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EORUPA SCIENCE & COMMERCE ACADEMY

Q. No. 2: ANSWER: Define Sole Proprietorship? Explain it advantage and disadvantages.

SOLE PROPRIETORSHIP
INTRODUCTION: Sole proprietorship is the oldest form of organization. It is as old as the civilization itself. Historically, the business stated with this form of organization. It is the simplest and natural type of organization. Sole proprietorships also called Individual proprietorship, sole trader ship or one man business. DEFINITION: The definitions of the sole proprietorship are as follows: According to D.W.T Stafford: It is a simplest form the business which I owned and controlled by one man. According to S. Tippets: The proprietorship is that form of business organization which is owned, managed and controlled by a single individual who receives all profit and risks all his property in the success or failure of the enterprise. According to Paterson and Plowman: a sole proprietorship is a business unit whose ownership and management are invested by one person. The individual assumes all risk of loss or failure of the enterprise and received all profits from its successful operations. Features of Definition: Following are the features. (1) It is owned and managed by single person. (2) He will enjoy whole profit. (3) He will bear whole loss. ADVANTAGES OF SOLE PROPRIETORSHIP Following are the advantages of sole proprietorship. (1) Easy to start: It is easy to start an individual proprietorship. it does not require much consultation or legal formalities. Any body can start this type of business according to his capacity & ability. Sole Authority: The proprietor, being the sole authority, takes decision of planning, organizing, staffing coordinating, controlling and directing of the business unit. Sole Claim on profit: The proprietor is the sole owner of the profit of the firm and is also personally responsibility for the losses.

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Prepared By: H. ABDUL REHMAN

0321-6485593

EORUPA SCIENCE & COMMERCE ACADEMY


(4) (5) (6) Quick Decision: As it does not require much consultation or approval, it facilitates quick decision. Direct Relationship with customers: A sole proprietor is in a position to maintain personal contacts with his customers who are limited in number. Secrecy: A sole trader, being the organizer himself, maintains a high standard of secrecy of profits, special technique of production special formula, etc. Credit Standing: If the proprietor has a sound goodwill and personal assets, he enjoys and excellent credit rating among the creditors. Power to start and close the business: The sole proprietor can start any lawful business without taking any advice from anyone. He has also the right to close the business when he likes. Self Employment: The sole trading business provides business careers to large number of persons with small means. Proprietor and proprietorship are one: Legally the sole trader and his business are not separate from each other. The business entity and the owner are one and the same. Less capital: It has the advantage of starting the business comparatively with a small amount of capital. Persons who have small capital but high qualities of enterprises Saving in Taxes: In such business the rate of taxes is very low because taxes are imposed on the income of a single person who is the owner of sole proprietorship. Social Benefits: It reduces the rate of unemployment and provides the public daily necessities of life. Flexibility: Sole trader can easily change his business policy at any time as per the marketing condition and this is due to flexibility of such business. He can introduce new technique of production without the consent of any other person. Less Chances of fraud: In such type of business affairs are settled by the sole trader so there are very less chances of fraud. Good will of the business: Sole trader has direct relations with the customer so he can increase the goodwill of business by running business according to their needs and demand. Facility to customers: Generally, sole traders start the business activities in their home or near the homes of customers. this makes the customer a great facility to get benefits from the business of sole proprietorship. Freedom to manage: The sole proprietor is the supreme in charge in his business. Sole proprietary can take his own decision. He has freedom to manage the business.

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Prepared By: H. ABDUL REHMAN

0321-6485593

EORUPA SCIENCE & COMMERCE ACADEMY


(19) Saving in cost: In sole proprietorship mostly functions are performed by the sole traders. If he needs capital so he borrows such capital from his relative without any interest as a result of this he reduces the cost of production,

DISADVANTAGES OF SOLE PROPRIETORSHIP Following are the disadvantages of sole proprietorship. (1) Unlimited Liability: Individual proprietorship, the entrepreneur is fully responsible for his profit or loss. He fears that his own capital may be lost in cause of loss. Therefore, he hesitates to take certain decisions and risk because of his unlimited liability. Small Scale Production: Due to shortage of capital, difficulty in supervision and in expansion of business to far off places, sole trader cannot do large scale production. Lack of Continuity: The continuity or permanence of a sole proprietorship is normally difficult to maintain. If the proprietor dies, falls sick, is disabled and there is no suitable successor to him, the business is adversely affected. The business may be closed, sold or liquidated. Loss in Absence: A sole proprietorship has to suffer from the long illness of the proprietor. The business in his absence comes to a standstill. Absence of Specialization: The sole trader is in a position to hire the services of experts like qualifies accountants, salesmen etc. the business therefore is deprieved of the services of experts. Weak Bargaining position: The sole trader both as a buyer and seller has weak bargaining position compared to big business units. Unsuitable for a developing business: When a business grows in size, it cannot meet the needs of expanding business. High cost of production: Being a small scale production, the entrepreneur cannot reap the benefits of the economies of large scale production. It results in the high cost of production and higher prices. All makes an adverse effect on the demand for his produce. Difficulty in Credit: The banks and other financial institutions hesitate to lend/advance loan to sole proprietor. So either they do not get loans or can get loan on very high rate of interest. Dependence of personal abilities: One man feels handicapped in looking after all the affairs of business so he has to depend on his personal qualities/abilities. Erratic decisions: Single man has to make all the decision himself. He does not consult others. Many of his decisions are erratic which adversely affected his business. Over worked: The owner being the organizer performs a wide range of activities some of which he may have no experience. He is, therefore, very much over worked.

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Prepared By: H. ABDUL REHMAN

0321-6485593

EORUPA SCIENCE & COMMERCE ACADEMY


(13) (14) (15) (16) (17) (18) Lack of public confidence: Because there is no legal restriction to control and wind up sole proprietorship business therefore, public shows less confidence on such type of business organization. Lack of inspection: In such type of business there is no need of inspection. So sometimes a businessman is found to involve in some illegal activities. Wastage of time: As the distribution of work is not possible in such form of business so it result in wastage of time while visiting various places. Not durable Sole trade business is very much temporary, because owners death of heavy loss can remove it. Lack of legal protection: The sole proprietorship is not having any legal protection as compared to other business organization. No economies of large scale production: Economies of large scale production, like reduction of average fixed cost and meaningful utilization of wastage are not to be achieved in this type of business organization: Lack of capital: The smallest of his capital and the fear of risk of loss may stop the owner from indulging in market research; he cannot also take the risk of new invention. Due to less capital availability, a single man cannot bear the high expenses of advertisement. CONCLUSION The sole proprietorship form of business is the best form of business organization where a person has limited resources and wishes to work independently.

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Prepared By: H. ABDUL REHMAN

0321-6485593