By Harshvardhan, the Subject Matter Expert at Edumarz
Solution: Sole proprietorship is a popular form of business organisation and is the most suitable form for small businesses, especially in their initial years of operation. Sole proprietorship refers to a form of business organisation that is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business. This form of business is particularly common in areas of personalised services such as beauty parlours, hair salons and small scale activities like running a retail shop in a locality.
A sole proprietorship offers many advantages. Some of the important reasons why many people continue to prefer sole proprietorship over other forms of organisation are as follows:
(i) Quick decision making: A sole proprietor enjoys a considerable degree of freedom in making business decisions. Further, the decision making is prompt because there is no need to consult others. This may lead to timely capitalisation of market opportunities as and when they arise.
(ii) Confidentiality of information: Sole decision-making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. A sole trader is also not bound by law to publish a firm’s accounts.
(iii) Direct incentive: A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise as he/she is the single owner. This provides the maximum incentive to the sole trader to work hard.
(iv) Sense of accomplishment: There is a personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instils in the individual a sense of accomplishment and confidence in one’s abilities.
(v) Ease of formation and closure: An important merit of a sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.