SOLE PROPRIETORSHIP

'Sole' means single and 'proprietorship' means ownership. It means only one person or an individual becomes the owner of the business. Thus, the business organization in which a single person owns, manages and controls all the activities of the business is known as sole proprietorship form of business organization. The individual who owns and runs the sole proprietorship business is called a ‘sole proprietor’ or ‘sole trader’. A sole proprietor pools and organizes the resources in a systematic way and controls the activities with the sole objective of earning profit.

 DEFINITION 

A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.

A sole proprietorship is defined as a business owned by a single person who receives all profits and assumes all risks.

A sole proprietorship is an unincorporated business owned by one individual, making it the simplest form of business to start and operate.

CHARACTERISTICS OF SOLE PROPRIETORSHIP

Sole proprietorship forms of business organizations have the following characteristics.

1.            Single Ownership: A single individual always owns sole proprietorship form of business organization. That individual owns all assets and properties of the business. Consequently, he alone bears all the risk of the business. Thus, the business of the sole proprietor comes to an end at the will of the owner or upon his death.

2.                  No sharing of Profit and Loss: The entire profit arising out of sole proprietor-ship business goes to the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. Nobody else shares the profit and loss of the business with the sole proprietor.

3.      One man’s Capital: The capital required by a sole proprietorship form of business organization is totally arranged by the sole proprietor. He provides it either from his personal resources or by borrowing from friends, relatives, banks or other financial institutions.

4.                One-man Control: The controlling power in a sole proprietorship business always remains with the owner. The owner or proprietor alone takes all the decisions to run the business. Of course, he is free to consult anybody as per his liking.

5.            Unlimited Liability: The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.

6.        Less Legal Formalities: The formation and operation of a sole proprietorship form of business organization requires almost no legal formalities. It also does not require to be registered. However, for the purpose of the business and depending on the nature of the business, the sole proprietorship has to have a seal. He may be required to obtain a license from the local administration or from the health department of the government, whenever necessary.

ADVANTAGES OF SOLE PROPRIETORSHIP

1.      Ownership

The sole owner of a sole proprietorship possesses all of the authority to make decisions on behalf of the company. Full ownership and management control is another advantage of owning a sole proprietorship. Owners are not required to attend formal meetings required of owners and members of other business structures. With a sole proprietorship, the owner can decide to sale or transfer the company to another individual and make important business decisions at his discretion.

2.      Taxation

Another advantage of forming a sole proprietorship is the taxation rules established by the Internal Revenue Service. Sole proprietors are not required to file separate tax returns for their business. Income made from the business is counted as personal income and owners pay taxes according to their individual tax rates. Sole proprietors must pay Social Security and Medicare taxes as well. The tax rules regarding sole proprietorship's allow owners to avoid the double taxation of corporations.

3.      Changing Business Structures

If your business grows to a place that the business structure of a sole proprietorship no longer works to your advantage, you can easily change your business structure to a more complex model. The only requirement for going from a sole proprietorship to another business structure is filling out the paperwork for your new business structure. You are not required to fill out paperwork with a regulatory body because sole proprietorship's are not governed by regulatory bodies.

4.      Distribution of Profits

Sole proprietors are the sole owners of their businesses and do not split profits with other owners. One hundred percent profit retention allows sole proprietors to use the money at their discretion. You can choose to reinvest the money back into the business to expand the company, start another business or use it for personal reasons.

5        Employment: Sole proprietorship's can hire employees. This can lead to many of the benefits associated with job creation, such as tax breaks. Also, spouses of the business owner can be employed without having to be formally declared as an employee. Married couples can also start a sole proprietorship, though liability can only assumed by one individual.

DISADVANTAGES OF SOLE PROPRIETORSHIP

1.                  Limited Capital: In sole proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business for its growth and expansion.

2.           Unlimited Liability: In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities.

3.                Lack of Continuity: The existence of sole proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is therefore uncertain.

4.             Limited Size: In sole proprietorship form of business organization there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.

5.           Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be poor in marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management.