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SOLE PROPRIETOR SHIP
INTRODUCTION Sole-trader is the oldest and most commonly used form of business organasiation. It is as old as civilization. Historically, it appears that business first started with this form of organisation. With the development of science and technology the needs of the business also increased and new forms of organisation developed. This organisation is also known as sole-proprietorship, individual-proprietorship, single-enterprenuership. In sole-trade organisation, an individual is at the helm of affairs. He makes all the investments, shares all risks, takes all profits, manages and controls the business himself. A sole-trader mainly depends up to his own resources, so the business is generally on a small-scale basis. The business is normally run with the help of family members but he may employ persons to look after the day-to-day activities of the business. So far as his liability is concerned, it is unlimited. The creditors are untitled to have claim even on his private property. The sole-trader moulds the fate of the concern. It is the competance of the proprietor which determines the future of the business. His powers are unlimited and his decisions are final. He is infact, the sole organiser, manager, controller and master of his business.
The sole-trader must, however, be a person competant to enter into a contract. The business to be carried on should also be allowed by law. In some instances, a person maybe expected to take a licence from competant authorities beforehand. Normally, no other legal formality is essential for starting a sole-trade business as in the case of a company or a co-operative. Any person can start or wound up a sole-trade business anytime. This type of business is a one man show and the capacities of that person may certainly be limited. He may not be able to deal with every situation himself; so there maybe chances of committing mistakes. Since the liability is unlimited and is to fall on one person, he should have a cautious approach.
DEFINITIONS L. H. HANEY, “The individual enterprenuership is the form of business organisations on the head of which stands an individual as the one who is responsible, who directs its operations, who alone runs the risk of failure". JAMES STEPHENSON, "A sole-trader is a person who carries on business exclusively by and for himself. He is not only the honour of the capital of the undertaking but is usually the organiser and the manager and takes all the profits or responsibilities for losses". S. R. DAVAR, “The sole-trader is a person who carries on a business of his own , that is, without the assistance of a partner. he brings in his own capital and uses all his labour. He also gets himself assisted by others to whom he pays a salary by way of remuneration".
CHARACTERISTICS OF SOLEPROPRIETORSHIP 1. INDIVIDUAL INITIATIVE This business is started by the initiative of a single person. He prepares the blueprints of the venture and arranges various factors of productions. He may employee other persons but ultimate authorities lies with him. All the profits and losses are taken by the single individual.
2. UNLIMITED LIABILITY In sole-trade business the proprietor is responsible for all losses arising from the business. The liability is not limited only to his investments in the business but his private properties is also liable for business obligations. 3. MANAGEMENT AND CONTROL The proprietor manages the whole businesshimself. He prepares various plans and executes them under his own supervision. There maybe some persons to help him but ultimate control lies with the owner. 4. MOTIVATION One person is the sole-owner of the business. He takes all profits and bears losses, if any. There is direct relationship between efforts and reward. If he works more, he will earn more. He is motivated to expand his business activities. He will not like to enter speculative business because the risk involved is more. 5. SECRECY All important decisions are taken by the owner himself. Business secrets are very important for small business. By retaining business secrets he avoids competitors entering the same business.
6. PROPRIETOR AND PROPRIETORSHIP ARE ONE Legally, the sole-trader and his business are separate entities. Loss in business is his loss. Liabilities of the business are his liabilities. 7. OWNERS AND BUSINESS EXIST TOGETHER In sole-trade business there is no separate existence of the business with the owner. The business is dissolved if the owner dies, becomes insolvent or is removed from the scene. 8. LIMITED AREA OF OPERATIONS A sole-trade business has generally a limited area of operations, the reason being the limited resources and managerial abilities of the sole-trader. He can arrange limited funds only and will be able to supervise a small business. Since all decisions are to be taken by the proprietor, so the area of business will be limited with his management abilities.
LEGAL POSITION OF SOLETRADE BUSINESS 1. There is no specific law under which this business required registration etc. It is not governed by any nature. So this business can be started and dissolved at the discretion of the owner without reference to any statutory provisions. 2. The sole-trade business will be subject to the general laws of the land. If there is a provision of getting a licence for setting up a particular business, then the sole-trader will also get the licence before setting up such a business. e. g. : a person desirous of starting a wine shop is expected to get a licence from the state government. A sole-trader wanting to enter this business will certainly be expected to comply with this law. 3. The sole-trader and his business are one and the same thing. The business exists only with the sole-trader. If he disappears from the scene due to death or some other reasons, then the business will also be dissolved. 4. The liability of the sole-trader is unlimited. If a business is dissolved then no distinction is made between business and private assets and business and private loans of the sole-traders.
