Proprietorship: Definition and Its Characteristics

Introduction to Sole Proprietorship

Sole trader-ship or proprietorship is the oldest form of business in all the countries of the world.
Along with the progress of the business, its form has also been changing. But due to its
simplicity, quick formation, and easiness, this form is the most popular and in practice in the
world.

Meaning of Sole Proprietorship

Sole trader ship (proprietorship) is a form of business organization whose owner is just one
person, who is called the sole trader. This person invests capital in the business and is solely
responsible for all the profits and losses of the business. The same person is the manager and
organizer of the business.

Definition

According to Prof Hynes

Sole Proprietorship is that form of business that has a single owner, who has the total
responsibility of the business, who runs the business and also bears the risk on the failure of
business.

In the words of Dr. John A Shubin

Under the Sole Trader-ship Business, a single man is an organizer; he is the owner and runs the
business by his own name.

Characteristics of Sole Trader-ship (Proprietorship)

1. Sole Ownership

A single person is an owner of this type of business. That person is responsible for all the
things relating to the business. He himself bears all the risk and organizes the whole
business. On the closure of the business, he is personally liable for all gains and losses.

2. Unlimited Liability

The liability of a sole trader is unlimited. On the occasion of any loss in the business, not
only the business assets but also the private assets of the sole trader (house, shop or land,
etc.) can be sold for recovery of losses.

3. Limited Work Area

The work of a sole proprietor business is limited because the capital acquiring, and
organizational skills of a person are limited. Thus, the progress of the sole proprietorship
is limited to the resources of its owner.

4. Sole Right on Capital

The arrangement of Capital to be invested in the sole trade has to be done by the
proprietor. Thus, he has full rights to the capital.

5. Sole Management

The sole proprietor is himself responsible for the control and management of the
business. With the expansion of the business, the proprietor can organize staff for his
convenience, but he himself is deemed to be responsible for the work done by the
managers.

6. No Legal Formalities

To start the business of the partnership or Joint Stock Company, some legal formalities like
registration, etc. are required, but the sole proprietor need not fulfill any such formalities
before starting his business, and the business can be easily started.

7. Free to Select his Business

The sole proprietor can select any business according to his abilities and will and can
make any changes in his selection of business when required.
 8. Willful Commencement and Closure

The sole trader can commence or close his business any time he wants. He need not
fulfill any legal formalities for these.

Advantages of Sole Proprietorship:

A sole proprietary organisation has the following advantages and pros:

1. Ease of Formation and Closure

A sole proprietorship business is easy to form. There is hardly any legal formality involved in
setting up this type of organisation. It is not governed by any specific law. It is only required that
the business activity should be lawful and comply with the rules and regulations laid down by
local authorities. Also, the business can be closed whenever desired by the proprietor without
any legal complications.

2. Simplicity of Operation and Flexible Management:

In sole proprietary organisation, all the decisions relating to business operations are taken by one
person who makes functioning of business simple and easy. The sole proprietor can also bring
about changes in the size and nature of activity. This gives flexibility to business.

3. Sole Beneficiary of Profits:

The sole proprietor is the only person to whom the profits belong. There is a direct relation
between effort and reward. This motivates him to work hard and bear the risks of business.

4. Benefits of Small-Scale Operations:

The sole proprietorship is generally organised for small-scale businesses. This helps the
proprietor’s family members to be involved and employed in business. At the same time, such a
business is also entitled to certain concessions from the government. For example, a small
industrial organisation can get electricity and water at concessional rates on a priority basis.

5.Prompt Decisions:
A proprietor can take quick decisions regarding his business affairs (e.g., price policy, credit
policy, discount policy, disposal of surplus funds, etc.).

He can take spot decisions as and when required. This avoids delay in important decisions.

6. Retaining Secrecy:

Business secrets are very important for every business. The secrets may be about manufacturing
process, variety of goods to be produced, raw materials used, marketing of products, etc. Trade
secrecy can be maintained in this form of organisation.

7. Social Desirability:

It provides self-employment, discourages concentration of wealth in a few hands and helps in

developing personal qualities of self-reliance, self- confidence, tact and diligence.

8. Tax Advantage:

A sole proprietorship business has minimum tax burden as compared to other forms of business
organisations. The owner is taxed as an individual and not as a business unit separately.

9. Full Control:
Owner of such organisation i.e., sole proprietor has full control over the functioning of business.

10. Minimum Government Control:

Organisations, such as Partnership firm, Joint Stock Company and Co-operative Societies are
governed by the Partnership Act of 1932, the Companies Act of 1956 and the Co-operative
Societies Act of 1912 respectively, whereas, Sole Proprietorship form of organisation does not
have any special Act enacted for it. Thus, it functions under the minimum government control.

Disadvantages of Sole Proprietorship:

A sole proprietor generally suffers from the following limitations or cons:

1. Limitation of Management Skills:
A sole proprietor may not be able to manage the business efficiently as he is not likely to have
necessary skills regarding all aspects of the business. This poses difficulties in the growth of
business.

2. Limitation of Capital:
The sole proprietor of a business is generally at a disadvantage in raising sufficient capital. His
own capital may be limited and his personal assets may also be insufficient for raising loans
against their security. This reduces the scope of business growth.

3. Unlimited Liability:

The sole proprietor is personally liable for all business obligations. The principle of unlimited
liability for the owner puts him at great risks in times of losses. For payment of business debts,
his personal property can also be used, if the business assets are insufficient.

4. Lack of Continuity:
A sole proprietary organisation suffers from lack of continuity. If the proprietor is ill, this may
cause temporary closure of business; and if he dies, the business may be permanently closed.

5. Weak Bargaining Position:

The proprietor cannot control the market because of his limited financial resources. Thus, his
bargaining power is weak, both as a purchaser and seller.

6. Limited Scope for Expansion:

Due to limitations of capital and management, proprietorship business cannot grow and expand
to a large size.

7. Risk of Wrong Decisions:

Any wrong decisions taken by the proprietor may bring disaster to his business fortunes. As he is
not assisted by any person, it may lead to wrong decisions.

8. No Large-Scale Economies:
A small-scale concern cannot enjoy economies in its operations which large-scale business
organisations enjoy due to higher production and less overhead expenses per unit. Their cost of
production is more and they cannot face competition from large units.

9. Limited Scope for Employees:

Sole proprietorship form of organisations have limited career opportunities, because of this they
are unable to attract trained and qualified persons.

10. No Check and Control:

There is nobody to question the decisions of sole proprietor and also there is nobody to guide and
help him in the operations of the business.

Conclusion:
From the account of the merits and limitations of an individual proprietorship given above, it can
be concluded that one-man control of business would be most efficient and profitable if only that
one man has the capacity to manage everything indefinitely. Unfortunately such a person does
not exist.

This form of enterprise is, therefore, suitable in the following cases:

(i) Where the capital required is small and the risk is not heavy.

(ii) Where quickness of decisions is very important.

(iii) Where the customers require personal attention.

(iv) Where special regard has to be shown to the tastes and fashions of the customers.

Naturally, then, household and personal services concerns, retail shops and professional firms are
generally owned by individual proprietors. Thus, individual proprietorship has its own scope of
activity, and continues to exist in spite of the development of bigger organisations, like
Partnership and Joint stock companies.
In India, the individual entrepreneur organisation is still quite popular. It accounts for the largest
number of business establishments in our country. The volume of business transacted by it does
not, however, compared with that of partnership firms and companies.