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Uploaded Date: 16 May 2020

Sole Proprietorship Its Features Advantages and Limitations


Sole Proprietorship

Meaning : Sole proprietorship is a form of organization in which there is only single owner of business. He himself manages and control the business.

Features of Sole-Proprietorship 

1) Single ownership - He is sole owner of all the assets and resources of business.

2) No separate Legal Entity - Sole proprietorship has no separate existence like company. owner and business are not separate.

3) No Legal Formalities - No Legal Formalities are required to start, manage and dissolve such business organization. because registration of  Sole proprietorship is not mandatory.

4) Control and management - In sole proprietary organisation, all the decisions relating to business operations are taken by one person, which makes functioning of business simple and easy.

5) Unlimited liability - The liability of owner is unlimited. In case, the assets of business are not sufficient to meet its debts, the personal property of owner can be used for paying debts.

6) Undivided Risk - The sole proprietor is the only person to whom the profits belong. There is a direct relationship between effort and reward. This motivates him to work hard and bear the risks of business

8) Secrecy - All the important informations concerning the business rests only with the owner so that no outside party can take any under advantage of it.

Advantages of Sole-Proprietorship

1) Easy Formation - It can be easily started and closed as there is no need to observe any legal formalities. It is not governed by any specific law. It is simply required that the business activity should be lawful and should comply with the rules and regulations laid down by local authorities.

2) Quick Decision - A Sole proprietor takes the decision quickly as he is not required to consult anybody about his decisions.

3) Secrecy - All the secrets are confined with the owner. They are not shared with any body, so there has full secrecy.

4) Direct motivation - There is a direct relationship between effort and reward. This motivates him to work hard and bear the risks of business

5) Personal touch - Sole proprietor can maintain personal contacts with his customers and employees. In this way, good work is possible at less cost and time.

Limitations of Sole-Proprietorship

1) Limited financial resources - Funds are limited to the owner's personal savings (i.e. his capital) and his personal assets may also be insufficient for raising loans against their security, which reduces his borrowing capacity.

2) Limited managerial ability - A sole proprietor may not be able to manage the business efficiently as he is not likely to have necessary skills regarding all aspects of the business and also due to limited financial resources sole proprietor may not afford qualified managers.

3) Unlimited liability - As the sole trader has to face the entire risk of business, so he compels him to avoid risky and bold decisions. Unlimited Liability It refers that if the business gets into difficulty and can't pay its debts, the owner of the business is hold personally liable for those debts. 

4) Uncertainty - Because sole proprietor is a natural person and their has no separate entity death, insolvency, lunacy or illness of a proprietor may leads to its closure.

5) Limited scope for expansion - Due to limited capital and managerial skills, it can't expand to a large scale.






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