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Sole Proprietorship

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An overview

Sole proprietorship concern is a classic way of starting you venture without any pressure from legal compliance requirement.

Although sole proprietor doesn’t require any specific registrations, he is advised to obtain a few registrations to make his business function smoothly.

  • Registering as SME
  • Shop and Establishment Act License
  • GST Registration

Features of Sole Proprietorship

1. Formation and Closure

  • This type of business organization is formed by the owner himself.
  • No legal conventions are obliged to start the sole proprietorship form of organization.
  • In some instances, the legal formalities are required or the owner should have a particular license or a certificate to run the business.
  • The owner can close the business at his own discretion.
  • Example: Goldsmith or a person running a medical shop should have a license to run this type of business.

2. Liability

  • In the sole proprietorship business, the sole owner has unlimited liability.
  • In this case, the owner is himself liable to pay all the liabilities. If he takes a loan for its business then he will be liable for all the debts.
  • Hence, he is personally liable for all the debt which can be recovered by his personal estate when funds are insufficient.
  • Example: A loan taken by the owner of the sweet shop is solely responsible for the repayment of the loan to the bank.

3. Sole Risk Bearer and Profit Recipient

  • A sole proprietor is only the one who bears all risks which are related to its business.
  • All the profits or losses which are earned from the business are to be enjoyed by the sole owner.

4. Control

As all the rights and responsibilities lie with the sole proprietor that is why he controls all the business activities.

No one can interfere in the business activities of a sole proprietor.

Hence, only the sole proprietor can modify his plans accordingly.

5. No Separate Entity

According to the accounting system, the owner and the business are considered as two separate entities.

But the law does not make any distinction between the sole trader and its business.

Hence, without the sole trader, the business has no identity because he is the only person who performs all the business activities.

6. Lack of Business Continuity

Death, imprisonment, physical ailment, insanity or bankruptcy of the sole proprietor will directly affect the business or it may cause shutting down of the business.

In the case of the beneficiary, successor or legal heir of sole proprietor, he can run the business on behalf of the proprietor.

Quick decision making– A sole proprietor has the freedom to make any decision. Therefore, the decision would be prompt as they don’t have to take the permission of others.
Limited Resources Resources of a sole proprietor are limited to his savings and borrowings from the relatives. Banks also hesitate or deny giving the long-term loans or extend the limit of long-term loans due to the weak financial position of the business. Lack of all these resources results in hindrance in the growth of the sole proprietorship business Above mentioned are the reason why the business generally remains small.
Confidentiality of information- Being only the owner of the business, it allows him/her to keep all the business information to be private and confidential.
Life of a Business Concern The owner and its business are the same entity and due to lack of successor or heir, the life of the business is limited. Due to death, insolvency, illness of a proprietor gives a detrimental impact on the business which results in closure of the business.
Direct incentive- A sole proprietor directly has the right to have all the profit or benefits of a company.
Unlimited Liability The major demerit of a sole proprietorship is that the owner has unlimited liability. If the sole owner becomes fails to pay the debts, due to the failure of a business, the creditors would not only claim from business assets but also from his personal estate. Taking a large amount of loan is too risky and also put the burden on the sole owner of the business. Hence, this is the reason why sole traders do not intend to take the risk for the survival and growth of the business.
Sense of accomplishment- He/she can have the personal satisfaction associated with working without any guidance or alone.
The sole proprietor has to accept all the responsibilities to carry out its business. Sometimes the proprietor has to perform all the managerial functions like sales, purchase, marketing, selling, dealings with clients, etc. He may not be able to employ and retain aspiring employees.
Ease of formation and closure- A single proprietor can enter the business with minimum legal formalities.
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