ADVANTAGES OF SOLEPROPRIETORSHIP 1. EASY IN FORMATION Sole -proprietorship is the only form of organisation where no legal formalities are required to be performed. Anybody wishing to start a sole-trade concern can do so without loss of time. This business is absolutely free from legal formalities. 2. BETTER CONTROL In this form of organisation one man is responsible for all types of activities. He controls all functions of the business. He himself takes decisions at appropriate times. The authority and responsibility lie with one man. He cannot afford to be complacent in taking decisions. If the responsibility is divided, then there can be a possibility of shifting obligations to other persons. In sole-trade business there is no such difficulty. The owner is all in all and he cannot escape his work. The business is controlled in an effective way. 3. FLEXIBILITY IN OPERATIONS A sole-proprietorship concern is generally run on a small scale basis. In case a change in operation is required, it can be possible without involving much expenditure. Even if a new line of production is to be taken up, it will not involve much efforts. A small scale concern can adjust its production according to the changing demand pattern. It can increase and decrease its production as per requirements. Moreover, no legal formalities are required for making changes in operations. Because of being flexible in operations, a sole trade concern is most suitable for industries dealing in fashionable and seasonal
4. RETENTION OF BUSINESS SECRETS A sole trader can maintain business secrets. Being the sole proprietor , he is not expected to share his trade secret with anybody else. He is not expected to publish his accounts. He can maintain secrecy from his competitors. Secrecy is very vital for small scale concerns. 5. EASY TO RAISE FINANCE An individual enterpreneur is able to create goodwill for his business. This helps him to establish his creditworthiness in the market. Secondly the liability in sole-trade organisation being unlimited, the creditors can have a claim over the private property of the owner. The creditors feel secure in extending credit to individual proprietors. Moreover, they try to repay the loans as quickly as possible so that they do not lose goodwill in the market. Once a sole-trader loses his creditworthiness, he will not be able to get much help from the market. 6. DIRECT MOTIVATION The proprietor takes keen interest in the working of the business. He tries to put his heart and soul in the business so to earn as much profits as he can. there is direct relationship in efforts and rewards. in other forms of organisation, the profits are shared by more than one person. So everybody may not put in his best efforts.
7. PROMPTNESS IN DECISION MAKING All important decisions are taken by one person. He can take prompt decisions. He will not let an opportunity slip away. If more than one person is involved in decision-taking, then delay is bound to occur. 8. DIRECT ACCESSIBILITY TO CONSUMER In sole-proprietorship the scale of operations is small. The owner can have direct contact with customers and employees. The can know the relations and preferences of consumers. It enable him to make necessary changes in the quality and design of his products. It will help him to boost his sales. he can also put emphasis on consumer services. 9. INEXPENSIVE MANAGEMENT The sole-trader is the owner, manager and the controller of the business. He does not appoints specialists for various functions. He personally supervises various activities and can avoid wastage in the business. He does not create managerial parphernalia. In this way managerial costs are saved to a large extent. 10. NO LEGAL RESTRICTIONS There are no legal requirements for starting a business. There is no special act governing the work of sole-proprietor. The proprietor is not required to submit the results of his business to any authority. There is no restriction in changing the nature of business. Even dissolution of the business can easily be undertaken. The tax liability on a sole-trader is also low. He is taxed as an individual and not as a business.
11. SOCIALLY DESIRABLE One man business is generally on a small scale basis. Large number of soletraders have entered all types of business. It helps in avoiding concentration of wealth. Large scale business leads to wealth accumulation in few hands. Soletrade business also provides competition to other businesses. The consumers will not be dependent upon big business houses. So, sole-trade business is socially desirable. 12. SELF-EMPLOYMENT The sole-proprietorship form of organisation offers the means of selfemployment to those who donor want to serve others. As everyone cannot get a suitable job to earn his livelihood in a developing country, the individuals can easily start a small sized business unit as a sole-trader. 13. HEALTHY RELATIONS WITH EMPLOYEES A sole-trader is in a position to maintain direct relations with his employees. This enables the employer and the employees to understand appreciate the difficulties of each other. Moreover, a sole trader can quickly solve the grievances of his employees. This results into healthy relations between employer and employees which is of vital importance for the success of the business. 14. BENEFIT OF INHERITED GOODWILL A sole-trader passes on the business goodwill to his successor. Technically a sole-trade business is dissolved on the death of the owner but in reality the same business is continued by a heir. The goodwill which one person earns during the lifetime is also passed on to those who continue that business.
