Understanding Sole Proprietorships

A sole proprietorship is the most common type of business. There are sole proprietorships everywhere. Small grocery stores, STD booths are mostly proprietorship businesses.

A “Sole Proprietorship” business means that there is only ONE owner. There may be employees or helpers hired under the owner, but there is only one “head” who administors and runs the show.

The definition of a Sole Proprietorship is: A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.

The basic advantage of a sole proprietorship is that since you are the only owner, you are free to run the business just the way you want to run it. Also, in a sole proprietorship you get to keep all the profits.

The biggest disadvantage is that there is “unlimited liability” on the “Sole Owner”.

What is the meaning of unlimited liability?

In the case of “Sole Proprietorship”, the Govt. does not see any difference between the firm and the individual. If you are a plumber named Raju Sharma and you start a plumbing service firm called “Flush” which is a sole proprietorship, the government does not differentiate between “Flush” and “Raju Sharma”

This means that if someone sues “Flush” and “Flush” owes that person a huge sum of money, it is as good as Raju Sharma owes that person a huge sum of money. Raju Sharma's bank accounts, property and even his house may be used to settle the claim.

This is the biggest disadvantage of sole proprietorships. Because of this reason, sole proprietorships are generally started if the business is small and there is “not much risk involved”.

If the concept of unlimited liablity is not clear, dont worry. It shall be cleared when you concider the other kinds of business.

To properly understand the nature of a sole proprietorship, here are a few characteristics of a sole proprietorship explained in detail:

Single Ownership:
A single individual owns the sole proprietorship! That individual owns all the assets and properties of the business. He alone bears all the risk of the business.

No sharing of profit & loss:
The entire profit out of the sole proprietor ship business goes to the sole proprietor. If there is any loss, it is also borne by the sole proprietor alone. Nobody else shares any of the profit and loss of the business.

Low capital:
The capital required by a sole proprietorship is totally arranged by the sole proprietor. He raises the capital either from his personal resources or by borrowing from friends, relatives, banks or financial institutions. Since there is only one person raising capital, very low capital can be raised.

One-man control:
The controlling power in a sole proprietorship business always remains with the owner alone. The owner or proprietor alone takes all the decisions to run the business. He may take decisions though a consultant or some advice, but the final decisions are always in his hand.

Unlimited Liability:
The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.

Almost no legal formalities:
The formation and operation of a sole proprietorship requires almost no legal formalities. However, the owner may be required to obtain a license from the local administration or from the health department of the government, whatever is necessary depending on the nature of the business.

Next - Advantages of Sole Proprietorships >>

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