Which is the oldest form of business organisations? Well, it is a sole proprietorship. Also, it is the most common type of business structure found in India. In fact, all the businesses that you see around you, your local grocer, the chemist, the doctor are all probably sole proprietors. So, let us look at some features of a sole proprietorship.
Sole Proprietorship in simple words is a one-man business organisation. Furthermore, a sole proprietor is a natural person(not a legal person/entity) who fully owns and manages this type of entity. In fact, the business and the man are the same, it does not have a separate legal entity.
In addition, a sole proprietorship usually does not have to be incorporated or registered. Thus, it is the simplest form of business structure and the ideal choice to run a small business or medium scale business. Let us look at some important features of a proprietorship.
Features of Sole Proprietorship
1] Lack of Legal Formalities
A sole proprietorship does not have a separate law to govern it. And so there are not many special rules and regulations to follow. Furthermore, it does not require incorporation or registration of any kind. In fact, in most cases, we need only the license to carry out the desired business.
And just like in its formation, there is hardly any legal process involved in its closure. All in all, it allows for ease of doing business with minimum hassles.
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Since there is no separation between the owner and the business, the personal liability of the owner is also unlimited. So if the business is unable to meet its own debts or liabilities, it will fall upon the proprietor to pay them. For instance, he may have to sell all of his personal assets (like his car, house, other properties etc) to meet the debts or liabilities of the business.
3] Risk and Profit
The business owner is the only risk bearer in a sole proprietorship. Since he is the only one financially invested in the company. As a result, he must also bear all the risk. In other words, 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.
As seen above the business and the owner has 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 such situations, 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. Thus this will facilitate quick decisions and freedom to do business
- Law does not require a proprietorship to publish its financial accounts or any other such documents to any members of the public. As a result, there is enough confidentiality which is important in the business world
- The business owner derives the maximum incentive from the business. Because 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. Moreover, you are answerable only to yourself. Hence 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 personal liability of the owner. If the business fails it can wipe out the personal wealth of the owner as well as affect his future business prospects too
- Another problem is that a sole proprietor has access to limited capital. The money he can borrow from his own personal savings may not be enough to expand the business. Moreover, banks and financial institutions are also wary of lending to proprietorships.
- The life cycle of a sole proprietorship is undecided and attached to its owner. An incapacitated owner may have 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. Furthermore, limited resources may mean that he cannot hire competent people to help him out. As a result, the business may suffer from mismanagement and poor decisions.
Solved Question for You
Q. The Proprietorship Act governs the functioning of Sole Proprietorships in India. True or False?
Ans: The statement is False. In fact, there is no such law in existence. Sole Proprietorship is not governed by any one single law. This is because it has no separate legal identity. There is no need for incorporation and the not many procedures to be done. The only steps involved are opening a bank account and obtaining a license (if necessary).