Ownership Structure – Sole Proprietorship and Joint
Hindu Family Business
Apart from trading business,
small manufacturing units,
fabrication units, garages,
beauty-parlour, etc., can also
be run by a sole proprietor.
Sole proprietorship is a
one man show where
an individual by his
cleverness, courage,
ability, honesty,
education and co-
operation tries to make
his business a success.
This is the oldest form of ownership
structure. It is more common and
simplest and natural structure. In this
structure, business is completely
controlled by one person who is
known as ‘owner’ or ‘Proprietor’.
We go to the market to buy items of
our daily needs. In the market we find
a variety of shops- some of them
small and some of them big. We may
find some persons selling vegetables,
peanuts, newspapers etc. on the
roadside. We may also find cobbler
repairing shoes on the footpath.
Every-day you come across such
types of shops in your locality. But
have you ever tried to know how
these businesses are run? Who are
the owners of these businesses?
What exactly does an owner do for
any business? You may say, the
owner invests capital to start the
business, takes all decisions relating
to business, looks after the day to day
functioning of the business and
finally, is responsible for the profit or
loss. In this lesson let us find out more
about the business in which a single
individual takes all initiatives to start
and run the business.
Meaning and Definition:

Sole means ‘Single’ and Proprietorship means ‘Ownership’. A sole

proprietor is a person who carries on business exclusively by and for
himself. He bears all the responsibility for all the risks involved. He is
not only owner of the capital but is usually the organiser and
manager and takes all the profits or bear all the loss.

A sole proprietorship has no legal existence apart from the

proprietor himself. He is the firm. – Peterson and Plowmen

Sole Proprietorship is a form of

business where the individual
proprietor is the supreme judge of all
matters pertaining the business, -
Kimbell and Kimbell.

A business owned, managed and

controlled by one person who bears
all the risks and takes all the profit –
such kind of business structure is
known as Sole Proprietorship.

Single Ownership Unlimited Liability No legal

• One man control • No Profit Sharing Formalities
• No seperate Legal • Small Size • Management and
entity Control
• Secrecy

Features of Sole Proprietorship:

1. Single Ownership:
A sole proprietorship firm is completely owned by one individual.
The individual supplies the total capital from its own wealth or
from borrowed funds.

This kind of business is completely controlled by the proprietor and

he takes all the necessary and important decisions pertaining to
the business. He is not required to consult anyone. Ownership and
2. One
management
man control:
rests with one person. Some persons may be
employed to help him.

Sole Proprietorship has no separate legal identity, it is not separate

from the owner. The law makes no distinction between the
proprietor and business. Business and owner exist together. If
owner
3. No dies or
Separate become
Legal insolvent the business is dissolved.
Identity:

The owner (proprietor) is personally liable for all the debts of the
business. In case the assets are insufficient to meet its debts, the
personal property of the proprietor can be attached.
4. Unlimited liability:
The sole trader alone is entitled to all the profits and losses of the
business. He bears the complete risk and there is nobody to share
the profit or losses.
5. No profit Sharing:
The scale of operations carried on by sole proprietorship is
generally small. A sole trader can arrange limited funds and
managerial ability. Therefore, the area of operation is generally
6. Small
local and
Size: limited.

No legal formalities are required to start, manage and dissolve sole

trader business. Only a licence is necessary in certain types of a
business.
7. No legal Formalities:
8. Capital Contribution:
The proprietor alone has to arrange for necessary capital and other
assets essential for starting and subsequent operations of his
business. The proprietor provides entire capital, either from his
personal belongings or borrowing form relatives or friends.
9. Management and Control:
Proprietor has full authority over the affairs of the business. He is
free to take decisions. There is no need for consultation with any
person. The working of the firm is entirely based on his own
discretion and decision

Merits of Sole Proprietorship:

1. Easy to start and Easy to dissolve:

Sole Proprietorship can be started easily and quickly. No legal
formalities and expenditures are involved in the establishment of
proprietorship, there is no need of association or any agreement.
Only a licence is needed in some cases. Similarly he can dissolve his
proprietorship at his wish.
2. Motivation to work:
Sole Proprietor is alone entitled to receive all the profits of the
business and he has to bear all the loss associated with the
business. There is direct relationship between work and reward
 here. There is also an incentive to work hard. Proprietor is
motivated to make the best use of his skills and resources to
maximise his profit.
3. Quick decision:
Sole Proprietor is completely free to take any decision and to
implement them. He needs not to consult or to take any approval
from anybody. Quick decision and prompt action help to improve
the efficiency of business operation.
4. Independent Control:
Sole Proprietor is the supreme judge in all the matters related to his
business. He enjoys complete freedom of action. No legal
formalities and no interference of anyone. Full authority and
responsibility are vested in the same person. Personal supervision
helps to improve efficiency of the business.
5. Secrecy of affairs:
Sole trader is not liable to publish accounting records to anyone.
He is not expected to share his secrets with others. Complete
secrecy is maintained and it provides a great strength to the
business.
6. Personal Touch:
The Sole Proprietor can maintain personal contacts with his
customers and employees. He can fulfil the requirements of each
and every customers and employees as he is in direct touch with
them. He can also build healthy relationship with them.
7. Inexpensive management:
The sole proprietor is the owner, manager and controller of the
business therefore the expense of the management are minimum.
Of course he can employ persons and professionals for this work
but he exercise full control over them.
8. Flexibility:
 Sole Proprietorship is usually a small in size and very simple in
structure. It can therefore be adjusted easily whenever necessary.
The proprietor can easily change or modify the business to suit the
changing conditions of the market, without consulting anybody.
There is not legal restriction on sole proprietor.
9. Social Desirability:
Sole Proprietorship is very useful to the society as it provides self-
employment, it is an independent way of life, it offers equal
opportunities to all to use their talent.

Demerits of Sole Proprietorship

Limited Capital: Capital resources are limited to the
personal savings and borrowings of the sole
proprietor. His own assets may be insufficient and
borrowing capacity is limited. Therefore there is very
limited scope of expansion and growth.

Limited managerial skills: A single person is unlikely to

possess all the necessary business skills. He may not be
able to manage the business efficiently. There is a lack
of specialisation in Sole Proprietorship. The proprietor
may feel overburdened sometime and feel pressure.
Moreover he cannot afford to employ professionals.

Unlimited Liability: Sole Proprietor is personally liable

for all the debts and responsibilities of the firm. If he
cannot meet the obligations his personal assets are
attached, it means his personal assets may be sold to
pay off the liabilities of his firm.

Lack of Continuity: The life of Sole Proprietorship is

uncertain. Illness, insolvency or death of proprietor
may lead to termination of the business.

Limited Scope of Expansion: Due to the

limitations of the capital and management,
proprietorship business cannot grow and
expand to a large size. Advantages of large
scale of operation cannot be obtained.

Risk of Wrong decisions: Sole Proprietor may

not necessarily be an expert in all the fields of
business. Hence one wrong decision can bring
a downfall to his business. He may have
employees but they are not liable for any
decision.
 Risk of long absence: If a Sole Proprietor is
absent for few days in his business, whole
structure and process of business is
hampered. He may appoint few employees
but key decisions are to be taken by him.
Hence whole business will be suffered
because of absence of owner.

Limited scope for employees: Sole

Proprietorship is for small scale business
and firms. It is very difficult for the growth
and development of employees. Imparting
training and arranging seminars are too
costly for sole proprietor to arrange for the
growth of its employees.

Suitability of Sole Proprietorship:

Suitability of Sole Proprietorship:

Sole Proprietorship business is very suitable for

the following types of business

1) Where market is local e.g. small scale

retailers
2) Where personal attention is needed
and preference of customers is essential
like barber, tailor etc.
3) Where fashion changes frequently like
jewellery
4) Where small amount of capital is
required but personal skills are more
important
5) Where quick decisions and prompt
actions are necessary e.g. stock broker
6) Where risk involved is negligible e.g.
doctor, lawyer, CA.
 Joint Hindu Family Business:

The Joint Hindu Family Business

refers to a business which is owned
and managed by the members of a
Joint Hindu Family. It is also known as
Hindu Undivided Family Business. It is
governed by Hindu Succession Act.

This kind of business is created by the

law of succession. It is the form of
business in which the family
possesses some inherited property.
The share of inherited property is
inherited by male member from his
father, grand-father and great grand-
father. All the male members having
share in family property are known as
Coparceners. The oldest male
member is known as Karta.