DISADVANTAGES OF SOLEPROPRIETORS 1. LIMITED RESOURCES Resources of sole-proprietor are limited. He makes investments from his family resources only. He tries to raise finances from financial institutions also. These institutions want securities from these loans. the sole-trader cannot offer much security, so he does not get much help from financial institutions. The capacity of expanding business operations is limited for want of resources, even when there is a scope for expansion. 2. LIMITED MANAGERIAL ABILITY One person may not be expert in each and every function of the business. He will not be able to devote sufficient time for all types of activities. He will have to depend upon paid employees. The employees may not take as much interest as the owner himself can take. The managing capacity of the proprietor is limited. In the present competitive world, complexity of managerial jobs are increasing everyday. The sole-proprietor may not be able to use the services of experts for want of resources. So one person may not be able to survive effectively. On the other hand, his limited resources will not allow him to use services of professional people. Limited managerial capacity will hinder the growth of concern.
3. UNLIMITED LIABILITY The liability of a sole-proprietor is unlimited. His private property can also be assigned for meeting business losses. A loss in business may deprive him of his private assets also. Unlimited liability also restricts his working. He tries to be cautious in taking risks. It acts as a detriment to the growth of business activities. 4. UNCERTAIN CONTINUITY The business continues as far as soleproprietor is there. In case of his mobility or death, the business is discontinued. The successors of the sole proprietor may not have an aptitude or ability to continue in the business. The closure of a business will cause inconvenience to the consumers. It will also result in the social loss.
5. LIMITED SCOPE OF EMPLOYEES A sole-trader cannot attract trained and qualified persons for reasons of limited carrier opportunities. Moreover the continuity of sole-trade business being uncertain, the employees also remain under psychological pressure. A sole proprietor cannot offer financial incentive to employees because his activities are on a small scale. The employees will try to join good concerns whenever an opportunity arises. 6. NO LARGE SCALE ECONOMICS A Small scale concern cannot economise in purchases, production and marketing. A large scale enterprise will be able to have favourable terms of purchasing and selling of goods. In a sole-trade concern overhead expenses are also more. So this type of concern cannot enjoy the benefits of large scale economics. 7. MORE RISK INVOLVED A sole proprietor is to take all decisions by himself. So there is a possibility of taking wrong decisions. In other forms of organisations, the decisions are taken by more than one person. So the possibility of mistakes and wrong decisions is minimised. Lack of counselling may create difficult situations.
SUITABILITY OF SOLEPROPRIETORSHIP The amount of capital and managerial skills required for a particular business influences the decision about form of organisation. When the scale of operations is small then capital requirements will be less and sole-proprietorship is the most suitable form of organisation. With the improvement of industrial technology and devising of new production methods, the needs for capital have increased. There are certain types of businesses where sole proprietorship is still the most suitable form of organisation. This form of organisation is also suitable under certain circumstances. these circumstances are as follows : 1. WHERE MARKET IS LOCAL when market for a product is limited only to a particular place, scale of business operations will be small. The amount of capital required will be less and the ordinary managerial skill will be sufficient. Under such situations, sole proprietorship will be most suitable. Most of the retail trade is controlled by sole-traders.
2. WHEN PERSONAL CONTACT WITH CUSTOMERS IS REQUIRED There may be a need for personal contact with customers. The customers may have their likings and preferences for particular things. Under these situations sole-proprietorship form of organisation will be suitable. A doctor and a lawyer will be required to have a direct contact with his patients and clients. A customer may have his own liking for getting his clothes stitched. So, in all these cases sole-proprietorship will be more useful. 3. SPECULATIVE BUSINESS In speculative business the demands and prices of products changes quickly. The businessman is required to take prompt decisions. A sole-proprietor can take immediate decisions as warranted by the situation. He need not consult anybody else. So he can decide things himself. No other form of organisaytion will be as suitable for speculative business as sole proprietorship.
SOCIAL DESIRABILITY OF SOLE PROPRIETORSHIP The limitations of sole-proprietorship has necessitated the development of other forms of organisation. The wide spread use of other forms of organisation has not eliminated sole-proprietorship, rather it continues to be most popular form of organisation in every country. This form of organisation has a social desirability too. Its social necessity is because of the following reasons : 1. EMPLOYMENT TO LARGE NUMBER OF PERSONS This form of organisation is started by one person but he takes other persons for his help. The numbers of soletraders is very large in all the countries and they employ many persons as their helpers. So, sole proprietorship is able to provide employment to a large number of persons.
