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Sole Proprietorship

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1. Formation and Closure –

Hardly any legal formalities are required to start.
But in some cases licence might be required.
Closure can be done easily.

Hence it is easy to form and close the business

2. Liability-

They have unlimited liability.
The owner is responsible to pay the debts. But, in case the assets of the business are not sufficient to meet the requirement, he has to sell his personal assets to repay all his debts.

3. Sole Risk Bearer & Profit Recipient-

The risks of the business are all borne by the owner
The profit is enjoyed fully by him when the business is successful

Hence he receives all the profit as a reward for bearing all the risks to earn the profit.

4. Control-

The owner runs all the business activity and hence makes all the decisions.

5. No Separate Entity-

Under sole proprietorship, the owner is not considered to be separate and distinct from the business. (By law)

Hence, owner is held responsible for all the activities of the business.

6. Lack of Business Continuity-

Since owner and business are one, the death, imprisonment, etc. of the owner will have a huge effect on the business which may lead to its closure.

MERITS

1. Quick Decision Making-

Freedom of decision making.
Can make decisions as and when required as there is no one to consult. Leads to timely capitalisation of market operations as and when they arise

2. Confidentiality of Information-

Since he makes all the decisions, he is able to maintain confidentiality and secrecy of information.

3. Direct Incentives-

He gains all the profit for his efforts.
Does not need to share profits

All this provides as the maximum incentive to the sole trader.

4. Sense of Accomplishment-

He gains personal satisfaction from perform his goals.
The knowledge that one is only responsible for the growth of the business creates a sense of self-satisfaction.

5. Ease of Formation & Closure-

Minimum legal formalities.
No law that governs sole proprietorship.

Hence, it is easy to start and close the business according to the wish of the proprietor.

LIMITATIONS

1. Limited Resource’s-

Limited personal savings and money borrowed from others.
Banks are uncertain to extend long term loans.

This is why the size of the business is small and rarely grows.

2. Limited Life of a Business Concern-

By law, the sole proprietor and the proprietorship are considered as one Therefore, death, insolvency, insanity, etc. of the sole proprietor may lead to the closure of the business.

3. Unlimited Liability-

A Sole Proprietor has unlimited liability.
If he is not able to repay the debts by selling the business assets then, he has to sell his own/personal assets in order to pay the money back. A poor decision and other faults may lead to huge financial losses for the owner.

That is why a sole proprietor does not want to expand to improve his business since it would lead to more amount of risks.

4. Limited Managerial Ability-

The owner has to do various tasks like financing, selling, purchasing, etc. This is not possible since he might not excel in all these areas. Thus a balanced decisions are not made in all areas.

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