sole proprietor needs a license from the local municipality; to open a chemist shop, the individual must have a license from the pharmacy council or government.
Advantages of Sole Proprietorship
Easy to Setup: A sole proprietorship business probably the easiest form of business to setup. Anybody wishing to start such a business can do so in many cases without any legal formalities.
Prompt Decisions: As the sole trader takes all the decisions himself the decision making is quick; the owner is able to take care of available opportunities immediately and provide immediate solutions to problems.
Better Control: The owner has full control over his business. He plans, organises, co-ordinates the various activities. Since he has all authority, there is always effective control.
Business Secrets: In a sole proprietorship business, the owner is in a position to maintain absolute secrecy regarding his business activities, for instance with regards to formulae, recipes and methods.
Flexibility in Operations: One man ownership and control makes it possible for change in operations to be brought about as and when necessary.
Personal Attention to Consumer Needs: In a sole proprietorship business, one generally finds the proprietor taking personal care of consumer needs as he normally functions within a small geographical area.
Direct Motivation: The owner is directly motivated to put his best efforts as he alone is the beneficiary of the profits earned.
Employment Opportunity: A sole proprietorship business facilitates self-employment and also employment for many others. It promotes entrepreneurial skill among the individuals.
Distribution of Wealth: A sole proprietorship business is generally a small scale business. Hence there is opportunity for many individuals to own and manage small business units. This enables widespread dispersion of economic wealth and diffuses concentration of business in the hands of a few.
Social Benefits: A sole proprietor is the master of his own business. He has absolute freedom in taking decisions, using his skill and capability. This gives him high self-esteem and dignity in the society and gradually he acquires several social virtues like self- reliance, self-determination, independent thought and action, initiative, hard work etc,. Thus, he sets an example for others to follow.
Disadvantages of Sole Proprietorship
Unlimited Liability: In sole proprietorship, the liability of business is recovered from the personal assets of the owner. It restricts the sole trader from taking more risk to expand her business.
Limited Financial Resources: The ability to raise and borrow money by one individual is always limited. The inadequacy of finance is a major handicap for the growth of sole proprietorship.
Limited Capacity of Individual: An individual has limited knowledge and skill. Hence his capacity to undertake responsibilities, his capacity to manage, to take decisions and to bear the risks of business is also limited.
Uncertainty of duration: The existence of a sole proprietorship business is linked with the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is, therefore, uncertain.
Suitability of Sole Proprietorship
Sole proprietorship business is suitable where the market is limited, localised and where customers give importance to personal attention. This form of organisation is suitable where the nature of business is simple and requires quick decision. For business where capital required is small and risk involvement is not heavy, this type of firm is suitable. It is also considered suitable for the production of goods which involve manual skill e.g. handicrafts, filigree works, jewellery, tailoring, hairdressing, etc.