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Introduction to Business

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Introduction to Business ­MGT 211
VU
LESSON 04
SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS
SOLE PROPRIETORSHIP
Sole proprietorship is a simple and oldest form of business organization. Its formation does
not require any complicated legal provision like registration etc. It is a small-scale work, as it is
owned and controlled by one person, and operated for his profit. It is also known as "sole
ownership", "individual partnership" and "single proprietorship".
DEFINITION
Following are some important definition of sole proprietorship:
1. According to D.W.T. Staffod
"It is the simplest form of business organization, which is owned and controlled by one man."
2. According to G. Baker
"Sole proprietorship is a business operated by one person to earn profit."
CHARACTERISTICS
Following are the main characteristics of sole proprietorship:
1. Capital
In sole proprietorship, the capital is normally provided by the owner himself. However, if
additional capital is required, such capital can be increased by borrowing.
2. Easy Dissolution
The sole proprietorship can be easily dissolved, as there are no legal formalities involved in it.
3. Easily Transferable
Such type of business can easily be transferred to another person without any restriction.
4. Freedom of Action
In sole proprietorship, single owner is the sole master of the business, therefore, he has full
freedom to take action or decision.
5. Formation
Formation of sole proprietorship business is easy as compared to other business, because it
dos not require any kind of legal formality like registration etc.
6. Legal Entity
In sole proprietorship, the business has no separate legal entity apart from the sole traders.
7. Legal Restriction
There are no legal restrictions for sole traders to set up the business. But there may be legal
restrictions for setting up a particular type of business.
8. Limited Life
The continuity of sole proprietorship is based on good health, or life or death of the sole owner.
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Introduction to Business ­MGT 211
VU
9. Management
In sole proprietorship, the control of management of the business lies with the sole owner.
10. Ownership
The ownership of business in sole proprietorship is owned by one person.
11. Profit
The single owner bears full risk of business, therefore, he gets total benefit of the business as
well as total loss.
12. Size
The size of business is usually small.
The limited ability and capital do not allow the
expansion of business.
13. Success of Business
The success and goodwill of the sole proprietorship is totally dependent upon the ability of the
sole owner.
14. Secrecy
A sole proprietorship can easily maintain the secrecy of his business.
15. Unlimited Liability
A sole proprietor has unlimited liability. In case of insolvency of business, even the personal
assets are used by the owner to pay off the debts and other liabilities.
ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETORSHIP
ADVANTAGES OF SOLE PROPRIETORSHIP
Following are the advantages of sole proprietorship:
1. Contacted with the customers
In sole proprietorship a businessman has direct contact with the customer and keeps in mind
the like and dislikes of the public while producing his products.
2. Direct Relationship with Workers
In sole proprietorship a businessman has direct relationship with workers. He can better
understand their problems and then tries to solve them.
3. Easy Formation
Its formation is very easy because there are not legal restrictions required like registration etc.
4. Easy Dissolution
Its dissolution is very simple because there are no legal restrictions required for its dissolution
and it can be dissolved at any time.
5. Easy Transfer of Ownership
A sole proprietorship can easily be transferred to other persons because of no legal restriction
involved.
6. Entire Profit
Sole proprietorship is the only form of business organization where the owner enjoys 100%
profit.
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Introduction to Business ­MGT 211
VU
7. Entire Control
In sole proprietorship the entire control of the business is in the hands of one person. He can
do whatever he likes.
8. Flexibility
There is great flexibility in sole proprietorship.  Business policies can easily be changed
according to the market conditions and demand of people.
9. Honesty
The sole master of the business performs his functions honesty and effitively to make the
business successful.
10. Independence
It is an independent form of business organization and there is no interference of any other
person.
11. Personal Satisfaction
As all the Business activities are accomplished under the supervision of sole owner, so he
feels personal satisfaction that the business is running smoothly.
12. Prime Credit Standing
A sole proprietor can borrow money more easily because of unlimited liability.
13. Quick Decisions
Sole proprietor can make quick decisions for the development and welfare of his business and
in this way can save his time.
