- Slides: 11
A Sole Proprietorship Firm
How To Start Sole Proprietorship A sole proprietorship requires almost no legal formalities. It can start the day you want it to start. One may even open a bank account on the name of your sole proprietorship concern. n In case you wish to have a trade mark, design and use it as your trade mark. One may even register a Trade Mark with the proper authorities. n The only thing you must take care of is that you have the required licenses specific to your line of business. For Example: If you are a doctor you need a license to practice etc. Find out about your line of business and what licenses you may require before setting up. n
n n n A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk. A sole proprietorship is the most common type of business. There are sole proprietorships everywhere. Small grocery stores, STD booths are mostly proprietorship businesses. A “Sole Proprietorship” business means that there is only ONE owner. There may be employees or helpers hired under the owner, but there is only one “head” who administers and runs the show.
Characteristics of a sole proprietorship n Single Ownership: A single individual owns the sole proprietorship! That individual owns all the assets and properties of the business. He alone bears all the risk of the business. n No sharing of profit & loss: The entire profit out of the sole proprietor ship business goes to the sole proprietor. If there is any loss, it is also borne by the sole proprietor alone. Nobody else shares any of the profit and loss of the business. n Low capital: The capital required by a sole proprietorship is totally arranged by the sole proprietor. He raises the capital either from his personal resources or by borrowing from friends, relatives, banks or financial institutions. Since there is only one person raising capital, very low capital can be raised.
n One-man control: The controlling power in a sole proprietorship business always remains with the owner alone. The owner or proprietor alone takes all the decisions to run the business. He may take decisions though a consultant or some advice, but the final decisions are always in his hand. n 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. n Almost no legal formalities: The formation and operation of a sole proprietorship requires almost no legal formalities. However, the owner may be required to obtain a license from the local administration or from the health department of the government, whatever is necessary depending on the nature of the business.
What is the meaning of unlimited liability? In the case of “Sole Proprietorship”, the Govt. does not see any difference between the firm and the individual. n If you are a plumber named Raju Sharma and you start a plumbing service firm called “Flush” which is a sole proprietorship, the government does not differentiate between “Flush” and “Raju Sharma” n This means that if someone sues “Flush” and “Flush” owes that person a huge sum of money, it is as good as Raju Sharma owes that person a huge sum of money. n Raju Sharma's bank accounts, property and even his house may be used to settle the claim. n
Advantage of a Sole Proprietorship n Easy to form and wind up: A sole proprietorship form of business is very easy to form. With a very small amount of capital you can start the business. There is no need for any legal formalities. (Except for those businesses which require a license from local authorities or health department of government etc. ) It is also very easy to wind up the business. It is the owners decision to form or wind up. n Direct motivation: The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between the effort and the reward. If he works hard, then there is a possibility of getting more profit and he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard.
n Better control: In sole proprietorship business the proprietor has full control over each and every activity of the business. Since the proprietor has all authority with him, it is possible to exercise better control over business. n Maintenance of business secrets: Business secrecy is an important factor for every business. It refers to keeping the future plans, business strategies, etc. , secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands. n Encourages self-employment: Sole proprietorship form of business organization leads to creation of employment opportunities for people. Not only is the owner selfemployed, sometimes he also creates job opportunities for others. Thus, it helps in reducing poverty and unemployment in our country.
Disadvantage of a Sole Proprietorship n Limited capital: In a sole proprietorship business, the owner arranges for the required capital for the business. It is 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’s growth and expansion. Venture capitalists and banks generally do not lend money to sole proprietorships. n Unlimited liability: In case the sole proprietor fails to pay the expenses arising out of business activities, his personal properties may have to be used to pay for those. This generally discourages the sole proprietor from taking risks. He thinks cautiously while deciding to start or expand the business activities.
n Lack of continuity: The existence of a sole proprietorship business is dependent on the life of the proprietor. Illness, death etc. of the owner brings an end to the business. The continuity of business operation is therefore uncertain. n Limited size: There is a limit beyond which it becomes difficult for a sole proprietor to expand the business activities. It is not possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit. n 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 weak 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.
Suitability of Sole Proprietorship Form of Business n n n Where the market for the product is small and local. For example, selling grocery items, books, stationery, vegetables, etc. Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc. Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc. Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stall, etc. Where manual skill is required. For example, making jeweler, haircutting or tailoring, cycle or motorcycle repair shop, etc.