Characteristics, Merits and Limitations of Sole Proprietorship Form of Business Organisation

Organization: 

Sole proprietorship

Gopal runs a grocery shop in the local market. He buys goods from the wholesale market and sells it to the customers as per their requirement. By doing so he earns some profit. He had started his business two years ago by investing Rs. 1 lakh, which he had borrowed from his friend. Today, he is running his business successfully, earning a good profit, and has been able to pay back the borrowed money. He has also employed two persons to help him in the shop. Gopal says, he is the owner of a sole proprietor concern

Definition of Sole Proprietorship

J.L. Hanson: 'A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business

Characteristics of Sole Proprietorship Form Of Business Organisation

(a)  Single Ownership: The sole proprietorship form of business organisation has a single owner who himself/herself starts the business by bringing together all the resources.

(b) No Separation of Ownership and Management: The owner himself/herself manages the business as per his/her own skill and intelligence. There is no separation of ownership and management as is the case with company form of business organisation.

Less Legal Formalities: The formation and operation of a sole proprietorship form of business organisation does not involve any legal formalities. Thus, its formation is quite easy and simple

Merits Of Sole Proprietorship Form Of Business Organisation

(a) Easy to Form and Wind Up: It is very easy and simple to form a sole proprietorship form of business organisation. No legal formalities are required to be observed. Similarly, the business can be wind up any time if the proprietor so decides.

b)   Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs of the sole proprietary organisation. So he/she can take quick decisions on the various issues relating to business and accordingly prompt action can be taken.

(c)  Direct Motivation: In sole proprietorship form of business organisations. the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently.

(d)   Flexibility in Operation: It is very easy to effect changes as per the requirements of the business. The expansion or curtailment of business activities does not require many formalities as in the case of other forms of business organisation

(e)   Maintenance of Business Secrets: The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts

(f)      Personal Touch: Since the proprietor himself handles everything relating to business, it is easy to maintain a good personal contact with the customers and employees. By knowing the likes, dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly, as the employees are few and work directly under the proprietor, it helps in maintaining a harmonious relationship with them, and run the business smoothly.

Limitations Of Sole Proprietorship Form Of Business Organisation

(a)  Limited Resources: The resources of a sole proprietor are always limited. Being the single owner it is not always possible to arrange sufficient funds from his own sources. Again borrowing funds from friends and relatives or from banks has its own implications. So, the proprietor has a limited capacity to raise funds for his business

(b) Lack of Continuity: The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.

(c)  Unlimited Liability: You have already learnt that there is no separate entity of the business from its owner. In the eyes of law the proprietor and the business are one and the same. So personal properties of the owner can also be used to meet the business obligations and debts.

(d) Not Suitable for Large Scale Operations : Since the resources and the managerial ability is limited, sole proprietorship form of business organisation is not suitable for large-scale business

(e) Limited Managerial Expertise: A sole proprietorship from of business organisation always suffers from lack of managerial expertise. A single person may not be an expert in all fields like, purchasing, selling, financing etc. Again, because of limited financial resources, and the size of the business it is also not possible to engage the professional managers in sole proprietorship form of business organisations.