In India majority of small businesses start as sole proprietorships. Sole proprietorship is owned, managed and controlled by an individual. He has day-to-day responsibility for running the business. He arranges capital for the business and he solely responsible for its management. Therefore, He is entitled to the profits and has to bear the loss of business. Sole proprietorships hold ownership of all the business assets. He also assumes complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, the sole proprietor and the business are one and the same.
It is one of the simplest and most easily form business organization. This is because very few legal formalities are required to establish it. For instance to start a small factory, the permission of the local authorities is sufficient. Similarly to start a small restaurant, permission from local health authorities is required.
Merits of Sole Proprietorship
A sole proprietorship has the following advantages :
- Easy formation : It is very easy to form a sole proprietorship business as there is no legal formality involved in setting up this type of organization. There is no specific law to govern sole proprietorship business. Any business activity formed as a sole proprietorship should be lawful and comply with the rules and regulations laid down by local authorities.
- Better Control : All the decisions relating to business operations are taken by one person in sole proprietorship, which makes functioning of business simple and easy to control. Sole proprietor can also change the magnitude and nature of business activity. This gives better control to business.
- Sole beneficiary of profits : In sole proprietorship all the profit or loss belongs to owner of the business as there is a direct relation between effort and reward. This motivates owner to work hard and bear the risks of business.
- Benefits of small-scale operations : The sole proprietorship is generally suitable for small-scale business. This helps the proprietor’s family members to be employed in business.
- Inexpensive Management : The sole proprietor does not appoint any specialists to perform various functions. He supervises various activities personally to avoid wastage in the business.
Demerits of Sole Proprietorship
A sole proprietor suffers from the following disadvantages :
- Limitation of management skills : To run a business efficiently necessary skills are required. A sole proprietor lacks that skill, that’s the reason many businesses go bad in long run. A sole proprietor may not be able to run business efficiently as he has limited skills regarding all aspects of the business.
- Limitation of Resources : It is one disadvantage which is faced by almost all the sole proprietors to raise sufficient capital in sole proprietorship business. A sole proprietor own capital may be limited and his personal assets may also be insufficient for raising loans against their security. This reduces the scope of business growth.
- Unlimited liability : In case sole proprietorship business suffers any loss the sole proprietor shall be personally liable for all business obligations. For discharging business debts, his personal property such has car, house etc. may also be used if the business assets are not sufficient.
- Lack of continuity : A sole proprietorship business lacks continuity. In case of any illness, business may close temporarily. In case of death of proprietor, the business may be permanently closed.