14. Personal Interest
A sole proprietor5 takes keen intere4st in the affairs of business because he alone is
responsible for profit and loss.
15. Saving in Interest on Borrowed Capital
Sometimes, a sole proprietor borrows money to increase his capital, from his relatives, without
interest.
16. Saving in Legal Expenses
As there are no legal restrictions for the formation of sole proprietorship so it helps in
increasing savings as legal expenses are reduced.
17. Saving in Management Expenses
The owner of the business himself performs most of the functions so it r educes the
management expenses.
18. Saving in Taxes
The tax rates are very low on sole proprietorship because it is imposed on the income of single
person.
19. Secrecy
It is an important factor for the development of business. A sole trader can easily maintain the
secrecy about the techniques of production and profit.
20. Social Benefits
It is helpful in solving many social problems like unemployment etc.
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Introduction to Business ­MGT 211
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DISADVANTAGES OF SOLE PROPRIETORSHIP
The disadvantages of sole proprietorship can be narrated as under:
1. Continuity
The continuity of sole proprietorship depends upon the health and life of the owner. In case of
death of the owner the business no longer continues.
2. Chances of Fraud
In sole proprietorship, proper records are not maintained. This increases the chances of
errors and frauds for dishonest workers.
3. Expansion Difficulty
In sole proprietorship, it is very difficult to expand the business because of the limited life of
proprietor and limited capital.
4. Lack of Advertisement
As the sources of single person are limited so he cannot bear the expense of advertisement,
which is also a major disadvantage.
5. Lack of Capital
Generally, one-man resources are limited, so due to financial problems he cannot expand his
business.
6. Lack of Inspection and Audit
In sole proprietorship there is lack of inspection and audit, which increases the chances of
fraud and illegal operations.
7. Lack of Innovation
Due to fear of suffering from loss, a sole proprietor does not use new methods of production.
So, there is no invention or innovation.
8. Lack of Public Confidence
The public shows less confidence in this type of business organization because there is no
legal registration to control and wind up the business.
9. Lack of Skilled Persons
One person cannot hire the ser4vices of qualified and skilled persons because he has limited
resources. It is also a great disadvantage.
10. Management Difficulty
One person cannot perform all types of duties effectively. If he is a good accountant, he may
not be a good administrator. Due to this, business suffers a loss.
11. Much Strain on Health
In this type of business organization there is much strain on the health of the businessman
because he alone handles all sorts of activities.
12. Not Durable
This type of business organization is not durable because its existence depends upon the life
of sole proprietor.
13. Permanent Existence
In this type of business there is a need of permanent existence of a businessman. In case of
absence from business for few days may become the cause of loss.
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Introduction to Business ­MGT 211
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14. Risk of Careless Drawings
In sole proprietorship owner himself is a boss.  There is no question to his decisions or
actions. So, there is a risk of careless drawings by him.
15. Risk of Loss
In case of sole proprietorship a single person bears all the losses, whereas in the case of
partnership or Joint Stock Company all the partners or members bear the loss.
16. Unlimited Liability
In sole proprietorship there is unlimited liability. It means, in case of loss personal property of
the owner can be sold to satisfy the claimants. It is a great disadvantage.
From the above-mentioned detail, we come to the point that despite the above disadvantages,
sole proprietorship is an important form of business organization. This is due to the fact that
its formation is very easy and due to unlimited liability the owner takes great care and interest
in the business, because in case of loss, he is personally responsible. As he enjoys entire
profit, this factor also encourages him to work with great efficiency which promotes his
business.
