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Sole Proprietorship: Features, Merits and Demerits

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  • Last Updated : 23 Jun, 2022
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A sole proprietorship is the most popular, oldest and simplest form of business organization. It is basically made up of two words, one is ‘sole’, which means “one” and the second is ‘proprietor’, which means “owner”. So, Sole Proprietorship means a business with a single owner, also known as a sole proprietor. Sole proprietorship is defined as a form of business organization in which the business is owned, managed, and controlled by a single person. The sole proprietor is the sole recipient of all profits and bearer of all losses of the business. It is suitable for enterprises that require personal attention, personalized services, and limited capital, such as Grocery Shops, beauty parlours, boutiques, etc. Other names of the sole proprietorship are Individual Entrepreneurship, Sole Trader, and Individual Proprietorship. 

The sole owner of the business cannot share the ownership with any other person, but he/she can appoint employees and take help from other people. Besides, only the owner can invest money in the business, and can raise the capital through loans from other sources of finance. 

The sole proprietorship is the form of business organization, at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure.  L.H. Haney

A sole proprietorship is a person who carries on business exclusively by and for himself. He is not only the owner of the capital of the undertaking, but is usually the organizer and manager and takes all the profits or responsibility for losses. – James Stephenson

Features of Sole Proprietorship

1. Formation and Closure of business

This type of business organization is simple to form as no legal formalities are required to start the business. But, in some cases, a license or certification is required to carry out the sole proprietor business. For example, if a person wants to open a pharmacy business, then he/she requires a ‘drug license’. Also, registration of business is not required, as there is no separate law that governs sole proprietorship. The owner can easily close the business anytime at his own discretion. Thus, it is easy and simple to form and close this kind of business. 

2. Unlimited Liability

In a sole proprietorship, the owner has unlimited liability, i.e., the proprietor is personally responsible to pay all the debts. In other words, if in the business, funds are not sufficient to pay the debt, then the personal assets of the owner may be used to pay off all the liabilities. 

3. No separate legal entity

A sole proprietorship business has no separate legal entity from that of its owners, like in partnership and company. In the eyes of law, there is no distinction between the owner and his business. It means that the owner of the business bears the responsibility for all the business activities. 

4. No sharing of profit or loss

There is no sharing of profit or loss, like partnership and company because the business is solely run by a single individual, who provides capital in the business, directs its operation and who alone runs the risk of failure.

5. Risk bearer

All the risk of the firm is borne by a single owner only. The single individual is the sole beneficiary of all the profits. Likewise, if losses occur in the business, then he alone has to bear all the risks. 

6. Control

The sole proprietor is the only owner of the firm and has full control over its business. All the rights, responsibilities, and decisions are in the hands of the owner himself. No one can interfere in the business without the permission of the owner. 

7. Lack of Business Continuity

Since business and owner are one and exist together, so in case of death, imprisonment, insolvency, or bankruptcy of the sole owner, the business can not be continued and has to shut down. However, there is an exception to this feature, i.e., if there is a beneficiary, then a successor or nominee or legal heir of the owner can run the business. 

8. Single Ownership

This form of business organization is owned wholly by a single person. He/she provides capital in the business either from his own wealth or from borrowed capital.  

Merits of Sole Proprietorship

1. Quick Decision Making

Total Management and control of the firm lies in the hands of the sole proprietor. He enjoys the freedom of action, and has all the authority to make decisions and run the business in the way, he/she desires. It leads to quick decision-making as the owner does not have to consult with others, and can take all minor and major decisions. Besides, timely decisions also help the owner in taking advantage of different market opportunities. 

2. Easy to Form and Dissolve 

In a sole proprietorship, hardly any legal formalities are required for setting up the business, except in some cases where a license is required. For example, in the case of pharmacy business, Drug License is required. Also, the owner can close the business whenever he desires by paying back its debts. Therefore, it is easy to form and close this type of business organization. 

3. Personal Touch

In a sole proprietorship, all the work is done by the owner himself. So, he is in direct contact with the employees and customers of the organization, and can make changes in the product according to the demands of the customer. Also, he will be able to solve the problems faced by the employees easily.

4. Maximum Incentive

In this type of business organization, there is a direct relationship between the rewards and efforts. If the proprietor puts extra effort into the business, then the profits increase and the proprietor get an extra reward for the efforts. Similarly, the owner gets maximum incentive, if he/she performs better. 

5. Confidentiality of Information 

To make the business successful, it is essential for the owner to maintain secrecy within the organization. The sole proprietor does not have to share the information with others and can keep it confidential, as he/she has the sole decision-making authority. Also, it is not legally required for the owner to publish business accounts. So, it is easy for him/her to maintain secrecy.  

Demerits of Sole Proprietorship

1. Limited Resources

It is very difficult to raise capital in a sole proprietorship as compared to a partnership and corporation because a sole proprietor has limited resources to the extent of his personal assets and borrowings. The credit-raising capacity of the owner is also limited, which reduces the scope for business growth. 

2. Unlimited Liability

This is one of the biggest disadvantages of sole proprietorship. The sole proprietor has unlimited liability, which means the personal assets of the owner can be used to pay the debts of the business. This puts a financial burden on the owner. If the business does not have adequate funds to pay for obligations, the personal assets of the owner will be used to pay off the debts.

3. Lack of Continuity of Business

The life of a business depends on the sole proprietor only because the law considers the owner and the business as the same (no separate legal entity). Therefore, if the proprietor falls ill, becomes bankrupt or insolvent, or dies, then the business may come to an end. 

4. Lack of Professional Skills and Expertise

The proprietor may lack professional skills and talent. His knowledge is only limited to his area of study and may not have the necessary skills to face competition to cope with changes taking place in the environment, like changes in fashion, technology, etc. For example, an owner may be a good salesperson, but not a good manager. It is very difficult to find all the skills in one person. The sole proprietors cannot afford to appoint expert employees. Thus, the proprietor is burdened with too many tasks.

5. Risk of Wrong Decisions

The sole proprietor is the only owner of the organization, and he has to take every decision on what to do, when to do it, and how to do it. Also, he does not have experts in the organization from whom he can take advice. Therefore, there is a possibility that he will make the wrong decisions, which can lead to problems in the business.

Even though sole proprietorship has many disadvantages, it is chosen by many because of its vast advantages. This form of business organization is suitable for small-scale businesses, where the owner has to fulfill the personalized demands of consumers. 

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