Define sole proprietorship and its advantage and and disadvantage

Individual of Sole Proprietorship

Individual or sole proprietorship is a business owned by one person. It is the most natural, the oldest, the simplest and one of the most popular forms of business organisation. It is a form of business organisation which is established, financed, owned and managed with almost unlimited freedom by an individual entrepreneur

who bears all the risks but receives the entire gains.

The individual, who establishes it, is known as individual entrepreneur, or sole proprietor or sole trader.

It has been one of the most popular forms of organisation because it can be established, organised and managed by any individual. Any person who wants to set up a business firm has simple to decide about the business which he wants to start. After that he has to arrange for the required amount of capital. He can invest out of his own savings or he can borrow from his friends and relatives. He is master of his own business and is free to do whatever he likes. He is “the supreme judge of all matters pertaining to his business” and there is none to interfere. He is required to observe minimum legal formalities either in its formation or dissolution. He has to follow only the general law which may affect his particular business. For its establishment, no registration is needed. For example, if a man wants to establish a tailoring shop he can do so without getting it legally registered. But in case of some business like a hotel and restaurant, he will have to obtain license from the proper authority.

The sole trader has to apply his own skill in decision-making. There is none to oppose him, and that is why he has to assume all the risks also. It is to be noted that the law makes no distinction between the firm and the entrepreneur and on, that account he will not only be liable to the extent of money invested in his business but his personal property will also remain at stake. In other words, his liabilities are unlimited. Similarly, since he assumes all the liabilities, he is entitled to receive the entire profits resulting from the business operations.

In general, an individual entrepreneur is able to start only a small business and gradually he makes efforts to expand it. But it does not mean that the sole proprietorship firms will necessarily be a small-scale venture. The entrepreneur is free to establish a large enterprise and there are several instances of large undertakings established under this form. Further, the sole proprietor is free to run the enterprise entirely by himself but it does not imply that such ventures are run by one person only. The proprietor is at liberty to engage as many persons as he may desire for the effective management of the concern. It is generally found that he is helped by members of his family, mostly his children. Thus, a sole trader may run his concern entirely with his own capital or with borrowed capital. He may start the concern in a portion of his residence or in rented premises. He may carry on the management himself or he may engage other persons to manage it.

Merits

Following are the merits or advantages of the sole proprietorship form of organisation :

(1) Easy and simple formation. The greatest advantage of this form of organisation is that it can be very easily established. Unlike other forms, no legal formalities are necessary for its formation. One can open it easily and in a simple manner and at the same time one can close it down whenever he may choose to do so. There are no legal formalities for expansion, contraction or dissolution of the business. Thus, it is the most flexible type of business enterprise.

(ii) Smooth management. Another merit of this form of organisation is that the management of the concern can be carried on smoothly. There is none to oppose and hence there is no room for any friction. The sole proprietor can control all its affairs personally. He is able to maintain better relations with his employees, if any.

(iii) Promptness in decision-making. The sole proprietor is free to conduct the affairs of his business and he has to consult none for it. For this reason, he is able to make quick decisions without any delay and hesitation, such promptness in decision-making is essential, in general, for the efficient conduct of the business undertakings.

(iv) Direct motivation and incentive to work. The sole proprietor has to assume all the risks and is entitled to receive all the profits; therefore, he takes pain to work as there is direct relationship between the efforts and the reward. He is always careful to avoid wastes and lapses and inefficiency. He tries to achieve maximum economy. At the same time he tries to exploit all the opportunities available for the maximisation of profits. He has not to depend upon paid emplyees who have little financial interest in the success of the enterprise.

(v) Personal touch with customers. A sole trader is always able to maintain close and personal touch with his customers which may not be possible in other forms of organisation. Thus, he is able to maintain goodwill and cater to the tastes of the consumers. Such personal touch adds to the success of the business.

(vi) Secrecy. An individual entrepreneur is able to maintain complete secrecy about important matters relating to his business and thus may be able to safeguard the business against his competitors.

(vii) Social advantages. This form provides employment opportunities to many. It ensures diffusion of business ownership and thus concentration of wealth and power in the hands of a few is avoided. Further, it helps in the development of several essential qualities in entrepreneurs, such as drive, initiative, hard-work, assumption of responsibilities, tact and self-reliance etc. The preservation of the single proprietorship offers the best promise of securing motivation and widespread ownership and control of industry.

Demerits

The sole proprietorship has got several demerits which are as follows:

(i) Limited financial resources. The greatest demerit of this form of organisation is that the capital available for the business remains very limited. An individual cannot possess enormous savings and he can borrow only limited funds from his friends and relatives. He may not have enough credit to borrow huge sums from the banks or financial institutions. This limits the size as well as profits of the business.

(ii) Limited managerial ability. An individual cannot be supposed to possess knowledge of every branch of management. Now, when the management is highly specialised and business is becoming more and more complex, nobody can claim to be an expert on all the subjects. An individual may have limited knowledge and ability to take correct decisions. He may take a wrong decision which ultimately may prove to be ruinous for the business. “Few persons are qualified by training or experience to handle alone the varied problems of purchasing, merchandising, advertising, customer relations and financing”.

(iii) Unlimited liability. Another great demerit is that the liability of the sole trader is unlimited. It implies that there is always a risk that he may lose the capital invested in his business as well as his personal property. In the event of some disaster, his creditors can satisfy their claims out of his personal property also. Thus, the entire risk has to be borne by one person alone. But, in a way unlimited liability may be of help too. The sole trader may get more credit from the creditors, as the limit of credit may extend to the value of property owned by him, and it will not be limited to the extent of capital invested by him in business only.

(iv) Lack of continuity. There is always lack of continuity or stability in such business. The mortality rate of such business has also been high. If the owner falls ill or he is away, the business stops. In case he dies, the business may disappear completely or may have to be rebuilt. It may be said that in his absence the business may be run by his relatives or paid employees, but in such a case either they may not run the business efficiently or the customers may turn to his competitors as they generally have personal touch with the owner.

(v) Possibility of expansion limited. Theoretically, it may be said that the size of the business firms run under this form can limit on the size. At the same time, the unlimited liability also discourages any expansion scheme to be executed with zeal.

In spite of the above demerits, this form of business organisation occupies a prominent place in the business world. In advanced countries as well as in developing economies like India, it is playing an important role. This form is ideal for small ventures and may be more than a match for larger enterprises. It is more suitable for the concerns where (i) capital required is small, (ii) risk involved is not heavy, (iii) goods of artistic nature are to be produced, (iv) personal touch with customers is necessary, (v) an individual is able to control the affairs, (vi) prompt decision is needed, (vii) scale of production is relatively small, and (viii) operation is simple in character not needing highly skilled management.