A Sole Proprietorship Firm

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A Sole Proprietorship Firm
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How To Start Sole Proprietorship

• A sole proprietorship requires almost no legal
  formalities. It can start the day you want it to
  start. One may even open a bank account on the
  name of your sole proprietorship concern.
• In case you wish to have a trade mark, design and
  use it as your trade mark. One may even register
  a Trade Mark with the proper authorities.
• The only thing you must take care of is that you
  have the required licenses specific to your line
  of business. For Example If you are a doctor you
  need a license to practice etc. Find out about
  your line of business and what licenses you may
  require before setting up.

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• A business enterprise exclusively owned, managed
  and controlled by a single person with all
  authority, responsibility and risk.
• A sole proprietorship is the most common type of
  business. There are sole proprietorships
  everywhere.
• Small grocery stores, STD booths are mostly
  proprietorship businesses.
• A Sole Proprietorship business means that there
  is only ONE owner.
• There may be employees or helpers hired under the
  owner, but there is only one head who
  administers and runs the show.

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Characteristics of a sole proprietorship

• Single Ownership
• A single individual owns the sole
  proprietorship! That individual owns all the
  assets and properties of the business. He alone
  bears all the risk of the business.
• No sharing of profit loss
• The entire profit out of the sole proprietor
  ship business goes to the sole proprietor. If
  there is any loss, it is also borne by the sole
  proprietor alone. Nobody else shares any of the
  profit and loss of the business.
• Low capital
• The capital required by a sole
  proprietorship is totally arranged by the sole
  proprietor. He raises the capital either from his
  personal resources or by borrowing from friends,
  relatives, banks or financial institutions. Since
  there is only one person raising capital, very
  low capital can be raised.

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• One-man control
• The controlling power in a sole
  proprietorship business always remains with the
  owner alone. The owner or proprietor alone takes
  all the decisions to run the business. He may
  take decisions though a consultant or some
  advice, but the final decisions are always in his
  hand.
• 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.
• Almost no legal formalities
• The formation and operation of a sole
  proprietorship requires almost no legal
  formalities. However, the owner may be required
  to obtain a license from the local administration
  or from the health department of the government,
  whatever is necessary depending on the nature of
  the business.

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What is the meaning of unlimited liability?

• In the case of Sole Proprietorship, the Govt.
  does not see any difference between the firm and
  the individual.
• If you are a plumber named Raju Sharma and you
  start a plumbing service firm called Flush
  which is a sole proprietorship, the government
  does not differentiate between Flush and Raju
  Sharma
• This means that if someone sues Flush and
  Flush owes that person a huge sum of money, it
  is as good as Raju Sharma owes that person a huge
  sum of money.
• Raju Sharma's bank accounts, property and even
  his house may be used to settle the claim.

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Advantage of a Sole Proprietorship

• Easy to form and wind up
• A sole proprietorship form of business is
  very easy to form. With a very small amount of
  capital you can start the business. There is no
  need for any legal formalities. (Except for those
  businesses which require a license from local
  authorities or health department of government
  etc.) It is also very easy to wind up the
  business. It is the owners decision to form or
  wind up.
• Direct motivation
• The profits earned belong to the sole
  proprietor alone and he bears the risk of losses
  as well. Thus, there is a direct link between the
  effort and the reward. If he works hard, then
  there is a possibility of getting more profit and
  he will be the sole beneficiary of this profit.
  Nobody will share this reward with him. This
  provides strong motivation for the sole
  proprietor to work hard.

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• Better control
• In sole proprietorship business the
  proprietor has full control over each and every
  activity of the business. Since the proprietor
  has all authority with him, it is possible to
  exercise better control over business.
• Maintenance of business secrets
• Business secrecy is an important factor for
  every business. It refers to keeping the future
  plans, business strategies, etc., secret from
  outsiders or competitors. In the case of sole
  proprietorship business, the proprietor is in a
  very good position to keep his plans to himself
  since management and control are in his hands.
• Encourages self-employment
• Sole proprietorship form of business
  organization leads to creation of employment
  opportunities for people. Not only is the owner
  self-employed, sometimes he also creates job
  opportunities for others. Thus, it helps in
  reducing poverty and unemployment in our country.

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Disadvantage of a Sole Proprietorship

• Limited capital
• In a sole proprietorship business, the owner
  arranges for the required capital for the
  business. It is difficult for a single individual
  to raise a huge amount of capital. The owners
  own funds as well as borrowed funds sometimes
  become insufficient to meet the requirement of
  the businesss growth and expansion. Venture
  capitalists and banks generally do not lend money
  to sole proprietorships.
• Unlimited liability
• In case the sole proprietor fails to pay the
  expenses arising out of business activities, his
  personal properties may have to be used to pay
  for those. This generally discourages the sole
  proprietor from taking risks. He thinks
  cautiously while deciding to start or expand the
  business activities.

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• Lack of continuity
• The existence of a sole proprietorship
  business is dependent on the life of the
  proprietor. Illness, death etc. of the owner
  brings an end to the business. The continuity of
  business operation is therefore uncertain.
• Limited size
• There is a limit beyond which it becomes
  difficult for a sole proprietor to expand the
  business activities. It is not possible for a
  single person to supervise and manage the affairs
  of the business if it grows beyond a certain
  limit.
• Lack of managerial expertise
• A sole proprietor may not be an expert in
  every aspect of management. He/she may be an
  expert in administration, planning, etc., but may
  be weak in marketing. Again, because of limited
  financial resources it is also not possible to
  employ a professional manager. Thus, the business
  lacks benefits of professional management.

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Suitability of Sole Proprietorship Form of
Business

• Where the market for the product is small and
  local. For example, selling grocery items, books,
  stationery, vegetables, etc.
• Where customers are given personal attention,
  according to their personal tastes and
  preferences. For example, making special type of
  furniture, designing garments, etc.
• Where the nature of business is simple. For
  example, grocery, garments business, telephone
  booth, etc.
• Where capital requirement is small and risk
  involvement is not heavy. For example, vegetables
  and fruits business, tea stall, etc.
• Where manual skill is required. For example,
  making jeweler, haircutting or tailoring, cycle
  or motorcycle repair shop, etc.