After reading this article you will learn about:- 1. Meaning of Sole Proprietorship 2. Definitions of Sole Proprietorship 3. Characteristics 4. Scope and Prospects 5. Advantages 6. Disadvantages.
Meaning of Sole Proprietorship:
This form of organisation is the oldest and functioning from times immemorial in one form or the other. This is a ‘one man business’ in which an individual produces independently with his own capital and assumes all the risk of ownership.
In other words, a business owned or controlled by one man with or without the help of family members or few employees, that is also known as individual proprietorship or individual entrepreneurship.
Its leading feature is that the individual carries on business exclusively by and for himself. He invests his own capital. The full control of the business is with him. He bears all the risks and is the master of all the profits.
He may engage in any business unless licence is required under law. Suppose he wants to open a shoes shop or a grocery store, he will do it but if he wants to open a restaurant, he will have to obtain a licence before opening the same.
Since he has limited capital and liabilities are too many, a sole trader must start his activities to a small undertaking. It is also difficult for him to open a new enterprise.
Definitions of Sole Proprietorship:
The following are the main definitions of sole proprietory organisation:
1. According to L. H. Haney, “The individual entrepreneur ship is the form of business organisation at the head of which stands an individual as the one who is responsible, who directs its operations and who alone runs the risk of failure.”
2. According to James Stephenson, “A sole trader is a person who carries on business exclusively by and for himself.”
3. According to Dr. John A. Shubin, “Under the sole proprietorship form of ownership a single individual organises, has title to, and operates the business in his own name.”
4. According to James Lundy, “The proprietorship is an informal type of business owned by one person.”
5. According to Kimball and Kimball, “The individual proprietor is the supreme judge of all matters pertaining to his business, subject only to the general laws of the land and to such special legislation as may affect his particular business.”
6. According to S. R. Daver, “A sole trader is a person who carries on business on his. own that is, without the assistance of a partner. He brings in his own capital and uses all his labour. He also gets himself assisted by other to whom he pays a salary by way of remuneration.”
It is clear from the above definitions that sole proprietorship is a business started by one person, with his own capital assuming all the risks and responsibilities arising from the enterprise.
Characteristics of Sole Proprietorship:
The following are the essential characteristics of sole proprietorship:
1. Sole Proprietorship:
The individual carries on business exclusively by and for himself. He invests his own capital and controls the whole business. He bears all the risks and is the master of all the profits.
2. Free from Legal Formalities:
A sole trade business is not expected to meet any legal requirement. A sole trader may engage in any business unless licence is required under law. Suppose, he wants to open a cloth shop or a grocery store, he will do it but if he wants to open a restaurant he will have to obtain a licence before opening the same.
3. Unlimited Liability:
In sole trade business, liability is unlimited. The proprietor bears all the losses arising from the business. His private property is also liable for the business obligations.
4. Sole Management:
The sole trader manages the whole business himself. He prepares the plans and executes them under his own supervision. He is not required to consult anyone else in taking decisions. The ultimate authority to manage and control rests with the proprietor.
It is also an important characteristic of sole proprietorship. All the decisions are taken by the proprietor himself. He is in a position to keep his affairs to himself and maintain perfect secrecy in all matters.
6. Freedom regarding Selection of Business:
A sole trader is at freedom to select any business of his choice. He has not to depend on others.
7. Proprietor and Proprietorship are One:
It is a fact that the sole trader and his business are not separate entities. Loss in the business is his loss. Liabilities in the business are his liabilities. He bears all the risks and is the master of all the profits.
Scope and Prospects of Sole Proprietorship:
In the modern business world the scope of sole proprietorship is very limited.
The sole proprietorship form of organisation is more suitable in following cases:
1. The business in which small amount of capital is required.
2. Where the risk involved is not much.
3. Where the extent of liability is not more.
4. Where the size of business is small.
5. When the market for a product is limited only to a particular place, scale of business operations will be small.
6. When personal contact with customers is required, sole proprietorship form of organisation will be suitable.
7. If one man is big enough to manage everything.
When the scale of operations is small, then capital requirements will be less and sole proprietorship is the most suitable form of organisation.
“One-Man Control is the Best in the World, if One Man is Big Enough to Manage Everything.”:
The sole proprietorship or one-man business is a form of organisation in which an individual produces independently with his own capital, skill and intelligence and is entitled to receive all profits and equally assumes all risks of ownership.
Despite its disadvantages and limitations, sole proprietorship form of organisation is very popular.
William R. Basset, in his book, The Organisation of Modern Business says that:
“The one-man control is the best in the world if that one man is big enough to manage everything. But a business must be small indeed to permit one man actually to know and to supervise everything. The danger is always present that he thinks he knows when really he does not know and naturally there is no permanency in this kind of management if the one man is away or ill, the business stops and of course when he dies, business vanishes or has to be re-built.”
According to William R. Basset, one-man controlled business is the best provided that man is able to manage all activities efficiently and effectively. The sole proprietorship is easy to form and is also free from legal formalities. The sole proprietor can take prompt decisions to avail all business opportunities.
In sole proprietorship being one man the owner of the business, the secrecy, economy, prompt decision and direct contact with customers, etc. are found.
(Here it is necessary to discuss the advantages of sole proprietorship in brief.):
It becomes clear from the above discussion that one-man control is the best in the world provided that man is able to manage all activities efficiently and effectively. In practice, the sole proprietor has to face many difficulties which are obstruction in the smooth running of the business.
