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Tuesday, 20 August 2019

Sole Proprietorship-Meaning, Features, Merits and Demerits, Class 11

What is a Sole Proprietorship/Sole Trading Concern?

Sole Proprietorship/Sole Trading Concern is one of the simplest and the oldest form of business organization. It is an informal type of business organization which has only one owner. The owner is called proprietor or sole proprietor or sole trader.

Usually (but not necessarily always) following businesses are run by a sole proprietor-
1. Local Chemist Shop
2. Small Travel Agency 
3. Local Grocery Shop, 
4. Small Food Joint
5. Small Bakery Shop
6. Tailoring, etc.


What are the features of Sole Proprietorship/Sole trading concern?

1. Minimum Government Regulations: Sole Trading Concern doesn't require any registration and hence it can be formed quickly and easily.

2. Liability of the owner is unlimited: Liability of the owner is unlimited in case of sole trading concern, which means that if business liabilities cannot be paid out of the business assets, the personal assets of the owner can be used for repayment of the business liabilities

3. Freedom in the selection of business: Another important feature of a sole trading concern is that there is a lot of freedom in the selection of the business. There are hardly any restrictions on the kind of business that a sole trader can do. Also, registration for sole trading concern is not mandatory which makes it easier for the sole trader to start the business

4. Highest Secrecy: The sole trader doesn't have to share his accounts with anyone. He does not have to share his business details with anyone. He does not have to involve anybody else in decision making and hence this form of a business organization provides the highest level of secrecy.

5. Single Ownership and Management: In this form of business organization, there is only one owner and he is the only person who takes all the important decisions. So there is only one person who does the management. Sole Proprietor himself takes all the managerial decisions.

6. Direct Contacts with the customers and employees: In this form of business organization, the owner/sole trader/sole proprietor directly deals with the customers and employees of the business since the size of the business is generally not very large. This gives an opportunity to him to build a personal rapport with all his customers and employees

7. Suitable for small businesses: This form of business organization is more suitable for small businesses like a cake shop or a beauty parlour. Such businesses require a limited amount of capital and can be managed by a single person

8. No sharing of profits or losses/risks: In this form of business organization, there is no sharing of profits or losses. So all the profits that the business makes goes to the owner or the sole proprietor. Similarly, if there are losses they are borne solely by the sole trader.




Also Read- Difference between Sole Proprietorship and Partnership

What are the merits of Sole Proprietorship/Sole Trading Concern?

1. Easy Formation: One of the biggest advantages of sole concern is that it is very easy to form. There is no registration required in case of sole trading concern. So you can start a sole trading concern without any registrations. So there are very few legal formalities that are involved in starting a sole trading concern.

2. The benefit of Secrecy: In the case of a sole trading concern, there is only one person who is the owner and the manager. So since only one person owns and manages the business a lot of secrecy can be maintained. The proprietor does not have to consult anyone before making any decision nor he is required to share any of his business details with an outsider. A Sole Proprietor does not even have to publish his accounts or financial statements.

4. Direct Motivation: In the case of a sole trading concern, the sole proprietor or the owner does not have to share his profits with anyone. He is the only one who manages the business and gets all the profit. So there is a lot of motivation for the owner to work hard. The more efforts he puts into the business, more profits he will get.

5. Quick Decisions: We have already discussed that in the case of the sole trading concern, the owner or the proprietor does not have to consult anyone for taking his decision. So this helps him to make quick decisions. Also, it becomes easy for him to implement his decision because he is the sole owner and the manager of the business. Hence this form of business organization is very useful in case of businesses which require quick decisions.

6. Flexibility in Operations: There is a lot of flexibility in operations of the sole trading concern. There is only one decision-maker who is the owner. So it helps him take quick decisions. Also, he does not have to consult anyone before implementation or changing his plans. So if need be, he can change his plan immediately and implement a new plan. This brings a lot of flexibility in running the business.





What are the Limitations of a Sole Proprietorship/Sole Trading Concern?

1. Limited Managerial Ability: In this form of business organization, there is only one owner who himself is responsible for managing the entire business. So it's not possible for a single person to manage a business beyond a certain point. Running a Business involves a lot of activities like Marketing, Sales, Production, Operations etc. So you can't expect an individual to be an expert at all these activities. Hence limited managerial ability is one of the biggest shortcomings of a sole trading concern

2. Limited amount of Capital: One more shortcoming of a Sole Trading Concern is a limited amount of capital. There is only one person who is the owner. And so he cannot contribute capital beyond a certain amount. The Sole Proprietor can take loans or financial assistance from his friends, relatives or even banks. But again, being a sole borrower, he cannot borrow money beyond a particular point. So a limited amount of capital starts hurting the business after a certain point

3. Unlimited Liability of the owner: This is also one of the biggest limitations of sole trading concern. Under this form of business organization, the liability of the owner is unlimited which means that in case business suffers any loss and if the business liabilities cannot be paid out of business assets then the personal assets of the owner will be used to pay off the business liabilities. Unlimited liability may prevent the owner from expanding his business in certain areas which may involve a little bit of risk. So unlimited liability also sometimes comes in the way of expansion of the business

4. Not suitable for large scale operations: This form of business organization is not suitable for large scale operations And we know the reasons why. There is only one owner and hence it results in limited managerial ability and a limited amount of capital for the business. So this form of business organization is not suitable for large scale operations

5. No Perpetual Existence: This form of business organization lacks stability. A sole proprietorship may come to an end in case of the event of death or insolvency of the owner

6. Absence of specialization and unprofessional decisions: We have already discussed that we cannot expect the proprietor to be an expert at all the functions of the business. Business involves quite a lot of functions like sales, production, operations etc. One single person cannot be an expert in all these areas. Hence this also results in unprofessional decisions. To make good decisions in the area of finance, you need to be a finance professional. To make good decisions in the area of production, you need to be a production professional. And since a proprietor cannot be an expert in all these, sometimes he ends up making decisions which are unprofessional or not the best for the business.

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