Sole Proprietorship

A sole proprietorship business venture is one of the most typical and easiest commercial forays not only in India but also across the world. Some of India’s largest existing enterprises, including Flipkart, started operating as solely-owned firms.

Globally, some of the most famous names in business started with a single owner. Familiar names like Coca-Cola, Amazon, the Walt Disney Corporation and toy-major Mattel are excellent sole proprietorship examples.

Historically, these are some of the oldest businesses that have been owned and operated by a lone individual, making them sole proprietorship ventures.

This chapter will help you understand what this type of businesses mean, what their characteristics are and some of the advantages and disadvantages of a sole proprietorship.

Defining Sole Proprietorship 

Such a firm is a one-person operation. “Sole” means only and “proprietor” refers to owner. When any natural person, and not a ‘legal’ person or another entity, is in charge of an organisation, it becomes a sole proprietorship enterprise. Both the owner and his/her business are the same.

They have no separate legal bearing.

A sole owner is automatically the custodian of all profits of the organisation. However, he is also liable to suffer the most should the business nosedive in perilous economic times, making risk-taking a part of owning a business entity.

A one-person operation allows the owner to employ whoever he desires. Termination of employment is also his executive domain, provided the terms and conditions laid out during hiring are maintained. His authority and discretion are also final.

Of all the various types of business organisations, this is the simplest. A solely-owned entity need not always be registered or even incorporated. However, registering a business venture has certain advantages which have been mentioned later.

Most of the small-scale businesses we see around us in our day-to-day lives are businesses with single owners. These can range from spas and beauty parlours to a medicine outlet and any local grocery store.

For advanced commerce students: Walt Disney was a struggling artist before his Mickey Mouse line of animated characters took off, and his name became globally known. You can research about his failures, how he dealt with them, and how he later developed a global reputation for himself and his company.

Features of a Sole Proprietorship 

Here are some of the elementary features of such entities.

  • Risk Bearing and Profit-sharing

The sole owner is the only individual who bears any business risks associated with his venture. No one else will bear any portion of that risk.

Conversely, the owner is also eligible to enjoy all the profits which his business delivers. If there are any losses, he will have to deal with them on his own.

  • Liability

In any sole proprietorship, the owner has “unlimited liability”. If he avails a business loan from a financial establishment, he will be liable to repay it. If he is unable to settle up on time, his private estates may be put on sale by the lender. 

The sole owner is liable to repay anyone who has helped him financially for his business purposes. This concept of unlimited liability is one of the significant disadvantages of a sole proprietorship. However, it remains a crucial characteristic of such ventures.

  • Formation of Business and Closure

Such business organisations are formed by a sole proprietor at his discretion. Similarly, the owner has the right and the legal authority to determine when he will close the business.

If, for example, the owner feels his fully-owned entity is facing a fiscal crunch, he may decide to shut shop. Since there are no hard and fast rules that govern sole proprietorship in India, there is no legal obligation for him to change his mind.

However, some businesses may require a license to run. For example, a medicine shop needs a business permit and a clearance from the concerned authorities since it is a sensitive business. These licenses have to be renounced at the time of closure.

The sole proprietor may decide whether to keep his existing workforce or disembark them. There is no legal obligation on him in either instance.

  • Same and Identical Entities

Unlike other types of business ventures, a sole proprietor and his business are the same entity. According to the existing laws, since the sole owner operates a business, he is the entity. Specific new accounting procedures, however, regard business and its sole owner as two entities, but no law has yet been amended.

Without the sole owner and operator, the business has no separate identity. Even if the proprietor employs additional hands, the law stands.

In case the owner expires, the business wraps up automatically. However, if the business has been passed down to successors, the clauses are different. The continuity of business clause then kicks in. The same concept also takes precedence when the proprietor is taken ill, imprisoned or otherwise aggravated. 

  • Sole Control

Because the owner controls a business, he alone controls all the rights and responsibilities. It is his prerogative to change the course of his business or to exit a particular sector altogether.

It is one of the many characteristics of sole proprietorship and wholly-owned businesses. The owner’s judgements, even if error-ridden, are final and no one else can interfere in them if not otherwise solicited.

If a business’ operations and methods of functioning are to be modified, only the owner can do so. No one else is authorised.

  • Highest Secrecy

The very sole proprietorship definition states that there is only one brain behind the operations. It means that any chances of industrial espionage are minimal, if any, save on inadvertent errors on the owner’s part. 

The owner need not share the account books with anyone else either. Overall, this is probably the safest and most restricted type of business.

For further studies on industrial espionage, what it means and previous instances of such malpractices, visit other relevant sections on Vedantu. You can also search for relevant examples on the Internet and gather what happened to involved parties, and broaden your knowledge horizon.

  • Freedom to Choose the Area of Operations

A sole proprietor is free to choose his or her area of business. If he decides to exit a specific segment and enter another one, he can do so easily. However, since single owners tend to have limited finances, though not always, he can choose to ignore capital-intensive segments and stick to businesses which are relatively easy to sustain.

