Features, merits and demerits of Sole Proprietorship

  

Date Posted: 4/11/2012 7:22:07 AM

Posted By: sashoo  Membership Level: Silver  Total Points: 382

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SOLE PROPRIETORSHIP
This simply refers to one man business. It is where one person starts a business enterprise and therefore he is the only share holder. However, he can employ organizers and labor force to assist him so as to achieve his objectives. It is the oldest form of business enterprise and it is common in retail, agriculture and direct service sectors.

ESSENTIAL FEATURES OF A SOLE PROPRIETORSHIP
1. Formation:
It is registered under the business names act as a business enterprise.

2. Membership:
It is formed by one person only, who is also the registered shareholder.

3. Liability of the owner:
The liability of the owner is unlimited i.e. if the business fails the owner is responsible for all the debts of the business, even if he has to sell personal properties to repay these debts.

4. Management and control:
A sole business is under the control of one person i.e. the owner. However, the owner employs managers and subordinates to assist him in day to day activities of the business.

5. Sources of capital:
i) Owners savings.
ii) Bank borrowing in terms of loans.
iii) Borrowing from other individuals.

6. Dissolution of the business:
A sole proprietorship business can be dissolved at the owner’s will or by a court order if it is found out that the business is engaged in illegal practice.

MERITS OF SOLE PROPRIETORSHIP
1. Sole benefits:
A sole trader enjoys all the profits generated by his business.

2. Minimal legal formalities:
There are minimal legal formalities required when forming the business. What is mostly required is a trading license which is offered at a small fee.

3. Secrecy:
A sole trader enjoys the top secrets of his business. These are normally the secrets that make his business successful and no one else can know it.

4. Personal contact:
It is easier for a sole trader to maintain closeness with his customers and employees.

This is because employees and customers are few in number, hence, he is able to know them individually consequently attending to their problems.

5. Freedom of action:
A sole trade does not need to consult anyone when making decisions. This is so because he is the only and final decision maker. Decisions can be made quickly.

6. It is flexible:
Changes can be made within a short period and time.

DEMERITS OF SOLE PROPRIETORSHIP
1. Lack of enough capital to expand the business. This is because he does not have enough security to acquire a big loan.

2. Unlimited liability:
This simply means that a sole trader bears all the losses of the business when it fails.

3. Poor decision making:
The owner often makes quick and poor decisions. This is because he might lack specialization in some areas of decision making e.g. specialization in financial markets.

4. Lack of Continuity:
The death of a sole trade may affect the continuity of the business. In most cases, the business collapses when the owner dies.

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