Sole Proprietorship: Definition, Features, Merits & Demerits

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What is Sole Proprietorship?

Sole Proprietorship is a one man business organization. It is the simplest unit of business organization though usually not the smallest in all respects. It features prominently in the trades, occupations, agriculture and small scale industrial establishments.

The proprietor often provides the capital, organizes the business, bears its asks and hence enjoys all profits accruing from its successful management.

Sole Proprietorship
Sole Proprietorship

Meaning of Sole Trader

A sole proprietorship also referred to as a sole trader, a proprietorship orone man business is an organization in which only one person works, where the mass is the owner and administrator of the economic drift of the company. Due to its considerable legal form, a sole proprietorship is a very unique form that is adopted by many people in different economic sectors. Most of these people are entrepreneurs who invest in certain economic branches to create financial projects and turn them into businesses.

In general, these companies are well recognized as independent or self-employed workers and private entrepreneurs as entrepreneurs. In other words, a person who owns his own company usually dedicates his time to auxiliary services or provides support to other economic structures.

The people who legally own their businesses cannot carry out or apply industrial projects of a greater quantity than their capacities.

Features of Sole Proprietorship

  • Ownership and control: the single proprietor owns the business and also controls it.
  • Risk bearing: the proprietor bears the risks of the business alone.
  • Capital: business capital is provided by only one man.
  • Liability: the sole proprietor’s liability is unlimited.
  • Profit: all profits from the business are enjoyed by the sole proprietor.
  • The business has no separate legal entity of its own.

How to Start a One Man Business

  • Represent the institutional structure in a diagram, where the commercial project is reflected.
  • State or present the general identity of the owner.
  • Company name or trade name of the business.
  • Purpose of the individual company.
  • Area where the commercial activity will be carried out.
  • How long will the company last? (This is set by the owner).
  • Tax registration to be able to cover the taxes.
  • And finally a written document where the owner makes a declaration of incorporation.

Advantages of a Sole Proprietorship

Next, we briefly explain what advantages or benefits exist in a sole proprietorship or individual company, let’s get to it.

  • Sole proprietorships are easy to set up, as you only need a declaration from the entrepreneur.
  • This is of an independent type, that is to say that all norms or regulations are established by the owner.
  • The activities and tasks are carried out by the same entrepreneur, being your own boss and answering to no one.
  • Both the investments and the profits belong to the owner, unless he has an employee within his organization.
  • The capital that is handled has no limits. It is only adjusted according to the needs required by the business or investment capacity.
  • It comes into existence easily because initial capital can be raised conveniently by the proprietor.
  • It ensures prompt decision making and implementation.
  • It makes rendering of personal services possible and advantageous.
  • Personal control is usually effective and often guarantees business success.
  • Net business profits accrue to the sole proprietor.
  • Double taxation does not affect this form of business organization.

Disadvantages of a Sole Proprietorship

Previously it was explained what advantages the idea of carrying out a personal company has, now we will show some defects that it could have.

  • All those resources invested by the owner are at risk if there is no budget and organizational plan to correctly manage said money.
  • It does not have support from other companies because there is no society in which it can manage and make decisions.
  • All responsibility falls on the owner, in case there are claims, only the owner responds.
  • There are obligations to the state or tax duties. These evaluate the percentage of performance, and establish tax payments and application of labor laws in case of having employees.
  • Projects of greater financial proportions cannot be carried out, and only the owner can participate in the investments.
  • Limited capital – the small size of the capital often makes expansion very difficult.
  • Lack of continuity the sole proprietor’s death or retirement may lead to the collapse of the business.
  • Unlimited liability the sole proprietor’s liability is not limited to his capital outlay only.
  • Limited internal economies of scale – the business does not enjoy as much internal economies as limited liability firms.
  • The proprietor often works long hours and does not go on leave.