sole proprietorship

One of the most common types of business is the sole proprietorship. It is considered the simplest form of business ownership. The name explains the meaning: The word “sole” means “only” and “proprietor” notes to “owner”. So, sole proprietorship refers to a business type, where the business is operated and owned by a single individual.

LEARNING OBJECTIVES

By the end of this topic, you should be able to:

• Define sole proprietorship
• Explain the features of a sole proprietorship.
• Discuss the formation and management of a sole proprietorship.
• Discuss the sources of capital for a sole proprietorship.
• Explain the advantages and disadvantages of a sole proprietorship.

A sole proprietorship is a business unit that is owned by one person. Examples of a sole proprietorship include a kiosk, a bookkeeping business, a local grocery store, a catering business, a financial planning business, an Information technology consultancy, and freelancing. It is formed by an application and acquisition of a trading license from a local authority. The sources of capital for sole proprietorships include: borrowing from banks, personal savings, trade credit, and donations from friends and relatives. This unit is managed by the owner but is sometimes assisted by family members.

FEATURES OF SOLE PROPRIETORSHIP

Formation and closure. The owner himself forms this type of business organization. There are not many legal requirements required to start. In some cases there are legal requirements, for example, the trader may be required to have a license. The sole proprietor can close the business at his own will.

Liability. In this type of business organization, the sole proprietor has unlimited liability. This means that the owner is liable to pay every liability. If the owner takes a loan to grow his business, he is liable to pay, and if the funds are insufficient, his personal property can be used to pay.

Risk and profit. In this type of business organization, a sole proprietor bears all the risks related to the business. All the losses or profits from the business are enjoyed by the sole proprietor.

Control. The sole proprietor controls all activities of the business. Nobody can interfere with the daily activities of the business. The sole proprietor modifies his plans alone, the way he sees fit.

No separate entity. The law does not create a distinction between a sole trader and his business. Therefore, without the sole trader, there is no identity for the business.

Lack of business continuity. Death, physical ailment, imprisonment, bankruptcy, or insanity of the sole trader will lead to the business shutting down.

A sole proprietorship can be dissolved due to different reasons. They include;

• Due to continuous losses.
• As a result of the death of the owner.
• Through a court order.
• After the transfer of the business to another person.

CAN A SOLE PROPRIETOR EMPLOY PEOPLE?

A sole proprietor can employ people and has no limit to the number of employees that can hire. As an employer, the role of a sole proprietor is administration, keeping records, and taking care of taxes. Some sole proprietors start by employing their family members.

ADVANTAGES OF SOLE PROPRIETORSHIP

• They are easy to start. There are minimal legal formalities, and the starting capital is also low.
• Decision-making is quick as there is no consultation with any other person. A sole trader has the freedom to make a decision at any time.
• The owner enjoys all the profits alone.
• They are easy to manage. Most sole proprietorships are small in scale. This makes the running of a sole proprietorship to be easy.

DISADVANTAGES OF SOLE PROPRIETORSHIP

• The owner suffers loss alone.
• Has unlimited liabilities. If the sole trader fails to pay debts, the creditors will claim from both business assets and personal property.
• Has limited sources of capital. The main sources of capital for sole proprietorship include savings and borrowing from relatives.
• Lack of continuity due to insanity, bankruptcy, or death of the owner.