Management Liability Members

Right to Account Dissolution

Features of Joint Hindu Family Business

1. Membership:
 The person becomes member in HUF by the virtue of his birth in
the family. No formal agreement is necessary between the family
members. The membership is restricted to three successive
generations. Only male members can be Coparceners. Only
female member of deceased male member have right to share in
business after his death. Minor is also a full-fledged member of
HUF. There is no limit to the number of members.

The management of HUF is rested only in the hands of Karta. The

karta may, however may associate few members to assist him in
the management.
2. Management:
The liability of the Karta is unlimited. The liability of other members
is limited to the extent of their share in the property of the family
business.
3. Liability:
Coparceners are not entitled to inspect or check accounts of the
business. However, a Coparcener leaving the business may
demand a copy of the account from the karta.
4.
5. Right to Account:
Dissolution:
HUF business is not dissolved on the death of any Coparcener. It
only comes to an end when all members notify that they are not
the members of Joint Hindu Family business.

Merits of HUF:

1. Ease of Formation:
A joint Hindu Family Business can be started easily and quickly. No
legal formalities are involved and it runs for long time. Registration
of HUF is not compulsory. It also will get an advantage of ancestral
goodwill means prestige and reputation.

2. Freedom of Action:
 The karta has complete control on the family business. The
management of the business is centralised in the hands of the
eldest member and most experienced man. No other family
member can interfere in his management.

A joint Hindu Family Business can maintain direct and intimate

contact with its employees and customers. It can provide personal
attention to the requirement of the customer.
3. Personal Contact:
The secrets of the business are known to karta only. There is,
therefore no danger of the trade secrets being disclosed to the
outsiders or rivals. Secrets of the business are not known even to
4. Utmost Secrecy: of the family.
other members

The liability of all the members except karta is limited and restricted
to their share in the business property. Their risk is limited and
known.
5. Limited Liability:
The existence of joint Hindu Family Business is not in danger by
the death or insolvency of any member or the karta. It is stable and
comes to an end only after the total breakdown of the joint Family.
6. Continuity:
Same as Sole Trader

A joint Hindu Family Business enjoys the benefit of ancestral

7. Incentive
goodwill.toThe
work:
creditworthiness of the business is high due to the
large property of the family and unlimited personal liability of the
8. Ancestral
karta. Goodwill:

9. Quick Decisions:
The karta alone is authorised to take all important decisions of the
family business. He had not to consult other family members for
 any decisions. His decision is final and cannot be challenged by
any member.
10. Economy:
Expenses of the management are low as karta is the sole manager
and controller of the Joint Hindu Family Business.

Demerits of HUF:

Limited Capital: The Capital of Joint Hindu

Family Business is limited to the ancestral
property. The family property gets divided on
the birth of every child in the family. The
business cannot expand and grow due to the
shortage of capital.

Unlimited Liability: The liability of Karta is

unlimited. His private properties are liable to pay
the debts of the business. The liability of the
remaining members is limited. Their private
properties are not attached to the obligation of
the HUF business.

Limited managerial ability: Same as Sole

Trader

Hasty Decisions: Karta is the only person

handling business activities hence
decisions taken by Karta may sometimes
be hasty, biased and unbalanced. This is
because sometimes he is overburdened
of work.
 Conflict: Exclusive power by the Karta often
creates lack of trust on the part of other
members. Suspicion and conflicts may arise
because the Karta alone knows all the
secrets of the business. This may lead to
split in the HUF.

Misuse of Power: Being the senior most

members of the family, the Karta has
complete control on the family business. He
may misuse his authority for the personal
gains.

Difference between: HUF and Sole Proprietorship

Basis of Difference Sole Proprietorship HUF

Formation
Members
Females
Liability
Minor
Management
Division of Profit
Existence
Law

Extra:

The HUF is a unique form of the business organization found in India. There are two
systems of the inheritance of the Joint Hindu Family Businesses- DAYABHAGA and
MITAKSHARA.

DAYABHAGA – is prevalent only in West Bengal ; under it both males and females
can be a member of the family business. MITAKSHARA – is operative in rest of the
India. Here only males can be a members of Joint Family Business.

ACTIVITY
i. Survey the shops in your nearby market and make a list of
Activity for You: shops. Identify at least five business units owned by
different
single individuals.
ii. Ask any shopkeeper of a small shop in your locality about the
problems faced by him in expanding his business activities.