Notes on topic "Sole proprietorship" For B.com part 1 students

Farhanmughal · #1 (**permalink**) 14-12-2006, 09:46 PM

Sole Proprietorship
Meaning/Definition
Characteristics
Advantages (merits)
Disadvantages (demerits)

Message for students from M.Usman (M.com) "Behind every success in life there is 90% luck & 10% hard work but with out the hard work luck is zero"

Meaning/Definition
Sole proprietorship is the simplest and oldest form of business Organization. It is owned and controlled by a single person. The sole proprietor supplies the entire capital to start the business. He takes all the profits and responsibility for losses. It is also called sole trader ship or One-man business.
Characteristics:
The characteristics of a sole proprietorship are as follows:
1-Single Ownership:
The most important feathre of a sole proprietorship is that it is owned by a single person.
2 -No Legal Entity:
The sole proprietorship has no separate entity in the eyes of law. The owner and the business are not separate from each other.
3 -Capital:
The sole proprietor provides the whole capital. If additional funds are needed he can borrow from friends, relatives or commercial Banks. He can use his profit in the business instead of borrowing.
4 -Unlimited liability:
The liability of the sole proprietor is unlimited. This means that not only his business property, but also his personal property is liable to pay his business debts.
5 -Management and Control:
The sole trader controls independently all the affairs of his business without interference from any one. He himself makes plans, policies and programmes of his business.
6 -Profit and loss:
Sole trader gets all the profit of his business and is responsible to bear the loss.
7 -Limited Operations:
Resources of sole trader are limited so he works with in limited areas.
8 -Freedom:
The formation and terminaltion is free from government rules & regulations.
9 -Duration:
As long as sole trader wants to continue his business he can continue or the business ends on the death, insanity or incapacity of sole trader.
Advantages
The following are advantages of sole proprietorship:
1 -Ease of Formation:
It is easy to form a sole proprietorship. No legal formalities like registration are required. A lawful business can be started at any time.
2 -Free from legal restriction:
There is no special act to govern the working of a sole proprietorship. Sole trader has to comply with the tax and labor laws only.
3 -Freedom of action:
Sole trader can take his own decisions. He has not to consult anybody. This type of freedom promotes initiative and self-reliance.
4 -Quick decisions:
One-man business is the best to take quick decisions. This is not possible in a partnership or in a company.
5 -Flexibility in operations:
A sole trader in more flexible in operation than other form of business organization. He is able to make changes quickly to meet the needs of changing situations.
6 -Personal contact:
The sole trader has direct link with customers. He can give individual attention to the customers needs. It increases sales and goodwill of the business.
7 -Maintenance of Secrecy:
Secrecy of business is very important for the success of a small business. A sole trader is in a better position to maintain secrecy.
8 -Credit Standing:
Due to unlimited liability the sole trader has high credit standing among the creditors. This is because they can fully recover their loan from the business and personal property of the sole trader.
9 -Management and control:
As sole trader is the sole mater of his business he can make any decision in the interest of his business. As he knows all his employees personally, he can motivate them for team work. It increase efficiency and reduces waste.
10 -Incentive and Satisfaction:
A sole trader gets all the profit of his business. Due to this incentive he works hard to make it successful.
11 -Tax Saving:
Unlike joint stock companies the income of a sole proprietorship is taxed only once. It is treated as the personal income of the sole proprietor.
12 -Ease of dissolution:
It is easy to discontinue a sole proprietor at any time. Unlike joint stock companies, no legal formalities are required.
13 -Self employment:
A sole trader is his own employee. Sole proprietorship in very suitable for those who do not want to work under others.
14 -Inexpensive Management:
The sole trader is the owner, manager and controller of the business. Therefore, the management expenses are at the minimum level.
15 -Development of Personal qualities:
The unlimited liability of the sole trader is a source of strength to the sole proprietorship. It develops the qualities of initiative, self-reliance and responsibility in the sole proprietor.
Disadvantages
The following are the disadvantages of a sole proprietorship.
1 -Unlimited Liability:
The liability of the sole trader is unlimited. The creditors have the right to recover their loan from the business and personal assets of the owner. The fear of losing personal property also discourages the owner from responding his business.
2 -Limited Managerial Ability:
The managerial ability of sole trader is limited. He may be expert in on field and not in others. He may not he able to perform all the business function with equal efficiency.
3 -Limited Capital:
This is an important disadvantage of sole proprietorship. Due to limited capital resources the sole proprietor is not able to avail many business opportunities. He cannot expand his business beyond a certain limit.
4 -Limited Expansion:
Limited managerial ability and limited capital source do not allow the sole proprietor to expand his business. He cannot avail the economies of larger scale.
5 -Uncertain Duration:
Any uncertain event happening in the personal life of the owner will disturb the smooth running of his business. The business comes to an end on the death or other disability of the sole proprietor.
6 -Chances of wrong decision:
The sole trader has to take all his decisions himself. There is no body to help him. As a result, there is possibility of making a wrong decision which may adversely affect the business.
7 -Lack of specialization:
The sole trader has to look after all the matters of his business himself. The resources of the business are also small. Therefore, he cannot engage the highly qualified experts in his business. He cannot get the benefits of specialization.
8 -Unsuitable for developing business:
Sole proprietorship is not a suitable form of organization for growing and expanding business.
9 -Lack of Public Confidence:
A sole proprietorship does not enjoy public confidence due to lack of publicity. Unlike joint stock companies the activities of the sole proprietorship are not publicly reported.
10 -No economies of larges Scale:
Due to smaller size, a sole proprietorship cannot avail the benefits arising from large scale such as large scale selling and manufacturing.

By M.Usman (M.COM)

(Farhan Mughal)