Definition of Sole Proprietorship and Its 8 Characteristics

Definition of Sole Proprietorship and Its 8 Characteristics – Best Study

Definition of sole proprietorship: L.H. Haney, “The individual entrepreneurship is the form of business organization on the head of which stands an individual as the one who is responsible, who directs its operations, who alone runs the risk of failure.

Introduction of Sole Proprietorship

Sole-trade is the oldest and most commonly used form of business organization. It is an old as civilization. Historically, it appears that business first started width of organization. With the development of science and technology the needs of the of organizations developed. This organization is also known as Sole-Proprietorship, Individual-Proprietorships, Single-Entrepreneurship.

In sole trade organization, an individual is at the helm of affairs. He makes all the investments, shares all risks, take all profits, manages and control the business himself. A she-trades mainly depends upon his own resources. so the business is generally on a small-scale basis. The business is normally run with the help of family members but he may employ persons to look after the day-to-day activities of the business. So far  as his liability is concerned.

The creditors are entitled to have claim even on his private property. The sole-trader moulds the fate of the concern. It is the competence of the proprietor which determines the future the business. His powers are unlimited and his decisions are final. He is, in fact, the sole organizer, manager, controller and master of his business.

The sole-trader must, however, be a person competent to. The business be carried on should also be allowed by law, in some instances, a person may be expected to take s license from competent authorities before hand. Normally, no other legal formality is essential for starting a sole-trade business as in the case of a company of co-operatively person can start of wound up a sole-trade business any time.

This type of business is a one man show and the capacities off that person may certainly be limited. He may not be able to deal with every situation himself, so there may be chances of commuting mistakes. Since the liability is unlimited and is to fall o person, he should have a cautious approach.

Definition of Sole Proprietorship

Some important definitions are discussed to have a clear view of sole trade form of organization.

Definition of Sole Proprietorship and Its 8 Characteristics
Definition of sole proprietorship

According to Haney, this business is in the hands of one person who is not only responsible for its management but also for its risks.

James Stephenson, “A sole-trader 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 emphasizes that sole-trade business is carried on by one person with his own funds and according to his managerial capabilities. He is also responsible for the success or failure of this business.

Other Definition of Sole Proprietorship

S.R. Davar, “The sole-trader is a person who carries on business of his own, that is, without the assistance of a partner. He brings in his own capital and uses all his labour. He also gets himself assisted by others to whom he pays a salary by way of remuneration.

According to Davar a sole-trader uses his resources only and does not get the help of a partner With the increase in work he may employ some persons for his help who get salary for their work. The adding of a partner will even change the form of organization because it will become a partnership concern then.

A sole-wader is a person who rets up the business with his own resource, manages the business himself by employing persons for his help and alone bears all the gains and risks of the business.

Characteristics of Sole Proprietorship

1. Individual Initiative. This business is started by the initiative of a single person. He prepares the blue prints of the venture and arranges various factors of production. He may employ other persons for assistance but ultimate authority and responsibility lies with him. All the profits losses are taken by the single individual.

2. Unlimited Liability. In sole-trade business liability is unlimited. The proprietor is responsible for all losses arising from the business. The liability is not limited only to his investments in the business but his private property is also liable for business obligations.

3. Management and Control. The proprietor manages the whole business himself. He prepares various plans and executes them under his own supervision. There may be some persons to help him but ultimate control lies with the owner.

4. Motivation. One person is the sole owner of the business. He takes all profits and bears losses, if any. There is a direct relationship between efforts and reward. If he works more, he will earn more. He is motivated to expand his business activities. He will not like to enter speculative business because the risk involved is more.

5. Secrecy. All important decisions are taken by the owner himself. He keeps all the business secrets only to himself. Business secrets are very important for small business. By retaining business secrets he avoids competitors entering the same business.

6. Proprietor and Proprietorship are one. Legally, the sole trader and his business are separate entities. Loss in his business is his loss. Liabilities of the business are his liabilities.

7. Owners and Business Exist Together. In sole-trade business there is no separate existence of the business with the owner. The business and owner exist together. The business is dissolved if the owner dies, becomes insolvent or is removed from the scene.

8. Limited Area of Operations. A sole-trade business has generally a limited area of operations, the reason being the limited resources and managerial abilities of the sole-trader. He can arrange limited funds only and will be able to supervise a small business. Since all decisions are to be taken by the proprietors, so the area of business will be limited with his management abilities.

Legal Position of Sole-Trade Business

Following points will explain the legal position of a sole-trade business:

1. There is no specific law under which this business required registration etc. A Joint Stock Company has to be incorporated under Companies Act, 1956, a partnership firm is governed by Partnership Act, 1932, a sole trade business is not governed by any such nature. So this business can be started and dissolved at the discretion of the owner without reference to any statutory provisions.

2. The sole-trade business will be subject to the general laws of the land. If there is a provision of getting a license for setting up a particular business, then the sole-trader will also get the license before setting up such a business. A person desirous of starting a wine shop is expected to get a license from the State Government. A sole-trader wanting to enter this business will certainly be expected to comply with this law.

3. The sole trader and his business are one and the same thing. The business exists only with the sole-trader. If he disappears from the scene due to death or some other reason, then the business will also be dissolved. The proprietor and his business have one personality.

4. The liability of the sole-trader is unlimited. If a business is dissolved then no distinction is made between business and private assets and business and private loans of the sole-trader.

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