What Is a Sole Proprietorship? Let Us Find Out!
A sole proprietorship is a form of business organization, where a single person Own controls and manages all the business activities, an individual who operates the business is called as a sole proprietor or, a sole trader. Sole Proprietorship in simple term is a one-person business organization. It is an entity that is wholly owned and managed by one natural person (not a legal person/entity) known as the sole proprietor. The business and the man are the same, but it does not have a separate legal entity.
In this business unit, the sole proprietor is exclusively and wholly responsible for employing the required capital to commence a business, bearing all the risk of the enterprise and also for managing all the activities single-handedly. And to do so, he/she pools and arranges various resources in an organized way, with the sole aim of earning a profit. The owner is exclusively responsible for all the decisions taken or to be made. All the profits earned by the business go to the sole trader?s pocket, and he is solely responsible for the loss suffered by him in the market.
A sole proprietorship does not have to be incorporated or registered. It is the simplest form of business organizations and the ideal choice to run a small or medium scale business.
Although sole proprietor doesn?t require any specific registrations, he is advised to obtain a few registrations to make his business function smoothly.
- GST Registration
- Registering as SME
- Shop and Establishment Act License
- Establishment PAN Card
Features of Sole Proprietorship
- Single Ownership- In this type of a business unit, a single person owns the entire business, i.e., all the assets and property belong to the proprietor. Accordingly, he bears all the risk and losses associated with the enterprise. Hence, the business ends up at his will or on his demise.
- 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 for Sole proprietor. It does not require incorporation or registration of any kind. In most of the cases, only a few licenses are required to carry out the desired business.
- Liability- As there is no separation between the owner and the business, the liability of the owner is also unlimited. Therefore, if the business is unable to meet its liabilities, it will fall upon the proprietor to pay them. All of his personal assets (like his car, house, other properties, etc.) may have to be sold by him to meet the liabilities of the business.
- Risk and Profit - The owner is the only risk bearer and decision-maker in a sole proprietorship. Since he is the only one who has financially invested in the company, he must also bear all the risk related to the business. If the business fails or suffers losses, he will be the only one affected. He also enjoys all the profits from the company.
- No Separate Identity - In legal terms, the business and the owner are the same. No separate legal identity will be bestowed upon the sole proprietorship. So the owner will be responsible for all the activities, decisions, and transactions of the business.
- Continuity- Just mentioned above the business and the owner has one identity. So a sole proprietorship is entirely dependent on its owner. The death, retirement, bankruptcy, Insanity, imprisonment, etc. will affect the sole proprietorship. In most of such cases, the proprietorship will cease to exist, and the business will come to an end.
|Merits of Sole Proprietorship||Demerits of Sole Proprietorship|
|Easy formation and closure||Limited resources|
|Maintenance of business secrets||Limited managerial ability|
|Quick decision and prompt action||Limited managerial ability|
|Better control||Limited size|
|Least record keeping||Unlimited liability|