A A sole proprietorship is a company or association owned, managed, and run by a single person who is the sole beneficiary of all gains or losses and is responsible for all risks. It is a common type of company, especially for small businesses in their early years of operation. This form of company typically provides a specific facility, such as hair salons, beauty salons, or small retail stores.
Sole proprietorship is described as:
A single-owner company is one that is owned, run, and operated by a single person.
The term “sole” refers to “only,” and “proprietor” refers to “owner.” All profits are distributed to a sole proprietor. The sole proprietor is responsible for all risks. The sole proprietor has complete and total control over his or her company. A single-owner beauty parlour, barbershop, general store, and candy shop are examples. Also see: What Is the Difference Between a Partnership and a Sole Proprietorship?
Sole proprietorship has the following characteristics:
(1) Establishment and Closure
This is a type of business entity that is created by the owner. The sole proprietorship form of business is not bound by any legal conventions.
In certain cases, legal formalities are required, or the owner must have a specific licence or certificate in order to operate the company. The owner has the authority to close the company at any time. A goldsmith or someone who runs a medical shop, for example, should have a licence to operate this form of company.
The sole proprietor has unlimited liability in a sole proprietorship company. In this case, the owner is personally responsible for all debts. If he takes out a loan for his business, he will be responsible for all debts.
As a result, he is directly responsible for any debt that his personal estate will recover if funds are inadequate. For example, if the owner of the sweet shop takes out a loan, he is solely responsible for repaying the bank.
(3) Sole Risk Bearer and Recipient of Profits
A sole proprietor is the only person who is responsible for all risks associated with their company. The sole owner is entitled to all of the gains or losses generated by the company.
(4) Maintaining control
Since the sole proprietor has complete control of all rights and obligations, he manages all aspects of the company. No one may intervene with a sole proprietor’s business operations. As a result, only the sole proprietor has the authority to change his plans.
(5) There is no separate entity.
The owner and the company are treated as two different entities in the accounting system. However, the law does not distinguish between a sole trader and his or her company.
As a result, the sole trader is the only one who conducts all of the business operations, and therefore the business has no identity without him.
(6) Insufficient Business Continuity
Death, incarceration, physical illness, insanity, or bankruptcy of a sole proprietor can have a significant impact on the company or can result in its closure.
He may run the company on behalf of the proprietor if he is the beneficiary, successor, or legal heir of a sole proprietor. You may be interested in knowing: What is the concept of entrepreneurship?
The Benefits of a Sole Proprietorship:
The following are some of the most well-known benefits of a sole proprietorship:
Make quick decisions– A sole proprietor has complete control over his or her company. As a result, they would be able to make a quick decision because they would not need to seek approval from others.
Confidentiality of information- As the sole proprietor of the company, he or she is free to keep all business information private and confidential.
Direct incentive- A sole proprietor has the right to any of a company’s profits or benefits. Sense of achievement- He or she may experience the personal gratification that comes from working independently or without supervision. Ease of incorporation and closure- A single proprietor can start a company with just the bare minimum of legal requirements.
The Disadvantages of a Sole Proprietorship:
The following are some of the most significant drawbacks of a sole proprietorship:
(1) Resources are restricted.
A sole proprietor’s resources are limited to his investments and family borrowings.
Due to the business’s poor financial status, banks are also hesitant to grant long-term loans or to increase the cap on long-term loans.
Due to a lack of any of these services, the growth of a sole proprietorship is hampered. The reasons mentioned above are why most businesses remain small.
(2) A Company’s Life Cycle
The owner and the company are one and the same, and the business’s existence is shortened due to the lack of a successor or heir.
The death, insolvency, or illness of a proprietor has a negative effect on the company, resulting in its closure.
(3) No Limitation on Liability
The main disadvantage of a sole proprietorship is that the owner is personally liable indefinitely.
If a sole proprietor fails to pay his debts as a result of the failure of his company, creditors will seek payment not only from the business’s assets but also from his personal estate.
Taking a large loan is too risky, and it also puts the pressure on the business’s sole owner.
As a result, sole traders do not wish to take the risk necessary for the business’s survival and development.
(4) Inadequate management skills
To run a company, a sole proprietor must assume all of the responsibilities.
The proprietor may be required to perform all administrative duties, such as sales, purchase, promotion, selling, client relations, and so on. He may be unable to hire and retain qualified workers.