Everything you need to know about the features of sole proprietorship. Sole proprietorship, also known as sole trader, is the most popular form of business organisation in India. You will find sole proprietors everywhere.
If you buy a notebook, a pen, etc., from a shop near your residence or school, most likely the shop is run by a sole proprietor.
In the term sole proprietorship, two terms are involved, sole and proprietorship. The literal meaning of sole is single and of proprietorship is ownership.
According to Peter and Plowman “Sole proprietorship is a business unit whose ownership and management are vested in one person. The individual assumes all risks of loss or failure of the enterprise and receives all profits from its successful operation”.
Some of the features of sole proprietorship are:-
1. Individual Ownership 2. Risk Bearing 3. Management and Control 4. Minimum Government Regulations 5. Unlimited Liability 6. Individual Financing 7. Individual Accountability 8. Maintenance of Business Secrecy 9. Flexibility of Organisation
10. No Sharing of Profits or Losses 11. Life of Business 12. Freedom 13. Formation and Closure 14. Sole Risk Bearer and Profit 15. No Separate Entity 16. Lack of Business Continuity 17. Capital Contribution 18. Risk and Rewards and a Few Others.
Features and Characteristics of Sole Proprietorship
Features of Sole Proprietorship – Top 10 Features: Individual Ownership, Risk Bearing, Management and Control, Minimum Government Regulations and a Few Others
Feature # 1. Individual Ownership:
One person is the owner in a sole proprietary form of organisation. He provides the entire capital either from his private resources or through loans etc.
Feature # 2. Risk Bearing:
In this form of organisation, the proprietor is the sole beneficiary of profits. If there is a loss, he alone has to bear it. Thus, the risks of business are borne by the proprietor himself.
Feature # 3. Management and Control:
Management and control of this type of organisation is the responsibility of the sole proprietor. He may, however, employ a manager or other people for the purpose.
Feature # 4. Minimum Government Regulations:
The government does not interfere in the working of the sole proprietorship organisation. However, they have to comply with the general laws and rules laid down by government.
Feature # 5. Unlimited Liability:
The sole proprietor has to bear the losses and is personally responsible for the liabilities of the business. If the business assets are not sufficient to meet the liabilities, he may also have to sell or pledge his personal property for that purpose.
Feature # 6. Individual Financing:
Financing of such organisations are done by the individuals i.e., owner or through his personal resources.
Feature # 7. Individual Accountability:
The managers and other employees of such organisations are accountable to the sole-proprietor i.e., the owner of enterprise.
Feature # 8. Maintenance of Business Secrecy:
Secrecy can be maintained about business matters and therefore, the proprietor will be able to take full advantage of any new ideas he may be able to think of. There is little risk of the competitors taking advantage of them before he does.
Feature # 9. Flexibility of Organisation:
If any change in business is called for, he does not have to consult anyone and is able to make the necessary changes without delay. This lends flexibility to this type of organisation. A good number of giant sized concerns fail on account of their inability to change their policies promptly with a change in situation.
Feature # 10. No Sharing of Profits or Losses:
The sole proprietor does not share the profits or losses of the business with any one. He alone gets all the profits and bears all the losses of the proprietary firm. The proprietor bears the complete risk and is solely responsible for success or failure of the business.
Features of Sole Proprietorship – 6 Main Features: Ownership, Control, Life of Business, Unlimited Risk, Unlimited Liability and Freedom
The essential features of sole proprietorship may be listed thus:
1. Ownership:
The proprietor owns the business. It is his baby. The ownership interest is undivided. He does not have to share this with anyone. He is the undisputed king of the venture.
2. Control:
The proprietor gets the business going. He runs the show. He pools the resources. He appoints staff if required. He interacts with customers. In short, he manages everything all by himself. He oversees everything from close quarters. The owner is the policeman, supervisor, and controller.
3. Life of Business:
The business has no life of its own. It is intertwined with that of the proprietor. In the eyes of law, the business and the owner are one and the same. Without the owner, the business has no existence of its own. It becomes a stretcher case, if the owner does not take interest. It would die naturally if the owner kicks the bucket (of course other family members can take charge after clearing legal hurdles).
