Sole Proprietorship is a type of enterprise that is owned and run by one person and in which there is no legal distinction between the owner and the business entity. The owner is in direct control of all elements and is legally accountable for the finances of such business and this may include debts, loans, losses, etc. A sole trader does not necessarily work ‘alone’ it is possible for the sole trader to employ other people. It is the simplest form of business organization and the ideal choice to run a small or medium-scale business.
Characteristics of Sole Proprietorship
- Lack of Legal Formalities: A sole proprietorship does not have a separate law to govern it. So there are not many special rules and regulations to follow. It does not require incorporation or registration of any kind. In most cases, only a license is required to carry out the desired business.
- Liability: Since there is no separation between the owner and the business, the liability of the owner is also unlimited. So if the business is unable to meet its liabilities, it will fall upon the proprietor to pay them.
- Profits and Losses: He is the only person to enjoy all profits and risks. There is nothing to share his profits. So he must bear the full risk in exchange for enjoying full profits.
- No Separate Identity: In legal terms, the business and the owner are the same. So the owner will be responsible for all the activities and transactions of the business.
- Continuity: is entirely dependent on its owner. The death, retirement, bankruptcy. insanity, imprisonment, etc will affect the sole proprietorship. In such situations, the proprietorship will cease to exist and the business will come to an end.
- Limited Resources: It has limited resources like limited extent, borrowings from relatives and friends. Thus, the scope for raising funds is highly limited in a sole proprietorship.
- Limited Ability: Proprietorship is characterized as a one-man show. One man may be an expert in one or two areas, but not in all areas like production, finance, marketing, personnel, etc. Then, due to the lack of adequate and relevant knowledge, the decisions are taken him be imbalanced.
- Unlimited Liability: It means that in case of loss, the private property of the proprietor will also be used to clear the business obligations. Hence, the proprietor avoids taking risks.