A Sole Proprietorship A Sole Proprietorship Firm Firm

How To Start Sole How To Start Sole ProprietorshipProprietorship

A sole proprietorship requires almost no legal A sole proprietorship requires almost no legal formalities. It can start the day you want it to formalities. It can start the day you want it to start. One may even open a bank account on the start. One may even open a bank account on the name of your sole proprietorship concern.name of your sole proprietorship concern.

In case you wish to have a trade mark, design In case you wish to have a trade mark, design and use it as your trade mark. One may even and use it as your trade mark. One may even register a Trade Mark with the proper authorities.register a Trade Mark with the proper authorities.

The only thing you must take care of is that you The only thing you must take care of is that you have the required licenses specific to your line of have the required licenses specific to your line of business. For Example: If you are a doctor you business. For Example: If you are a doctor you need a license to practice etc. Find out about need a license to practice etc. Find out about your line of business and what licenses you may your line of business and what licenses you may require before setting up.require before setting up.

A business enterprise exclusively owned, A business enterprise exclusively owned, managed and controlled by a single person managed and controlled by a single person with all authority, responsibility and risk.with all authority, responsibility and risk.

A sole proprietorship is the most common A sole proprietorship is the most common type of business. There are sole type of business. There are sole proprietorships everywhere. proprietorships everywhere.

Small grocery stores, STD booths are Small grocery stores, STD booths are mostly proprietorship businesses. mostly proprietorship businesses.

A “Sole Proprietorship” business means A “Sole Proprietorship” business means that there is only ONE owner. that there is only ONE owner.

There may be employees or helpers hired There may be employees or helpers hired under the owner, but there is only one under the owner, but there is only one “head” who administers and runs the “head” who administers and runs the show. show.

Characteristics of a sole proprietorshipCharacteristics of a sole proprietorship Single Ownership:Single Ownership: A single individual owns the sole proprietorship! That individual A single individual owns the sole proprietorship! That individual

owns all the assets and properties of the business. He alone bears owns all the assets and properties of the business. He alone bears all the risk of the business. all the risk of the business.

No sharing of profit & loss: No sharing of profit & loss: The entire profit out of the sole proprietor ship business goes to 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 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 proprietor alone. Nobody else shares any of the profit and loss of the business. the business.

Low capital:Low capital: The capital required by a sole proprietorship is totally arranged by The capital required by a sole proprietorship is totally arranged by

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

One-man control: One-man control: The controlling power in a sole proprietorship business always The controlling power in a sole proprietorship business always

remains with the owner alone. The owner or proprietor alone takes remains with the owner alone. The owner or proprietor alone takes all the decisions to run the business. He may take decisions all the decisions to run the business. He may take decisions though a consultant or some advice, but the final decisions are though a consultant or some advice, but the final decisions are always in his hand. always in his hand.

Unlimited Liability: Unlimited Liability: The liability of the sole proprietor is unlimited. This implies that, in The liability of the sole proprietor is unlimited. This implies that, in

case of loss the business assets along with the personal properties case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities. of the proprietor shall be used to pay the business liabilities.

Almost no legal formalities:Almost no legal formalities: The formation and operation of a sole proprietorship requires The formation and operation of a sole proprietorship requires

almost no legal formalities. However, the owner may be required almost no legal formalities. However, the owner may be required to obtain a license from the local administration or from the health to obtain a license from the local administration or from the health department of the government, whatever is necessary depending department of the government, whatever is necessary depending on the nature of the business. on the nature of the business.

What is the meaning of unlimited What is the meaning of unlimited liability?liability?

In the case of “Sole Proprietorship”, the Govt. does In the case of “Sole Proprietorship”, the Govt. does not see any difference between the firm and the not see any difference between the firm and the individual.individual.

If you are a plumber named Raju Sharma and you If you are a plumber named Raju Sharma and you start a plumbing service firm called “Flush” which is start a plumbing service firm called “Flush” which is a sole proprietorship, the government does not a sole proprietorship, the government does not differentiate between “Flush” and “Raju Sharma”differentiate between “Flush” and “Raju Sharma”

This means that if someone sues “Flush” and “Flush” This means that if someone sues “Flush” and “Flush” owes that person a huge sum of money, it is as good owes that person a huge sum of money, it is as good as Raju Sharma owes that person a huge sum of as Raju Sharma owes that person a huge sum of money.money.

Raju Sharma's bank accounts, property and even his Raju Sharma's bank accounts, property and even his house may be used to settle the claim. house may be used to settle the claim.