4. Unlimited Risk:
The proprietor does not share profits or losses with anyone. If things go as planned, he enjoys profits. But when things take an ugly turn, he has to swallow losses all alone. He has to live with risk and uncertainty on a daily basis.
5. Unlimited Liability:
The proprietor’s liability—when things take a nasty turn—is not limited to the resources invested by him. He has to bear the entire loss and meet the claims made by creditors. Sometimes, he may have to sell his property, family jewellery and other assets in order to meet the liabilities arising out of the venture.
6. Freedom:
Proprietary businesses can be formed easily and quickly. The law does not come in the way of setting up a small venture.
Features of Sole Proprietorship – With Suitability
Sole proprietorship is easy to start as no legal formalities are required to start it (though in some cases, one may require a licence).
(a) There is no separate law that governs sole proprietorship.
(b) It can easily be dissolved (or closed) when the sole trader is interested. So, there is ease in formation as well as closure of business.
The liability of sole proprietor is unlimited. It means that the owner is personally liable for payment of debts if assets are not sufficient to meet all the debts, i.e., his/her personal property may be sold to pay business debts in case the debts exceed the assets of the firm.
For example, Suppose the total outside liabilities of XYZ dry cleaner, a sole proprietorship firm, are Rs. 80,000 at the time of dissolution, but its assets are Rs. 60,000 only. In such a situation the proprietor will have to bring in Rs. 20,000 from her personal sources even if she has to sell her personal property to repay the firm’s debts.
3. Sole Risk Bearer and Profit:
A sole proprietor bears all types of risks himself. If there are losses, he/she alone has to bear them. If the business is successful, he is the sole beneficiary of all rewards/ profits.
A sole proprietor has full control over his business. He/she can carry out his plans without any interference from others.
In the eyes of the law, no distinction is made between the sole trader and his business, as business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business.
6. Lack of Business Continuity:
Since the owner and business are one and the same entity; death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business.
Suitability:
It is best suited for the following businesses:
(a) Businesses which are carried out on small scale with modest capital and limited managerial talent, e.g., medical store, local grocery store, bakeries, small factories etc.
(b) Businesses where customers demand personalised services such as small beauty parlors, hair cutting saloons, tailoring units, dry cleaners etc.
(c) Businesses producing artistic goods, e.g., embroidery, craft centre, etc.
(d) Businesses where risk is not extensive, i.e., lesser fluctuation in price and demand, e.g., stationery shops.
Features of Sole Proprietorship – 7 Main Features
The main features of sole-proprietorship are as follows:
1. Individual ownership – Sole-proprietorship form of organisation is owned by an individual. The proprietor is all in all. He takes his own decisions and runs the business with his talent, skill, prudence and presence of mind.
2. Individual management – Such organisation is managed and controlled by the sole proprietor.
3. Individual financing – Such organisation is financed mainly by the sole proprietor.
4. No sharing of profits and risks – The surplus earnings of his business entirely belong to the sole trader alone and losses too are to be borne by him single handedly. It is because he is the only responsible person for his business affairs.
5. Unlimited liability – The liability of the sole trader is unlimited. If the business assets are not enough to repay all the business debts in full, the private property of the proprietor can be used for such purpose. That is, the proprietor’s liability for the business debts is not restricted to his contribution but also extends to his private property.
6. Minimum Government regulation – There is no special legislature to govern a sole trading concern. There are no legal formalities either in formation or dissolution of a proprietorship concern.
7. No legal entity – A sole trading concern does not enjoy legal entity separate from that of its proprietor. The concern and the proprietor are identical.
Features of Sole Proprietorship
1. Sole Ownership – Under this form of business organisation there is sole, single or individual ownership. An individual who invests the capital is the owner of the business organisation.
2. Sole Management – The owner himself manages the entire affairs of the business organisation.
3. Sole Control – The owner not only manages the entire affairs of the business organisation but also keeps the direct control on it.
4. Sharing Losses and Profits – The sole proprietor himself bears all the losses and risks and also enjoys the whole profit whatever he has earned. None other can share his losses or profits, Profits depends only on the efforts whatever, he puts in the business.
