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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.
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. . However overall control of policy is retained by owner.According to Paterson & Plowman A sole proprietorship is a business unit whose ownership & management are vested in one person. If business is large he may delegate some powers to trusted employee.
Profit is his profit. If additional funds are required capital can be increased by borrowing.Finance: Capital for starting business is provided by owner. Size of Business Unit: The size of business unit is usually small. Proprietor & proprietorship are one: Legally the sole trader & his business are not separate entities. Risk: Owner operates the business for his own personal interest. . Loss is his loss. but it is not necessarily. Liabilities of his business are his liabilities. The owner & business exist together. So he assumes all risks of business.
g. .Freedom of Action: Sole trader can take prompt & immediate action within a legal framework. 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. Service of beauty parlor etc. Power to Start & End the Business: Sole trader has the power to start any lawful business without taking any advice from anyone.
. Sole Authority: The sole trader being sole authority takes decisions of planning. The person has to develop idea. controlling & directing of business unit. organizing. set goals & then develop it into profitable operation.Advantages of Sole Proprietorship: Ease of formulation: A person can start any business activity for profit motive. Sole Claim on Profit: The sole trader is sole owner of the profit of firm and is also responsible for losses. coordinating.
Government give incentives to start small business units. changing methods of production.Flexible & Inexpensive Management: Full authority rests with sole trader. He can take prompt decisions in policies. Credit Standing: If sole trader has sound goodwill & personal assets. Minimum Legal Restrictions: An individual business is easy to form & simple to run as minimum legal restrictions apply. . reducing or increasing the prices & by increasing production activities of workers by giving them incentives. he enjoys excellent credit rating among creditors.
Proprietor & Proprietorship are one: Legally sole trader & his business is one & same. he therefore takes direct personal interest in increasing productivity & maximizing profit. Loss in business is his loss & profit is his profit. Management Lies with the Owner: As owner receives 100% profit. Secrecy: A sole trader being the owner himself. keeps secrecy of profits. . Direct Relationship with Customers: Sole trader is in a position to maintain personal contacts with his customers who in limited in number.
Benefit of Inherited Goodwill: The ownership passes on to generations to generations.Power to start & close business: Sole trader can start business & he has the right to close business as & when he likes. . 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 small means.
the personal property of proprietor can be sold.As a result single owner finds it difficult to expand business. . If a firm suffer losses & assets of business are not sufficient to cover claims against business. So in case of loss proprietor faces risk of unlimited liability. Capital which is invested comes from personal savings.Disadvantages of Sole Proprietorship: Unlimited Liability: Business involves risk. Difficulties of expansion: An individual sole trader faces difficulty in expanding business.Banks are reluctant to advance long term loan to owners.
producing & supervising business.The business may be closed.Limited Managerial Ability: In managing business sole trader has to rely on his own skill & judgment for operating business. falls sick etc there is & no suitable successor to him. marketing. the business is effected. .purchasing. sold or liquidated. Lack of Continuity: The continuity of sole trader is difficult to maintain. If he dies. Weak Bargaining Power: The sole trader both buyer & seller has weak bargaining power compare to big business. Most of traders do not posses all management skills required for financing.
Loss in Absence: A sole trader ship has to suffer from the long illness of sole trader.Operational Disadvantages: Sole trader has inadequate buildings. . 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. substandard machinery. poor location & inability to purchase raw material in large quantity due to difficulty in acquiring capital.