Advantage of a Sole Advantage of a Sole ProprietorshipProprietorship

Easy to form and wind up:Easy to form and wind up: A sole proprietorship form of business is very easy to form. A sole proprietorship form of business is very easy to form.

With a very small amount of capital you can start the With a very small amount of capital you can start the business. There is no need for any legal formalities. (Except business. There is no need for any legal formalities. (Except for those businesses which require a license from local for those businesses which require a license from local authorities or health department of government etc.) It is also authorities or health department of government etc.) It is also very easy to wind up the business. It is the owners decision to very easy to wind up the business. It is the owners decision to form or wind up.form or wind up.

Direct motivation: Direct motivation: The profits earned belong to the sole proprietor alone and he The profits earned belong to the sole proprietor alone and he

bears the risk of losses as well. Thus, there is a direct link bears the risk of losses as well. Thus, there is a direct link between the effort and the reward. If he works hard, then between the effort and the reward. If he works hard, then there is a possibility of getting more profit and he will be the there is a possibility of getting more profit and he will be the sole beneficiary of this profit. Nobody will share this reward sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole with him. This provides strong motivation for the sole proprietor to work hard. proprietor to work hard.

Better control: Better control: In sole proprietorship business the proprietor has full In sole proprietorship business the proprietor has full

control over each and every activity of the business. Since control over each and every activity of the business. Since the proprietor has all authority with him, it is possible to the proprietor has all authority with him, it is possible to exercise better control over business. exercise better control over business.

Maintenance of business secrets: Maintenance of business secrets: Business secrecy is an important factor for every business. Business secrecy is an important factor for every business.

It refers to keeping the future plans, business strategies, It refers to keeping the future plans, business strategies, etc., secret from outsiders or competitors. In the case of etc., secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since good position to keep his plans to himself since management and control are in his hands. management and control are in his hands.

Encourages self-employment: Encourages self-employment: Sole proprietorship form of business organization leads to Sole proprietorship form of business organization leads to

creation of employment opportunities for people. Not only creation of employment opportunities for people. Not only is the owner self-employed, sometimes he also creates job is the owner self-employed, sometimes he also creates job opportunities for others. Thus, it helps in reducing poverty opportunities for others. Thus, it helps in reducing poverty and unemployment in our country. and unemployment in our country.

Disadvantage of a Sole ProprietorshipDisadvantage of a Sole Proprietorship

Limited capital:Limited capital: In a sole proprietorship business, the owner arranges for the In a sole proprietorship business, the owner arranges for the

required capital for the business. It is difficult for a single required capital for the business. It is difficult for a single individual to raise a huge amount of capital. The owner’s own individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business’s growth and expansion. meet the requirement of the business’s growth and expansion. Venture capitalists and banks generally do not lend money to sole Venture capitalists and banks generally do not lend money to sole proprietorships.proprietorships.

Unlimited liability:Unlimited liability: In case the sole proprietor fails to pay the expenses arising out of In case the sole proprietor fails to pay the expenses arising out of

business activities, his personal properties may have to be used to business activities, his personal properties may have to be used to pay for those. This generally discourages the sole proprietor from pay for those. This generally discourages the sole proprietor from taking risks. He thinks cautiously while deciding to start or expand taking risks. He thinks cautiously while deciding to start or expand the business activities. the business activities.

Lack of continuity:Lack of continuity: The existence of a sole proprietorship business is dependent The existence of a sole proprietorship business is dependent

on the life of the proprietor. Illness, death etc. of the owner on the life of the proprietor. Illness, death etc. of the owner brings an end to the business. The continuity of business brings an end to the business. The continuity of business operation is therefore uncertain. operation is therefore uncertain.

Limited size:Limited size: There is a limit beyond which it becomes difficult for a sole There is a limit beyond which it becomes difficult for a sole

proprietor to expand the business activities. It is not possible proprietor to expand the business activities. It is not possible for a single person to supervise and manage the affairs of for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit. the business if it grows beyond a certain limit.

Lack of managerial expertise: Lack of managerial expertise: A sole proprietor may not be an expert in every aspect of A sole proprietor may not be an expert in every aspect of

management. He/she may be an expert in administration, management. He/she may be an expert in administration, planning, etc., but may be weak in marketing. Again, planning, etc., but may be weak in marketing. Again, because of limited financial resources it is also not possible because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks to employ a professional manager. Thus, the business lacks benefits of professional management. benefits of professional management.

Suitability of Sole Proprietorship Form of Business

Where the market for the product is small and local. For example, selling grocery items, books, stationery, vegetables, etc.

Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc.

Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc.

Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stall, etc.

Where manual skill is required. For example, making jeweler, haircutting or tailoring, cycle or motorcycle repair shop, etc.