Types of Sole Proprietorship Businesses

These are the existing types.

  1. An Independent Contractor: A contractor is hired by business houses or other, more prominent contractors at pre-determined income levels or profit-sharing margins. But this does not make an independent contractor an employee, for he has the freedom to say ‘no’ to an engagement.

  1. Self-Employed Owner: Someone who acts both as the owner and an employee of his business is a self-employed owner. In this digital age, someone who sells goods on an E-commerce firm is self-employed. He owns an enterprise but also has to look after his day-to-day operations like an employee. Other examples can be a painter and a shopping assistant. 

  1. Franchise: A franchise is also considered a form of a sole proprietorship. The owner decides to rent a franchise from a leading brand and pours in the requisite capital. Note that the franchisee has to pay royalties to the franchisor. This type of business is an excellent starting point for first-time business owners, as he does not have enough experience to run a full-fledged firm but can still bank on the reputation of his franchisor.

Advantages of a Sole Proprietorship

There are several advantages. The most basic ones are enumerated here.

  1. Prompt Decision-Making Processes: Since these are necessarily a one-man show, there are minimal hassles when a particular decision has to be reached at. The proprietor does not need anyone’s permission or consent, or dissent, to carry on exactly as he wills. This lack of such agility in decision-making in bigger businesses with partners is a significant hurdle at times.

  1. Direct Incentive: The owner alone gets to enjoy all profits- the fruits of labour. He will also retain any benefits apart from revenues that a business may generate.

  1. Full Confidentiality: Secrecy is paramount in modern businesses given the ferocious competition. There is no leak of inside information in this business model, making it arguably the safest type of business.

  1. Forming and Closing a Business is Easy: Should there be losses in operations and the business proves untenable, a sole proprietor is free to close the firm down. He can always use the leftover capital or profits hitherto generated for other purposes.

  1. A Direct Sense of Accomplishment: If a sole owner’s business thrives, and customers or clients are satisfied, the boost to morale is enormous. It is why many budding entrepreneurs choose to start as sole proprietors. When business volumes expand, he can then take on partners or form an LLP. 

Attention, advanced students of commerce: Do you know who some of India’s most successful sole proprietors are? You can find a list of names on the Internet. You can research on how they started, how their initial struggles were, and how the business ultimately bore fruit. You can even compare their career graphs to that of globally known people who were sole owners of businesses at some point.

Disadvantages of a Sole Proprietorship

The following are some major limitations of self proprietorship.

  1. Resources Limited: A single owner does not have access to a large corpus initially. He may have to take a bank loan or ask relatives or friends for loans. If his business fails to take off, he will have difficulty repaying. 

  1. Limited Expertise: Running a business requires a lot of varying expertise in different fields. There has to be clarity on operations, client relationships, margin-setting, accounts, and so on. Technological know-how is also crucial. For a single owner, these elements present unique challenges. 

  1. Unlimited Liability: Speaking on merits and demerits of a sole proprietorship, this is a major demerit. A sole owner has to carry the burden of unlimited liability. For example, in direct relation to point A of this section, creditors may also seek compensation from the owner’s private estate if he is unable to repay loans. It is a significant deal-buster for many would-be entrepreneurs. However, on a positive note, most solo businesspersons are aware of this risk.

  1. Lack of Continuity: Yet another disadvantage of sole proprietorships is a lack of continuity of a business’ life-cycle. If the owner dies, his business ceases to exist. While it is true that he can decree that his successor will run the business on his demise or ailment, there is no guarantee that the business will be run as efficiently.

What Happens if a Sole Proprietor Decides to Register his Business?

As stated earlier, a sole owner is under no obligation to register his business save in specific sectors. However, if he chooses to register a business, he must possess the following documents.

  • Registered proof of office and office premises

  • PAN and Aadhaar details with updated information

  • Bank statements from the previous 6 months

To ensure that a business runs smoothly and sans hiccups, a sole proprietor can choose to register his business under the MSME Act and also procure GST Registration. Lastly, a Shop and Establishment License may also come handy.

To learn more about other business models like partnership firm and joint-stock companies, you can refer to our study materials available at our website and on our app.

FAQ (Frequently Asked Questions)

1. What is a Sole Proprietorship?

When an individual starts a business on his own, has no partners, bears all risks and tastes all profits, and calls all the shots in his operations, that individual is the sole proprietor or owner of that business. This act of owning a business by oneself is the sole proprietorship.

2. Does one need a business license if he is a Sole Proprietor?

No, a business license is not required in all cases. However, several business sectors require their own licenses. For example, if someone owns a medicine store (Chemists and Druggists), he/she will require a business license.

3. What are the shortcomings of Sole Proprietorship?

Sole proprietors may not always have the necessary technical skills to facilitate or advance his business venture. The sole liability clause is also a major disadvantage.