Sole proprietorship is a business organization in which an individual has the sole ownership. It is also called a one man business. In this type of business organization, the sole owner supplies land, labour, capital etc.
The sole proprietor performs the function of organizer and that of entrepreneur. He may hire paid labour if need arises. He alone is responsible for the profit or loss; as a result his liability is unlimited. Sole proprietorship is the oldest form of business. This type of enterprises is found in the small scale industries or in the case of storekeepers and direct services.
BASIC FEATURES OF SOLE PROPRIETORSHIP
1) Sole Ownership: This type of business organization is owned and run by one man.
2) Unlimited Liability: The liability of a one man business is not limited to his investment. He may lose is personal belongings if the business fails.
3) Small Capital: This type of business organization requires small capital investment to start up. Anyone with high quality of enterprises can start a sole proprietorship business with small amount of money.
MERITS OF SOLE PROPRIETORSHIP
1) Easy to Start: It is easy to start a one-man business because it does not require much consultation or documentation.
2) Independence of the Proprietor: The single owner of the business is independent. He can undertake any transaction as he wishes. There is no check on his approach towards decision making.
3) Quick Decisions: Business decisions are taken quickly without much consultation. A sole proprietor can make quick decision, keeping in view his own personal interest.
4) Small Capital: A sole proprietorship business requires small capital and that is why it is easy to start. It could be started by personal savings of the proprietor or loans from friends and family.
5) Close Relations with Customers: Being a small business, the owner is able to have a one-on-one relation with his customers which enables him to know them better and individual preferences.
6) Easy to Supervise: This type of business is easy to supervise because it has a small scale and without much difficulty.
7) Easy to Close: As it is easy to start so it is easy to close. The sole proprietor is the only one concerned. He can easily change business if he desires.
DEMERITS OF SOLE PROPRIETORSHIP
1) Lack of Division of Labour: There is no adequate room for production process to be broken down as it operate on a small scale.
2) Absence of Large Scale Production: The entrepreneur lacks capital. Therefore, production has to be carried out on a small scale. So, he cannot enjoy the advantages of large scale production.
3) Unlimited Liability: In a sole proprietorship business the liability of the owner is not limited only to his investment. He may lose his personal belongings or estate in a case of huge loss. Therefore, he hesitates to take certain bold decision and risk because of his unlimited liability.
4) High Cost of Production: Production is mostly carried out on a small scale; the entrepreneur cannot reap the benefit of economics of large scale production. Small scale production results in high cost of production and higher prices. This has a negative effect on the demand for his products or services.
5) Difficulty of Credits: A sole proprietor faces more difficulty in getting finance. Banks and other financial institution hesitate to advance loan to an individual proprietor, because of his less credit worthiness. It is either he is not able to get a loan or at a higher rate of interest.
6) Difficulty to Face Economic Crisis: Due to limited available capital and unlimited liability. A sole proprietor is notable to withstand heavy losses or economic crisis for a long period. In the event of these challenges he has to shutdown the business.