5. Unlimited Liability – In this type of business organisations there is always unlimited liability burns by the proprietor. If business assets, property, wealth is, insufficient for the payment of the debts of business the sole proprietors private, personal property is held responsible for repayments of debts.
6. Free from Government Regulations or Legal Formalities – The formation of business under this form is very simple. An individual can easily start his business under this type. There are no legal formalities for starting a business under this form except those business in which licenses are required.
7. No Separate entity of the Firm – There is no distinction or difference between the sole proprietor and his business. If he dies, becomes insolvent, becomes insane or mentally disabled the existence of business is directly affected.
Features of Sole Proprietorship – 17 Important Features: Capital Contribution, Risk and Rewards, Management and Control, Unlimited Liability and a Few Others
Feature # 1. Capital Contribution:
Sole proprietorship means single owner. Ownership arises from contribution to capital. Since the sole trader is the only owner, the entire capital is to be brought in by him. He may either use his savings or borrow from friends and acquaintances. There is no other person contributing capital and hence, there is no other owner of the business.
Feature # 2. Risk and Rewards:
All the rewards of ownership are enjoyed by the sole proprietor. Thus, all the profits earned by the business belong to the sole proprietor. Similarly, any loss incurred by the business is borne by him. There is no sharing of surplus earnings or losses arising from the business, with any other person.
Feature # 3. Management and Control:
The business is entirely managed by the sole trader. He takes full charge of all the activities. He takes all the critical decisions and is not obliged to consult anybody else. The entire business is under his direct control.
Feature # 4. Unlimited Liability:
The sole trader is fully responsible for all the loans taken for the purpose of his business. The creditors of the business can claim not only his business assets, but also his personal assets in settlement of their dues. For example, a person starts a business by borrowing Rs.2 lakhs from a bank.
Unfortunately, the business suffers a loss and he is not able to repay the money to the bank. The bank can take away his car, sell it and recover the money given to him as a loan. The car was not being used for business. The car was being used for his family. However, the personal asset can also be used towards settlement of his business liability.
Feature # 5. Centralization of Authority:
Sole proprietorship is a ‘One person show’. The sole proprietor takes all the decisions himself. His team essentially consists of his family members and known people. All major actions will have to be approved by the sole trader. Nothing happens without his knowledge.
Feature # 6. Finite Life:
There are many instances of successful businesses that had to be closed down as there was nobody to continue the business after the death or retirement of the business owner. For example, let us say a businessman runs a very popular sweet shop in a city. He has only one son.
The only son of the shopkeeper studies medicine and becomes a doctor. After the shop owner becomes old, there is nobody to take care of the shop and hence, the shop may have to be closed down. Thus, a sole proprietary business has a finite or limited life and it is linked to the life of the sole proprietor.
Feature # 7. Flexibility:
Since the sole trader takes all decisions, he can steer his business any which way he wishes. He can choose to enter any new business he wishes to. He can similarly decide to close down any business division. He can quickly adapt to ant change in circumstances, as he does not have to consult or convince anybody.
Feature # 8. Small Size:
All sole proprietorship concerns are smaller in size. This is mainly because the amount of capital that can be invested by a single person is limited. Moreover, one person cannot manage everything. Thus, as the organization grows, the business will change form into a Partnership firm or joint stock company.
Feature # 9. Local Business:
Most sole trading businesses are restricted to a local area. This is because of the limited capability and limited manpower available at their disposal. There is a limit to the amount of money a person can invest in a business. Similarly, there is a limit to the amount of work a person can do. Hence, most businesses are restricted to a city or at best, a state.
Feature # 10. Lack of Systems:
Sole proprietary organizations are largely unorganized. There are no clearly defined roles and responsibilities. Everybody goes about doing everything. There are frequent changes in the way things are done.
Feature # 11. Simplicity in Operations:
Since the sole proprietor is answerable only to himself, he is not bound by legal formalities and procedures. There is no need for registration, agreements, approvals etc. Except for the general laws in force in the country, there are no specific laws governing the operations of a sole proprietary concern. However, in some types of business, there might be some legal formalities of registration or licenses, which can usually be obtained easily.
