The term ‘Sole Proprietorship’ means the single owner and is preferred by a small business or an organisation owned, controlled and run by a single individual who is only the sole person responsible for all risks, profits or loss incurred over time. These businesses are of different kinds, such as beauty parlours, hair salons or small retail shops.
Features of Sole proprietorship
- Set-up and closure: These types of business organisations get set up by the owner himself where there is no requirement of legal conventions to begin the journey of a sole proprietorship. There are times when legal formalities have to occur, or the owner should hold his specified license or a certificate to operate the business. At his/her discretion, the owner can shut the operations of the company. For instance: Goldsmith or a person should have a license to operate a medical shop.
- Control: All the rights and responsibilities are of the sole proprietor. He/She monitors all the business activities without any interference from an outside element. Therefore, he/she can amend his schedules as per the situation.
- Liability: The owner has unlimited liability in the sole proprietorship business. One is responsible for paying all the liabilities. When taking a loan for the business, one will certainly be liable for all the debts that can be recovered through personal estate when funds become inadequate. For example, if the stationery shop owner takes a loan, he is solely liable to yield the loan timely to the concerned bank.
- Risk bearer and Profit recipient: A sole proprietor is only the one who takes all risks which come while operating a business. The owner manages all the profits or losses which are incurred from the company.
- No separate entity: The sole owner and the business are understood as two separate entities as per the accounting system. However, the law does not make any difference between the sole trader and its business. The business has no recognition without the sole trader because he is the only sole owner who practices all the business activities.
Advantages of Sole proprietorship
- Simple and lower costs: A sole proprietorship has an easy and inexpensive way of its business design while setting up a particular kind of business.
- Rapid decision-making process: A sole proprietor has the choice to make a decision. It is declared in no time as they don’t require approval from others.
- Safeguarding the information: Being the sole proprietor permits him/her to keep all the information private related to the organisation, ensuring confidence.
Drawbacks of Sole proprietorship
- Limited resources: Resources of a sole proprietor are limited to his savings as relatives or friends have to lend in such cases. Banks have their reasons or refute in providing the long term loans or its extension due to the unsuitable financial position of the business. As the resources are devoid of things, outcomes could be obstructed when it comes to the growth of the sole proprietorship business.
- Challenging to raise money: Sole proprietors confront various tasks when one tries to raise money as there is no selling of stocks in the business, investors don’t invest in much quantity. Banks also think twice before offering a sole proprietorship because of lack of credibility at the time of repayment and when the business suffers from losses.
- Restricted managerial ability: The sole proprietor has to acknowledge and put in effect all the responsibilities for the execution of the business. There are times when the proprietor has to carry out all the managerial functions such as purchase, marketing, sales, selling, dealings with clients and others. One will not be able to hire and retain potential employees in the organisation.