(Here it is necessary to discuss the disadvantages of sole proprietorship in brief.):
In conclusion, it can be said that “One-man control is the best in the world if that man is big enough to manage everything.”
The sole proprietorship form of organisation is more suitable in the following cases:
(i) Which are small in size.
(ii) Which require small amount of capital.
(iii) Where risk involved is not much.
(iv) Where personal attention to consumers’ needs and tastes is important,
(v) When market for a product is limited only to a particular place.
Advantages of Sole Proprietorship:
The main advantages of sole tradership are discussed as follows:
1. Ease in Formation:
Sole proprietorship is the only form of organisation which is easy to form and simple to run. No legal formalities are required to be faced by such as registration, etc. He may, however, obtain licence where required under government rules such as opening of restaurants.
2. Perfect Control:
As the sole proprietor is himself the master of the business he maintains a perfect control. He takes his own decisions and is to face the consequence. As the employees are very few he maintains personal contact with them and creates a team work. The golden rule of capitalism is ‘where the risk lies, control must lie’. There is no wastage because of his perfect control.
3. Flexibility in Operations:
As he is the sole master he is in a position to introduce any change he considers necessary. Hence, there is a great deal of flexibility in the policy making of this type of organisation.
4. Direct Motivation:
The proprietor takes a personal interest in the business as all the profits are his own. He is keen to run the business efficiently and economically because the success of business is his own success and failure is his own failure. The direct relationship between the efforts and reward acts as a great stimulus for working hard and making the enterprise successful.
5. Maintenance of Secrecy:
Secrecy, is of great importance for the success of a small business and being a sloe trader, he is in a position to keep all his affairs to himself and maintain perfect secrecy in all matters.
6. Prompt Decision:
As he himself is to consider the problem and to give decisions. He takes prompt decisions which promote efficiency. Being the sole master, he takes prompt decision and makes advantage of the opportunity. Since his decisions are not to be challenged by anyone, he does not hesitate to take decisions.
7. Catering for Individual Tastes:
As a sole proprietor, he is in a position to have close contacts with his customers and can cater for the customers’ tastes. This helps him to build goodwill which naturally results in the flourishing of business. The individual owner flourishes in all enterprises where the personal element is important.
8. Minimum Government Regulations:
The activities of the sole trader are regulated by government and law to the minimum extent. In fact, his right and obligations are the same as of any other citizen, except that he is to pay income- tax and sales tax, there is hardly any other interference of law in his affairs. The formation and dissolution of the business is not subject to any law or regulation in this form of organisation.
9. Easy to Raise Finance:
A sole proprietor is able to create goodwill for his business. This helps him to establish his creditworthiness in the market. And being his liability unlimited the creditors can have a claim on his private property also. The creditors feel secure in extending credit to the sole proprietors.
10. Social Advantages:
By doing small business, he is rendering service to the society and at the same time maintaining independent way of life.
The general advantages are given below:
(i) Independent Way of Life:
This form of organisation provides a way of life for those who take pride in ownership and control of what they are masters. They are obviously of independent spirit and would not care to serve under others. Such persons are in a position to utilise their capacity to full extent and enjoy freedom of action. He is both the master and manager and this fact gives the greatest possible satisfaction.
(ii) Generation of Social Values:
This form of organisation affords a high degree of self-determination, the enjoyment of purposeful work, the warmth of social contact, a well integrated family and respectable life. This develops the qualities of self-reliance, responsibilities and initiative which are of great social significance.
(iii) Diffusion of Business Ownership:
Under this form of organisation, a very large number of people must own and manage vast number of small business units. It makes for diffusion of business ownership as against concentration of power in few hands offered by a joint stock company.
Disadvantages of Sole Proprietorship:
Notwithstanding so many advantages, both economic and social, the sole ownership suffers from various disadvantages or limitations which are discussed below:
1. Limited Capital:
The sole proprietor has got the serious handicap of limited capital. Except very few, generally no one is rich enough to expand his business. Since the sole proprietor determines his own policy and conducts his business, no one else is prepared to invest his money into the business of sole proprietorship. Thus, this form of organisation can not expand his business even if there is chance for doing so.
2. Limited Managerial Ability:
An individual however capable cannot be expected to passess all the knowledge of all branches of a business and is bound to waste his energies in doing things which would have been left to experts in a joint stock company. Since being alone, he has to bear a great responsibility which may crush him unless he is a giant in judgement, intelligence and intellect. He may at time give wrong directions resulting in loss.
3. Unlimited Liability:
The liability of the sole proprietor is unlimited. It is not only the assets of the business which are liable but his private property is also liable for the debts of his business. The advantage of personal control is counterbalanced by the risk which is inherent in this from of organisation. Limited capital, limited managerial capital and unlimited liability of sole proprietor act as brakes to the development and expansion of the business.
4. Uncertainty of Continuity:
There is no guarantee that sole-trading concern will be continued, because it may close down in the case of loss or the death of the proprietor. There may be no one after him who may keep on the business. It may also be that there may be no heir or there may be legal conflicts. In most of the cases, the business ends with the death of sole proprietor.
5. Hasty Decision:
In sole proprietorship, the decisions are taken by owner. So there is a possibility of taking a worse decision and it may be of great harm to the business. It is well known fact that “Haste makes waste”.
6. No Large Scale Economies:
Since the scale of operation is relatively small, the sole proprietor cannot avail the benefits of large scale production. A small scale concern cannot economise in purchases, production and marketing.
In conclusion, it may be said that one man control is the best from the point of view of efficiency, economy and profitability, provided one man is big enough to manage everything.