Feature # 12. Dependence on One Person:
The sole proprietor is the sole decision maker of the business. He has all the information pertaining to the business. The impact of the decisions is also borne by him only. Thus, he is not answerable to anyone. He does not have to explain his actions to any other person.
As such, he does many things which he only knows why he is doing. His staff is expected to take orders from him and execute them. In such a situation, the business becomes directionless if he is not available for any reason.
Feature # 13. Secrecy:
All important decisions are taken by the owner himself. All information pertaining to the business is with the owner. The owner keeps all the business secrets to himself. For example, a restaurant owner will not share the recipes of special dishes or the list of some special ingredients even with his chefs who make the dishes. He does this to ensure that his staff does not become competitor and existing competitors do not get to know of his secrets.
Feature # 14. Proprietor and Proprietorship are one:
Legally, the sole trader and his business are not separate entities. Loss in his business is his loss. Liabilities of his business are his liabilities.
Feature # 15. Motivation:
One person is the sole owner of the business. He takes all profits and bears all losses. There is a direct relationship between his efforts and rewards. Hence, if he works hard then he will be rewarded profitably. If he does not, then he has to bear all the consequent losses. Thus, the sole proprietor has lot of motivation to do well.
Feature # 16. Personal Relations:
The sole trader is in full control of his business. Thus, he personally talks to his suppliers as well as his customers. He himself interviews and appoints his staff. Thus, he has good grip on the business situation. His personal relations with suppliers and customers help him in getting better terms. His personal relations with employees motivate the employees to put in their best efforts.
Feature # 17. Discretionary:
A sole trader can take any decision at any time. Everything is at his discretion. For example, he may decide to close down the business at any time.
Features of Sole Proprietorship – 7 Major Features: Ownership, Control, Life of Business, Unlimited Risk, Unlimited Liability and Freedom
A sole proprietor is the unquestioned king of his venture. He owns it; he controls it from the word go; he provides the needed resources and it is he who launches the enterprise on his own. He burns up his candle of energies on everything; brings his skills, knowledge, and expertise to the table; plans every step of the way; hires more people, if additional hands are required; interacts with the customers; and does everything possible to please them.
If the venture is successful, he will get to have the cake and eat it too. If the venture fails, he will lose everything in no time. At the end of the day, it is his business and he owns it in the truest sense. He has to invest his time, money, effort, energies on a daily basis. Of course, it is he alone who will harvest his labour.
The essential features of sole proprietorship may be listed thus:
1. Ownership:
The proprietor owns the business, as the ownership interest is undivided. He does not have to share this with anyone. He is the undisputed owner of the venture.
2. Control:
The proprietor gets the business going. He runs the show. He pools the resources. He appoints staff if required. He interacts with the customers. In short, he manages everything all by himself. He oversees everything from close quarters. The owner is the policeman, supervisor, and controller—all in one.
3. Life of Business:
The business has no life of its own. It is intertwined with that of the proprietor. In the eyes of the law, the business, and the owner are one and the same. Without the owner, the business has no existence of its own. It will collapse if the owner dies or becomes disassociated from it (of course, other family members can take charge after clearing the legal hurdles).
4. Unlimited Risk:
The proprietor does not share the profits or losses with anyone. If things go as planned, he enjoys the benefits. But when things take an ugly turn, he has to swallow the losses all alone. He has to live with risk and uncertainty on a daily basis.
5. Unlimited Liability:
The proprietor’s liability—when things take a nasty turn— is not limited to the resources invested by him. He has to bear the entire loss and meet the claims made by the creditors. Sometimes, he may have to sell his property, family jewellery, and other assets in order to meet the liabilities arising out of the venture.
6. Freedom:
Proprietary businesses can be formed easily and quickly. The law does not come in the way of setting up a small venture.
Features of Sole Proprietorship
Sole proprietorship, also known as sole trader, is the most popular form of business organisation in India. You will find sole proprietors everywhere. If you buy a notebook, a pen, etc., from a shop near your residence or school, most likely the shop is run by a sole proprietor. In the term sole proprietorship, two terms are involved, sole and proprietorship. The literal meaning of sole is single and of proprietorship is ownership.