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Table of Contents:
  1. INTRODUCTION:CONCEPT OF BUSINESS, KINDS OF INDSTRY, TYPES OF TRADE
  2. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:THE ECONOMIC ENVIRONMENT
  3. BUSINESS ORGANIZATION:Sole Proprietorship, Joint Stock Company, Combination
  4. SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS:ADVANTAGES OF SOLE PROPRIETORSHIP
  5. PARTNERSHIP AND ITS CHARACTERISTICS:ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP
  6. PARTNERSHIP (Continued):KINDS OF PARTNERS, PARTNERSHIP AT WILL
  7. PARTNERSHIP (Continued):PARTNESHIP AGREEMENT, CONCLUSION, DUTIES OF PARTNERS
  8. ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS:ETHICS IN THE WORKPLACE, SOCIAL RESPONSIBILITY
  9. JOINT STOCK COMPANY:PRIVATE COMPANY, PROMOTION STAGE, INCORPORATION STAGE
  10. LEGAL DOCUMENTS ISSUED BY A COMPANY:MEMORANDUM OF ASSOCIATION, CONTENTS OF ARTICLES
  11. WINDING UP OF COMPANY:VOLUNTARY WIDNIGN UP, KINDS OF SHARE CAPITAL
  12. COOPERATIVE SOCIETY:ADVANTAGES OF COOPERATIVE SOCIETY
  13. WHO ARE MANAGERS?:THE MANAGEMENT PROCESS, BASIC MANAGEMENT SKILLS
  14. HUMAN RESOURCE MANAGEMENT:Human Resource Planning
  15. STAFFING:STAFFING THE ORGANIZATION
  16. STAFF TRAINING & DEVELOPMENT:Typical Topics of Employee Training, Training Methods
  17. BUSINESS MANAGERíS RESPONSIBILITY PROFILE:Accountability, Specific responsibilities
  18. COMPENSATION AND BENEFITS:THE LEGAL CONTEXT OF HR MANAGEMENT, DEALING WITH ORGANIZED LABOR
  19. COMPENSATION AND BENEFITS (Continued):MOTIVATION IN THE WORKPLACE
  20. STRATEGIES FOR ENHANCING JOB SATISFACTION AND MORALE
  21. MANAGERIAL STYLES AND LEADERSHIP:Changing Patterns of Leadership
  22. MARKETING:What Is Marketing?, Marketing: Providing Value and Satisfaction
  23. THE MARKETING ENVIRONMENT:THE MARKETING MIX, Product differentiation
  24. MARKET RESEARCH:Market information, Market Segmentation, Market Trends
  25. MARKET RESEARCH PROCESS:Select the research design, Collecting and analyzing data
  26. MARKETING RESEARCH:Data Warehousing and Data Mining
  27. LEARNING EXPERIENCES OF STUDENTS EARNING LOWER LEVEL CREDIT:Discussion Topics, Market Segmentation
  28. UNDERSTANDING CONSUMER BEHAVIOR:The Consumer Buying Process
  29. THE DISTRIBUTION MIX:Intermediaries and Distribution Channels, Distribution of Business Products
  30. PHYSICAL DISTRIBUTION:Transportation Operations, Distribution as a Marketing Strategy
  31. PROMOTION:Information and Exchange Values, Promotional Strategies
  32. ADVERTISING PROMOTION:Advertising Strategies, Advertising Media
  33. PERSONAL SELLING:Personal Selling Situations, The Personal Selling Process
  34. SALES PROMOTIONS:Publicity and Public Relations, Promotional Practices in Small Business
  35. THE PRODUCTIVITY:Responding to the Productivity Challenge, Domestic Productivity
  36. THE PLANNING PROCESS:Strengths, Weaknesses, Threats
  37. TOTAL QUALITY MANAGEMENT:Planning for Quality, Controlling for Quality
  38. TOTAL QUALITY MANAGEMENT (continued):Tools for Total Quality Management
  39. TOTAL QUALITY MANAGEMENT (continued):Process Re-engineering, Emphasizing Quality of Work Life
  40. BUSINESS IN DIGITAL AGE:Types of Information Systems, Telecommunications and Networks
  41. NON-VERBAL COMMUNICATION MODES:Body Movement, Facial Expressions
  42. BUSINESS ORGANIZATIONS:Organization as a System
  43. ACCOUNTING:Accounting Information System, Financial versus Managerial Accounting
  44. TOOLS OF THE ACCOUNTING TRADE:Double-Entry Accounting, Assets
  45. FINANCIAL MANAGEMENT:The Role of the Financial Manager, Short-Term (Operating) Expenditures