Sole Proprietorship : Meaning, Definition and Features

What is Sole Proprietorship ?

A sole proprietorship is the most popular, oldest and simplest form of business organization. It is basically made up of two words, one is ‘sole’, which means “one” and the second is ‘proprietor’, which means “owner”. So, Sole Proprietorship means a business with a single owner, also known as a sole proprietor. Sole proprietorship is defined as a form of business organization in which the business is owned, managed, and controlled by a single person. The sole proprietor is the sole recipient of all profits and bearer of all losses of the business. It is suitable for enterprises that require personal attention, personalized services, and limited capital, such as Grocery Shops, beauty parlours, boutiques, etc. Other names of the sole proprietorship are Individual Entrepreneurship, Sole Trader, and Individual Proprietorship. 

The sole owner of the business cannot share the ownership with any other person, but he/she can appoint employees and take help from other people. Besides, only the owner can invest money in the business, and can raise the capital through loans from other sources of finance. 

Definition of Sole Proprietorship

The sole proprietorship is the form of business organization, at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure.  – L.H. Haney

A sole proprietorship is a person who carries on business exclusively by and for himself. He is not only the owner of the capital of the undertaking, but is usually the organizer and manager and takes all the profits or responsibility for losses. – James Stephenson

Features of Sole Proprietorship

The features of Sole Proprietorship are as follows:

1. Formation and Closure of business

This type of business organization is simple to form as no legal formalities are required to start the business. But, in some cases, a license or certification is required to carry out the sole proprietor business. For example, if a person wants to open a pharmacy business, then he/she requires a ‘drug license’. Also, registration of business is not required, as there is no separate law that governs sole proprietorship. The owner can easily close the business anytime at his own discretion. Thus, it is easy and simple to form and close this kind of business. 

2. Unlimited Liability

In a sole proprietorship, the owner has unlimited liability, i.e., the proprietor is personally responsible to pay all the debts. In other words, if in the business, funds are not sufficient to pay the debt, then the personal assets of the owner may be used to pay off all the liabilities. 

3. No separate legal entity

A sole proprietorship business has no separate legal entity from that of its owners, like in partnership and company. In the eyes of law, there is no distinction between the owner and his business. It means that the owner of the business bears the responsibility for all the business activities. 

4. No sharing of profit or loss

There is no sharing of profit or loss, like partnership and company because the business is solely run by a single individual, who provides capital in the business, directs its operation and who alone runs the risk of failure.

5. Risk bearer

All the risk of the firm is borne by a single owner only. The single individual is the sole beneficiary of all the profits. Likewise, if losses occur in the business, then he alone has to bear all the risks. 

6. Control

The sole proprietor is the only owner of the firm and has full control over its business. All the rights, responsibilities, and decisions are in the hands of the owner himself. No one can interfere in the business without the permission of the owner. 

7. Lack of Business Continuity

Since business and owner are one and exist together, so in case of death, imprisonment, insolvency, or bankruptcy of the sole owner, the business can not be continued and has to shut down. However, there is an exception to this feature, i.e., if there is a beneficiary, then a successor or nominee or legal heir of the owner can run the business. 

8. Single Ownership

This form of business organization is owned wholly by a single person. He/she provides capital in the business either from his own wealth or from borrowed capital.  

Merits and Demerits of Sole Proprietorship: Merits of Sole Proprietorship include quick decision-making, personal touch, etc., and the demerits include limited resources, unlimited liability, etc.