Sole proprietorship is defined as follows:
Sole proprietorship is a business organisation which is owned by a single person who bears the entire business risks.
The person who is the owner of the sole proprietorship is known as sole proprietor.
Sole proprietorship is the form of organisation at the head of which stands an individual as one who is responsible, who directs the organisation and who alone runs the risk of failure. -L.H. Haney
Sole trader is a type of business unit where one person is solely responsible for providing the capital, for bearing the risk of the enterprise and for management of business. -J.L. Hansen
Features of sole proprietorship are as follows:
1. Single Owner:
Sole proprietorship is owned by a single individual. He alone is responsible for bearing risk and managing the affairs of the business. However, for managing the business affairs, he may employ others as employees.
2. No Separate Legal Entity:
Sole proprietorship is not a separate legal entity. A separate legal entity is an entity which exists independent of its owners, for example, a company. Thus, the sole proprietor owns everything which the business owns, both in terms of assets and liabilities. There is no difference between the sole proprietor and his business, from legal point of view.
3. Management and Control:
Sole proprietorship is a one-man show. Thus, the owner takes all the decisions relating to business operations—from the decision regarding what business is to be done and how this business is to be done.
4. Unlimited Liability:
The sole proprietor has unlimited liability in the matter of business affairs. He is personally responsible for paying business debts if these cannot be paid by the business.
5. Capital:
Capital of the sole proprietorship is provided exclusively by the sole proprietor. If he invests money borrowed from others, this is treated as debts/loans.
6. Formation:
Formation of a sole proprietorship is quite easy as it does not involve any legal formality.
7. Continuity:
Continuity of sole proprietorship depends on the continuity of the sole proprietor. Thus, in the case of his death, insanity, insolvency, imprisonment, etc., the sole proprietorship ceases to exist.
Features of Sole Proprietorship – 6 Important Features: Formation and Closure, Liability, Sole Risk Bearer and Profit Recipient, Control, No Separate Entity and a Few Others
The various features of sole proprietorship are described below:
Feature # 1. Formation and Closure:
It is relatively easy to start a business in the form of sole proprietorship as there is no separate law that governs this form of business. In general, only a few legal formalities are required to start a sole proprietary business. However, in certain cases a license may be required. Besides, the closure of the sole proprietor business involves a simple procedure.
Feature # 2. Liability:
The liability of a sole proprietor is unlimited. As a result, the personal assets of a sole proprietor may be used to settle the claims of the outsiders in case the business assets are insufficient. For example, suppose the total outside liabilities of ‘Flavours’ a fast food restaurant, a sole proprietor firm are Rs.18,00,000 at the time of dissolution, but its assets are worth Rs.16,00,000 only. In this case, the debts to the extent of Rs.2,00,000 will be repaid through the personal possessions of sole proprietorship like his car, property etc.
Feature # 3. Sole Risk Bearer and Profit Recipient:
Being the sole owner of business, the success or failure of business will have a direct bearing on the sole proprietor. On one hand, the sole proprietor assumes the risks of failure of business all alone and on the other hand the proprietor enjoys all the benefits of the success his business. Thus, he is the sole recipient of profits during good times and sole bearer of loss during adversities.
Feature # 4. Control:
The sole proprietorship enjoys a centralised control over his business. The power to take all decisions and run the business lies in the hands of the sole proprietor.
Feature # 5. No Separate Entity:
As in the eyes of the law, no distinction is made between the sole trader and his business, both are treated as one entity. Consequently, the sole proprietorship form of business has no separate entity and the responsibilities of all its activities is vested with the sole proprietor.
Feature # 6. Lack of Business Continuity:
The sole proprietorship form of business may be adversely affected on the death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor and may lead to closure of the business. As a result, sole proprietorship form of business is not considered to be very stable.
Features of Sole Proprietorship – 8 Salient Features
The following are the salient features of the sole proprietorship form of business organisation:
(i) Simple to Start and Wind-up – Sole proprietorship, generally, operates on a small scale. There are very limited legal formalities to be complied with for starting or winding-up the business. These are just his personal decisions. However, in some cases a license or permission from the government may have to be taken to assure that it is a permitted line of business which is carried by him.
