Sole Proprietorship

Sole proprietorship is one of the most popular forms of business organisation and is especially well suited to small businesses, particularly in their early years. Whenever you buy pens, registers or chart paper from the small stationery shop in your neighbourhood, you are most likely dealing with a sole proprietor.

Meaning: A sole proprietorship is a form of business that is owned, managed and controlled by a single individual who is the sole recipient of all profits and the sole bearer of all risks. The term itself explains it — "sole" means only, and "proprietor" means owner; so a sole proprietor is the only owner of the business. This form is common in personalised services such as beauty parlours and hair salons, and in small-scale activities such as running a local retail shop.

• Real example: Coca-Cola traces its origin to a sole proprietor — the pharmacist Dr John Pemberton, who created the syrup in 1886; ownership later passed to Asa Candler, who advertised his firm as the "sole proprietors of Coca-Cola" before forming a company in 1892.

Features

• Formation and closure: There is no separate law governing sole proprietorship. Almost no legal formalities are needed to start one (though a licence may sometimes be required), and it can be closed just as easily. So there is ease of both formation and closure.
• Liability: The proprietor has unlimited liability. If the business assets are not enough to pay its debts, the owner's personal assets (such as a personal car or property) can be used to settle them. Example: if XYZ Dry Cleaner's outside liabilities are Rs. 80,000 at dissolution but its assets are only Rs. 60,000, the proprietor must bring in the remaining Rs. 20,000 from personal sources.
• Sole risk bearer and profit recipient: The proprietor alone bears the risk of failure, but also enjoys all the profits if the business succeeds — the profit being a direct reward for bearing the risk.
• Control: The right to run the business and take all decisions rests absolutely with the proprietor, who can act without interference from anyone.
• No separate entity: In the eyes of the law, the owner and the business are not distinct. The business has no identity separate from the owner, who is held responsible for all its activities.
• Lack of business continuity: Because one person owns and controls it, the proprietor's death, insanity, imprisonment, physical illness or bankruptcy directly affects the business and may even force its closure.

Merits

• Quick decision making: The proprietor enjoys great freedom and need not consult anyone, so decisions are prompt — allowing timely use of market opportunities.
• Confidentiality of information: Sole decision-making lets the owner keep business information secret; a sole trader is also not legally bound to publish accounts.
• Direct incentive: As the only owner, the proprietor keeps all profits without sharing, which gives maximum incentive to work hard.
• Sense of accomplishment: Working for oneself brings personal satisfaction and builds confidence and a sense of achievement.
• Ease of formation and closure: With no separate governing law and minimal legal formalities, it is the least regulated form and can be started or closed at the owner's wish.

Limitations

• Limited resources: Funds are confined to the owner's savings and borrowings; banks may hesitate to grant long-term loans. This is a major reason why such businesses rarely grow large.
• Limited life of the business: Since it depends on one person, the proprietor's death, insanity, imprisonment, illness or bankruptcy can lead to closure. …