question_answer

Explain the meaning, features, merits and demerits of Sole Proprietorship.

Answer:

Ans.     Sole Proprietorship means a business owned, financed and controlled by a single person who is recipient of all profits and bearer of all risks. It is suitable in areas of personalized services like beauty parlour, hair cutting saloons and small scale activities like retail shops.

Features:

(i) Single Ownership: It is wholly owned by one individual.

(ii) Control: Sole proprietor has full power of decision-making.

(iii) No Separate legal entity: Business and businessman are not separate entities in the eyes of law.

(iv) Unlimited liability: The liability of owner is unlimited. In case the assets of business are not sufficient to meet its debts, the personal property of owner can be used for paying debts.

(v) No legal formalities: No legal formalities are required to start, manage and dissolve such business organization.

(vi) Sole risk bearer and profit recipient: He bears the complete risk and there is nobody to share profit / loss with him.

Merits:

(i) Easy to start and close: It can be easily started and closed without any legal formalities.

(ii) Quick decision-making: As sole owner is not required to consult or inform anybody about his decisions.

(iii) Secrecy: He is not expected to share his business decisions and secrets with anybody.

(iv) Direct incentive: Direct relationship between efforts and reward provide incentive to the sole trader to work hard.

(v) Personal touch: The sole trader can maintain personal contacts with his customers and employees.

(vi) Social utility: It provides employment to persons with limited money who are not interested to work under others. It prevents concentration of wealth in a few hands.

Limitations:

(i) Limited financial resources: Funds are limited to the owner's personal savings and his borrowing capacity.

(ii) Limited managerial ability: Sole trader can't be good in all aspects of business and he can't afford to employ experts also.

(iii) Unlimited liability: Unlimited liability of a sole trader compels him to avoid risky and bold business decisions.

(iv) Uncertain life: Death, insolvency, lunacy or illness of a proprietor affects the business and can lead to its closure.

(v) Limited scope for expansion: Due to limited capital and managerial skills, it cannot expand to a large scale.