2. NEED OF LESS CAPITAL This form of organisation can be undertaken by the persons of all means. A person with small resources can start a business at a small scale. e. g. : a vegetable seller can start his business with few hundred rupees and get his capital back at the end of the day. So, this type of form encourages people to take up their independent business. 3. LESS RISK Generally sole-proprietorship is started at a low scale and investments made are also less. A person can even change his limne of business if it is not suitable because it is less risky to do so. 4. PROVIDING GOODS AT LOW PRICES The consumers are provided goods at low prices under this type of form. The number of sole-traders being large, they have stiff competition from one another and consumers are provided goods at competitive rates. The overhead expenses of the business are, generally, less; so it enables the soletraders to sell goods at low prices.
5. EQUAL DISTRIBUTION OF INCOME This form of organisation acts as a constraint on the monopolistic tendencies of other forms of oeganisations. A large number of persons enter the business; so this results in equal distribution of income. Every person is able to invest his savings and get an equitable return on it. When the business is in the hands of a few persons, then it results in concentration of wealth in the hands of some persons only. 6. HELPFUL TO SMALL PRODUCERS The sole-traders purchase goods from small producers and sell them to the consumers. A number of intermediaries are eliminated from the channel of distribution. The part of profit earned by mediators in the shape of commission is partly left with the producers and partly passed on to the consumers in the shape of low prices. 7. HELPFUL TO CONSUMERS The consumers are helped by the sole traders in making their purchases. The sole-traders open their shops in the streets so that consumers are able to make purchases from the nearby shops. The goods are supplied even at the door step by the hawkers, etc. . 8. ACTS AS A TRAINING CENTRE A sole-trade business provide an opportunity to learn the techniques of business. The investments being less so one can afford to learn by trial and error method. By hearing various pros and cons of a business one can expand it later on. So, this is a good form of organisation to get business training.
EXPANSION OF SOLE-PROPRIETORY BUSINESS A sole-trade business has a limited scope because of the limitations of the owner. Since only one person invests his funds, so the funds may certainly be limited. The managerial capacities of the proprietor are also limited. He has to take all the decisions himself. He will try to keep the business only to that scale which can remain in his personal supervision. The liability of the sole-trader is unlimited so he w ill not do anything which may be risky. When a business is expanded, then the risk is bound to be there, the sole-trader will be hesitant of increasing his scale of operations. Despite various difficulties and limitations, the sole-trader will certainly try to expand his business. There are two alternatives before him: 1. Adding a partner 2. Employing a servant The pros and cons of both the alternatives are discussed as follows:
ADDING A PARTNER When a new person is added as a partner, then it becomes partnership firm instead of remaining a sole-trade concern. A new partner brings in his resources and experience which can help in the expansion of business.
ADVANTAGES 1. MORE CAPITAL The partner brings in capital which can remain permanently in the business. In a sole-trade concern the investments are limited to the resources of one person only and on the admission of a partner the resources of two persons are combined. Additional funds can also be raised through loans but this will be a temporary source and interest liability of the business will also increase. So it will be better to ad a new partner when more funds are needed. 2. MANAGERIAL ABILITY The managerial ability of one person is limited. The sole-trader is the final authority in every decision; so he will personally decide everything. If the bu 8 siness needs to be expanded then there must be a sharing of the managerial responsibility. This can be possible by employing a manager too but his role will be limited because the final decisions will have to be taken by the proprietor. If managerial needs are more, then the addition of a partner will be more suitable. The partner will be able to make final decisions; so the managerial responsibility can well be shared by taking a new partner. 3. SHARING OF RISK The liability of sole-trader is unlimited: so he he will have to face all business risk by himself. When a partner is added; then the risk is shared by both the partners. The fear of risk does not, sometimes, allow the sole-trader to expand his business because it will bring more risk also. When the expansion is done by adding the partner, then the business risk will be shared among two persons.
