Sole Proprietorship is Said to be one of the oldest and most traditional entities in India, a sole proprietorship is very common. For e.g, grocers, chemists, etc are all sole proprietors. here, we shall take a brief look at sole proprietorship.
What Is The Meaning of Sole Proprietorship And what Are Its Characteristics?
A sole proprietorship means a business managed and owned by one man called the only or sole proprietor, or otherwise simply put in as “one-man business organization”. The concept of the corporate or company and the owner being two distinct legal entities doesn’t hold in the case of a sole proprietorship. The business and the man are the same, and it’s not a separate legal entity. MSME Government is the originator who is filling online Proprietorship Firm Registration in India. A sole proprietorship usually shouldn’t be incorporated or registered. Therefore, it’s considered to be the simplest form of business organization and it is commonly referred to run a small or medium scale business. It is easy to line up and also the cost is nominal.
The features of a sole proprietorship are as follows:
1. Less legal formalities:
There’s no separate law to govern a sole proprietorship, therefore, not many rules and regulations are applicable. The most important plus point is that it doesn’t require incorporation or registration of any kind. All you need to have for a sole proprietorship is a license. similar to incorporation, even in the case of termination of the business, there are not any legal technicalities involved. Therefore, it is a business that is hassle-free.
2. Unlimited liability:
Because a sole proprietorship doesn’t differentiate between a business and its owner, the liability is unlimited in nature. If the business is unable to meet or satisfy its own liabilities, it’ll fall upon the proprietor to pay them. All of his personal assets (like his car, house, other properties, etc) may have to be sold to meet or satisfy the liabilities of the business. This can be often seen as a disadvantage.
3. Risk and Profit:
Because a sole proprietorship is marked by the unlimited liability of the proprietor, the owner becomes the only risk bearer within the business. Since he’s the only sole or one financially invested within the company, he must also bear all the risks. If the business suffers losses or fails he will be the one affected. On the other side, irrespective of the scale of profit, it all goes to the pocket of the sole owner of the company. There’s no obligation on him to share his profits with anyone as technically there is nobody else but himself in the managerial positions of the corporate.
4. No separate identity:
Speaking legally, in the case of a sole proprietorship, there’s no difference between the identity of the business and the owner, it’s one and therefore the same. Therefore, the owner will be held responsible for all transactions of the business and activities. In legal terms, the company and the owner are one and the same.
The continuity of the business is entirely dependent on the life of the owner. If the owner dies, retires, is imprisoned, or bankrupt. In most such cases, the proprietorship will cease to exist, and also the business will come to an end.
Advantages of a sole proprietorship
1. Full control:
Complete control of the whole business, allowing for a fast decision-making process and full freedom to do business according to their own wishes
2. No legal formalities:
Legal technicalities are minimum to the extent that there’s no law that needs a sole proprietorship to publish its financial accounts or any other such documents to members of the public. This enables the business a great and excellent deal of confidentiality which is sometimes important within the business world
3. Maximum benefits:
The owner derives the max. incentive from the business. He doesn’t have to share any of his profits. That the work he puts into the business is totally reciprocated in incentives.
4. No unnecessary procedures:
Not many people are involved and thus it cuts out the procedures of hierarchy generally present in a corporate. Single-handedly managing your business has its own advantages such as you aren’t answerable to anyone nor you are responsible to share your profit or ask someone to bear the loss for you.
Disadvantages of Sole proprietorship
1. On the other side of having all the profit to yourself, is that in the case of any loss suffered by the business, you are the only person who has to bear the loss of the company. In legal terms, you have got unlimited liability to make good the loss suffered by the enterprise. Therefore, if a business fails, in order to recover from the loss, you will have to keep at stake all your personal assets and wealth.
2. Moreover, because it’s a one-man company the capital investment is also low. In certain cases, the owner’s money and personal savings he can borrow may not be sufficient to expand the business. Banks and financial institutions are also wary of lending to sole-proprietorships for the risk involved and limited guarantors.
3. There is a great and excellent deal of risk attached to the life of the business entity because it is entirely attached to its owner therefore, if the owner is incapacitated in any way it has a negative effect on the business, and it may even lead to the termination of the business. A sole proprietorship cannot continue without its proprietor.