Sole propritor and its advantages and disadvantages
W. R. Basset and refers to sole-proprietorship form of business organisation. According to Haney, “The sole proprietorship is the form of business organisation at the head of which stands an individual who is responsible, who direct its operations and who alone runs the risk of failure,” C.S. Gerstenberg defines sole trading as “that form of business organisation which is started and run by one person who bears profits and losses of it.”
A sole proprietor is a person who carries on business exclusively by and for himself. It is very easy to start a small business on sole tradership basis because of very few legal formalities. According to Kimbal and Kimball, “The individual proprietor is the supreme judge of all matters pertaining to his business subject only to general laws of the land to such special legislation as may affect his particular business.”
A sole trader is an individual who directs and bears the risks of a business in which he owns or borrows the capital, rents the land and employs the necessary labour. He manages the business and takes the profits or bears the losses. Sole tradership is the oldest and the simplest form of business ownership and is very suitable for carrying small business operations.
This form has the following characteristics:
1. Common Identity or No Separate Entity: A sole tradership concern has no separate legal entity independent of the owner. The owner and the business concern are one and the same. The owner owns everything the business owns and he owes everything the business owes.
2. Capital In sole tradership, the capital is employed by the owner himself from his personal resources. He may also borrow money from his friends and financial institutions of he cannot depend solely on his personal resources.
3. Unlimited Liability: The liability of the proprietor for the debts of the business is unlimited. The creditors have the right to recover their dues even from the personal property of the proprietor in case the business assets are not sufficient to cover their debts.
4. Easy Formation: It is very easy to form proprietorship. In most of e cases even licence is not required. Peddlers, hawkers, small vendors nd shopkeepers can start business at their own will, provided it is not legal, and against the public interest.
5. One Man Control: Sole tradership is a one man show. The sole Fader provides management to the business. He takes all the decisions, resources material resources, employs personnel and directs and controls he affairs of the enterprise. He is not required to consult anyone else in taking any decision. Though the sole trader may delegate some of his authority to his assistants, but the ultimate authority to manage and controlests with him.
6. Profits and Losses : The surplus arising in the business of the sole reader entirely belongs to him and similarly all the business losses and risks are to be borne by him alone.
7. Limited Resources : In case of sole proprietorship the owner is an individual. Resources of an individual are always small and limited as compared to the resources of the group. It also suffers from the limited ability and limited capital of the owner.
A sole tradership firm enjoys the following benefits:
1. Easy Formation: The formation of a sole tradership concern is easier as compared to other forms of organisation. A person with small amount of capital can start the business without undergoing much legal formalities. Procurement of license may be necessary to deal in particular commodities like drugs, liquor, etc.
2. Quick Decision-making: Sole tradership facilitates quick decision making and prompt action as the sole trader has exclusive control over his business.
3. Secrecy : It is easy to preserve secrecy in business in case of sole proprietorship. The important clues of business can be kept as closely guided secrets by the proprietor.
4. Flexibility: The sole trader is free to carry out any business as the situation demands. The flexibility is available because the sole trader is the sole owner and he has invested a small amount of capital.
5. Personal Touch: A sole trader can maintain intimate personal contacts with his customers. Direct contacts will enable the proprietor to know the nature of his customers and their tastes, likes and dislikes. Close personal touch with the customers enhances the reputation of the firm.
6. Direct Incentive: In this form of business organisation, the proprietor takes all the profits and bears all the risks and losses. Thus, there is a direct relationship between effort and reward. This will motivate the owner of the business to work hard to achieve maximum efficiency for the business.
7. Independent Way of Life: Sole proprietorship offers an independent way of life for people who have necessary skills, but do not wish to serve others. This provides an excellent opportunity for self-employment of persons of small means with professional skills.
8. Low Overheads: The overhead costs of management are less as compared to other forms of business enterprises. Since the sole trader himself manages the business, he can achieve greater economy in the business operations.
9. Few Government Regulations: The sole tradership concern is subject to the minimum of government regulations. He is not subject to special legislation as in case of companies and partnership firms.
This firm suffers from the following disadvantages:
1. Limited funds: The one-man business, has a limited quantity of funds since these funds are derived from the personal savings of the entrepreneur or the small surpluses that may be generated by the business. Thus the size of the business necessarily remains small.
2. Limited managerial talent : Howsoever talented an individual might be, it cannot be denied that often his managerial ability is small in relation to an expanding business. He cannot hope to cope with everchanging conditions. He cannot be an expert. So, in every aspect of management and many a time his decisions might be wrong
3. Lack of continuity : Lack of continuity is associated with this form of organisation. The business closes down as soon as something happens to the owner. If the successors are competent, they may further the interests of the business, otherwise it may close down due to losses.
4. Unlimited liability: Unlimited liability is another drawback of this form of organisation. Since the private assets of the owner are at stake, he cannot take the risks of expanding his business, except on a limited scale.
From the above discussion it is clear that although sole proprietorship has many merits, yet it suffers from several limitations and drawbacks. He can manage only small business with small capital. This is the age of keen competition and technological advancement. He may not provide even the required managerial skill. Thus, the scope of one-man control business is only limited to small-scale sector. He has the limited risk bearing capacity. Though this type of ownership is good but the person managing it suffers from several limitations. We conclude in the words of William R. Basset,” One man control is the best in the world, if that one man is big enough to manage everything. But a business must be small, in-deed to permit one man actually to known and to supervise everything. The danger is always present that he thinks he knowns when really he does not know and naturally there is no permanency in this kind of management; if the one-man is away or ill, the business stops and of course when he dies, business vanished or has to be re-built.” Thus, one-man control is strictly limited to small business only.
