Sole proprietorship

A form of business organization in which a single individual owns and

manages the business, takes the profits and bears the losses, is known
as sole proprietorship form of business organization.
 Definition
“A type of business unit where one person is solely responsible for
providing the capital and bearing the risk of the enterprise, and for the
management of the business.”
Characteristics of Sole Proprietorship Form of
Business Organization
1.Single Ownership : The sole proprietorship form of business organization has a single owner who
himself/herself starts the business by bringing together all the resources.

2. Simple Formation: no legal formalities to start the sole proprietorship . Establishment of sole
proprietorship form of business is simple .

3.Liability :the owner has unlimited liability .the person is personally responsible for payment of business
liabilities – banks or creditors .

4.Sole risk bearer : owner has to bear all the business losses himself .

5. No separate entity : owner and business are not two different parties .they are considered as one so
owner is responsible for all the business activities

6. Continuity : continuity of the business is solely decided by the owner .

7. Control : the owner takes all the decisions related to running of business . He can appoint people to
operate the business but management lies with the owner .

8. Only recipient of profit : proprietor solely enjoys all the success of business . He receives all the business
profit as a direct reward for risk bearing
sole trader :The individual who owns and runs the sole
proprietorship business is called a ‘sole proprietor’ or ‘sole
trader’.

Functions of sole proprietor:

1.A sole proprietor pools and organizes the resources in a
systematic way and controls the activities with the sole objective
of earning profit.
 ADVANTAGES OF SOLE PROPRIETORSHIP

1. Easy to Form and Wind up :

•A sole proprietorship form of business is very easy to form.
•A very small amount of capital one can start the business.
•Legal formalities are minimum.
• just like formation It is also very easy to wind up the business.
• It is the owners, sole discretion to form or wind up the
business at any time.
2.Direct Motivation :
•The profits earned belong to the sole proprietor alone and he
bears the risk of losses as well. Thus, there is a direct link between
effort and reward.
• If he works hard, then there is a possibility of getting more profit
and vice versa.
• This provides strong motivation for the sole proprietor to work
hard.
3. Quick Decision and Prompt Action :

• In a sole proprietorship business the sole proprietor alone is responsible for all
decisions.
•Since no one else is involved in decision making it becomes easy to take quick and
prompt action on the basis of decision taken.
Better Control :
• In sole proprietorship business, the proprietor has full control over
each and every activity of the business.
•He is the planner as well as the organizer, who co-ordinates every
activity in an efficient manner.
•Since the proprietor has all authority with him, it is possible to
exercise better control over business.
Maintenance of Business Secrets :
• In the case of sole proprietorship business, the proprietor is
in a very good position to keep his plans to himself since
management and control are in his hands.
• There is no need to disclose any information to others.
Close Personal Relationship :
•The sole proprietor is always in a position to maintain good personal contact
with the customers and employees.
•Direct contact enables the sole proprietor to know the likes, dislikes and tastes
of the customers.
•It helps in maintaining close and friendly relations with the employees and
thus, business runs smoothly.
Provides Self-employment :
Sole proprietorship form of business organization provides
self employment opportunities to the people. sometimes he
also creates job opportunities for others.
Thus, it helps in reducing poverty and unemployment in the
country.
Demerits or limitation of
sole proprietorship
1. Unlimited liability :
• If Business incurs loss then the creditors can recover their dues from
the personal asset of proprietor.
• In sole proprietorship business owner or a proprietor has unlimited
liability. .
1. Limited managerial skill :
• as one person is taking decision it may not be a balanced decision .
• Proprietor may not be expertise in all the fields so there is chance
of making error while taking decision it may leads to loss .
1. Limited resources :
• resources of the proprietor are limited .
• Banks and other lending institutions may not provide loan to run a
business in large scale .
• Limited life of a business concern : as this business is owned and
controlled by one person ,death or physical ailment leads to the
closure of business .