SOLE PROPRIETORSHIP

Also called individual proprietorship or sole

trader ship or one man business.

A form of organization in which an individual

introduces his own capital, uses his own skill in
management of affairs, assumes all the risks of
business and is wholly responsible for result of
its operations.

Bakery, hardware store, service stations, barbers

shop are example of sole proprietorship.
According to Paterson & Plowman
A sole proprietorship is a business unit whose
ownership & management are vested in one
person. The individual assumes all risk of loss or
failure and receives all profit from successful
operations.

Characteristics of Sole Proprietorship:

Ownership: of business is by one person.
Management: Owner is manger of business unit.
If business is large he may delegate some powers
to trusted employee. However overall control of
policy is retained by owner.
Finance: Capital for starting business is provided
by owner. If additional funds are required capital
can be increased by borrowing.
Size of Business Unit: The size of business unit
is usually small, but it is not necessarily.
Risk: Owner operates the business for his own
personal interest. So he assumes all risks of
business.
Proprietor & proprietorship are one: Legally the
sole trader & his business are not separate
entities. The owner & business exist
together.Profit is his profit. Loss is his loss.
Liabilities of his business are his liabilities.
Freedom of Action: Sole trader can take prompt
& immediate action within a legal framework.
Power to Start & End the Business: Sole trader
has the power to start any lawful business
without taking any advice from anyone. He can
also end or dissolve it as and when he likes. He is
the king of his business.
No Legal Formalities: There are no legal
formalities to set up this business.
Personal Service: The sole proprietorship is the
best form of organization where personal service
is required, e.g.. Service of beauty parlor etc.
Advantages of Sole Proprietorship:

Ease of formulation: A person can start any

business activity for profit motive. The person
has to develop idea, set goals & then develop it
into profitable operation.
Sole Authority: The sole trader being sole
authority takes decisions of planning, organizing,
coordinating, controlling & directing of business
unit.
Sole Claim on Profit: The sole trader is sole
owner of the profit of firm and is also responsible
for losses.
Flexible & Inexpensive Management: Full
authority rests with sole trader. He can take
prompt decisions in policies, changing methods
of production, reducing or increasing the prices
& by increasing production activities of workers
by giving them incentives.
Credit Standing: If sole trader has sound
goodwill & personal assets, he enjoys excellent
credit rating among creditors.
Minimum Legal Restrictions: An individual
business is easy to form & simple to run as
minimum legal restrictions apply. Government
give incentives to start small business units.
Proprietor & Proprietorship are one: Legally sole
trader & his business is one & same. Loss in
business is his loss & profit is his profit.
Secrecy: A sole trader being the owner himself,
keeps secrecy of profits.
Management Lies with the Owner: As owner
receives 100% profit, he therefore takes direct
personal interest in increasing productivity &
maximizing profit.
Direct Relationship with Customers: Sole trader
is in a position to maintain personal contacts with
his customers who in limited in number.
Power to start & close business: Sole trader can
start business & he has the right to close business
as & when he likes.
Benefit of Inherited Goodwill: The ownership
passes on to generations to generations. It
enables son to reap benefits of goodwill of his
father.
Reducing concentration of wealth: Sole trader
ship reduce concentration of wealth in few hands.
It gives wider distribution of business ownership
in country.
Self Employment: Sole trading business provides
business careers to large number of persons with
Disadvantages of Sole Proprietorship:
Unlimited Liability: Business involves risk. If a
firm suffer losses & assets of business are not
sufficient to cover claims against business, the
personal property of proprietor can be sold. So in
case of loss proprietor faces risk of unlimited
liability.
Difficulties of expansion: An individual sole
trader faces difficulty in expanding business.
Capital which is invested comes from personal
savings.Banks are reluctant to advance long term
loan to owners.As a result single owner finds it
difficult to expand business.
Limited Managerial Ability: In managing
business sole trader has to rely on his own skill &
judgment for operating business. Most of traders
do not posses all management skills required for
financing, marketing,purchasing, producing &
supervising business.
Lack of Continuity: The continuity of sole trader
is difficult to maintain. If he dies, falls sick etc
there is & no suitable successor to him, the
business is effected.The business may be closed,
sold or liquidated.
Weak Bargaining Power: The sole trader both
buyer & seller has weak bargaining power
Operational Disadvantages: Sole trader has
inadequate buildings, substandard machinery,
poor location & inability to purchase raw
material in large quantity due to difficulty in
acquiring capital.
Loss in Absence: A sole trader ship has to suffer
from the long illness of sole trader. The business
in his absence comes to a standstill.
Absence of Specialization: Sole trader is not in a
position to hire the services of experts like
qualified accountants etc. Business is therefore
deprived of the services of experts.