DISADVANTAGES 1. DIVISION OF PROFITS When a partner is added, then business profits will be shared by two persons. In sole-trade business, all profits belong to the owner and he takes more interest in the business. On the other hand, if the manager is added instead of a partner, then the question of sharing profits does not arise. The sharing of profits will certainly reduce the interest of proprietors. 2. NO RETENTION OF BUSINESS SECRETS A sole-trader can keep all business secrets to himself. When partner is added, then all the secrets have to be shared with him. There may be situation when relations with partners become strained; then the secrets can be passes out. On the other hand, if an assistant us employed, then business secrets are not shared with them and there is no fear of passing them out. 3. DELAY IN DECISION TAKING When a partner is added in a business, then the decisions are taken with his consent. All business decisions have to be taken with the concensus among partners. If the decisions are not taken with the consent of a partner, then there is a fear of business being dissolved. Any partner can ask for the dissolution of the firm. the decision-making process is delayed because it may take time to come together and then agreeing for a particular decision.
EMPLOYING A SERVANT The employment of a servant is the other alternative in expanding sole-trade business. One person cannot supervise each and everything. The owner needs the help of the other persons, for controlling and managing the business properly. A manager or the assistant will share some of the burden of the proprietor. The assistant works in the sphere assigned to him and final authority is retained by the proprietor. This alternative too has some pros and cons.
ADVANTAGES A sole-trade business can be expanded by employing some person and some of the advantages of this system are discussed as follows: 1. The sole-trader is able to shift some of his responsibilities to his assistant. The assistant will look after the work assigned to him and will work under the overall control of the owner. 2. The assistant will be paid a salary and the profits belong to the owner. If the partner is added then he will have a share in profits. It will be better to get the help of a paid employee instead of taking a partner who will share profits of the business. 3. The proprietor will be able to retain business secrets because he will not be required to share them with his employer. In some concerns the secrecy of trade or business policies is very important. In such cases the employment of an assistant will be useful. 4. There will not be any delay in taking decisions because one person is the final authority in the business. The proprietor can take counselling of his employees but final decisions will remain with him.
DISADVANTAGES 1. The employment of servant will not help in bringing more funds to the business as can be possible when a partner is added. 2. A servant will not take as much interest as can be taken by the proprietor or a partner. The servant will be paid a salary; so he will not be much interested in increasing the profitability of the concerned. A partner, on the other hand, will share the profits of the business, so he will certainly take keen interest in the working of the business. 3. sometimes the employees set up there own units after taking some experience and understanding the working of the business. The sole-trader will face competition from his former employee. 4. There is also a difficulty in finding a suitable person for employment. If a wrong person is employed, then it will create problems instead of solving them.
EXAMPLES Bookkeeping A bookkeeping business caters to the financial needs of other businesses. A bookkeeper posts a company’s revenue, expenses and other financial data to an accounting system. This gives businesses owners accurate financial information concerning their business. The financial information maintained by a bookkeeper is used to prepare a company’s tax returns. Home Healthcare The healthcare industry usually flourishes in both good and bad economic conditions. Many sole proprietors seek to benefit from this stability by starting home healthcare businesses. Many of these cater to senior citizens. Services may include cooking meals, cleaning homes and assisting with hygiene needs. Financial Planners Sole proprietors work as financial planners, offering their services to individuals and small businesses. They help families plan for retirement, save for college expenses and invest in securities. Financial planners catering to businesses may help a company set up its employee retirement packages and other employee benefits.
Landscaper A landscaper may work alone or hire a small team of employees. Landscapers maintain lawns, plants and trees of homeowners and businesses. Most landscaping companies working with commercial customers hire employees to work on projects. Computer Repair Services Computer repair companies are often operated as sole proprietorships. Some business owners operate commercial shops, while others work from home. Small computer repair businesses typically cater to individuals. Catering Company Catering companies offer their services for parties, weddings, church functions and business events. In most cases, a sole proprietor operating a catering company needs to hire employees.
Housecleaning Service The startup costs for a housecleaning business are generally low. Business owners can offer a variety of additional services, such as laundry, window washing and carpet cleaning. Freelance Writer Some freelance writers operate as independent contractors, while others start small publishing companies. A freelance writer provides content to businesses owners or writes content to sell to consumers. Press releases, sales copy, website content and blog posts are commonly provided by freelance writers. Tutoring businesses provide learning assistance to students in a variety of subjects. Tutors may work with students in person or through online video chats. Many tutors have teaching experience or extensive knowledge in the subject they are teaching. Virtual Assistant Virtual assistants help entrepreneurs with administrative functions through the Internet. The tasks completed by virtual assistants depend upon the needs of clients. Common tasks may include checking emails, creating excel spreadsheets and typing documents
SUBMITTED TO : Mrs. KRITI MAHAJAN SUBMITTED BY : ANUJ JINDAL ROLL NO. 116 BCOM 1 st. B AMANDEEP ROLL NO. 174 BCOM 1 st. B