(ii) Single Ownership – Only one person, the proprietor, is liable for all activities of the business. He provides capital, bears all losses and enjoys all profits.
(iii) Risk Bearing – The proprietor is the sole risk bearer and enjoys all benefits and rewards. This form of business organisation is most suitable for low risk business enterprises.
(iv) Unlimited Liability – The liability of the sole proprietor is unlimited. This means that he is personally liable for all liabilities of the business. If the business assets are insufficient to pay the liabilities, his personal properties will have to be sold to pay the business liabilities.
(v) No Separate Entity – The business and the proprietor are one and the same thing. There is no separate legal entity of the business. The proprietor is responsible for everything that business is responsible for.
(vi) Single Person Management – Proprietor alone performs all functions of management. He himself plans, controls and directs the business. He alone provides the capital and arranges the work force. The entire working of the business is based on his decisions. However, a manager and assistants can be employed by him to help him in performing his managerial and day to day functions.
(vii) Lack of Continuity of Business – The entire business depends on one person. If anything happens to him, the business is likely to be affected. His death, insanity, ailment or insolvency may lead to closure of the business.
(viii) Small Size – As a sole proprietor, can arrange limited funds and has limited managerial ability, so the sole proprietorship firms generally operate on a small scale.
Features of Sole Proprietorship
A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.
Now we shall discuss each of the characteristics in details.
(i) Single Ownership – A single individual always owns sole proprietorship form of business organization. That individual owns all assets and properties of the business. Consequently, he alone bears all the risk of the business. Thus, the business of the sole proprietor comes to an end at the will of the owner or upon his death.
(ii) No sharing of Profit and Loss – The entire profit arising out of sole proprietor Sole Proprietorship ship business goes to the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. Nobody else shares the profit and loss of the business with the sole proprietor.
(iii) One man’s Capital – The capital required by a sole proprietorship form of business organisation is totally arranged by the sole proprietor. He provides it either from his personal resources or by borrowing from friends, relatives, banks or other financial institutions.
(iv) One-man Control – The controlling power in a sole proprietorship business always remains with the owner. The owner or proprietor alone takes all the decisions to run the business. Of course, he is free to consult anybody as per his liking.
(v) Unlimited Liability – The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.
(vi) Less Legal Formalities – The formation and operation of a sole proprietorship form of business organisation requires almost no legal formalities. It also does not require to be registered. However, for the purpose of the business and depending on the nature of the business, the sole proprietorship has to have a seal. He may be required to obtain a licence from the local administration or from the health department of the government, whenever necessary.
Features of Sole Proprietorship – 6 Features
(i) No Separate Legal Entity – Legally, the sole trader and his business are not separate entities. In other words, all the assets and liabilities of the businesses are the personal assets and liabilities of the proprietor.
(ii) Unlimited Liability – The sole trader’s liability is unlimited. He is responsible for all losses arising from the business. The liability is not limited only to his investments in the business; but his private property is also liable for business obligations.
(iii) Management and Control – The sole-proprietor alone has absolute and over all authority or decision making power on all matters and functioning of the business. It is not necessary for him to consult anybody while taking any decision or action in the conduct of business.
(iv) Undivided Profit Earning – Since the Sole proprietor bears all the risks of the business, he alone is entitled to all the profits. There is a direct relationship between his efforts and rewards. This serves as a built in motivation for the proprietor for expanding his business activity.
(v) One-Man Ownership – The business is owned by a single individual. He may contribute capital out of his own saving or borrow it from banks. Since the savings and borrowing capacity of an individual are limited, the capital available for the business is also limited.
(vi) Stability – A sole proprietorship firm lasts as long as the proprietor is alive and continues to run it. As the business is identified with the proprietor himself, this form of business has less stability. The life of a business comes to an end when (a) the proprietor dies, (b) he voluntarily closes the business, (c) he sells it out to another person or a group of person. In case of (a) and (c), the business firm may be continued; but it ceases to be same old proprietorship firm; its proprietorship is changed.