Enumerate any three limitations of sole proprietorship.
OR
Define ‘sole proprietorship’. Explain any two demerits of sole proprietorship.
OR
What do you understand by a sole proprietorship firm ? Explain its merits and limitations.
The word “sole” implies “only” and “proprietor” refers to the “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 saloons and small scale activities like running a retail shop in a locality.Merits: Sole proprietorship offers many advantages. Some of the important ones are as follows :
1.Quick decision making : A sole proprietor enjoys considerable degree of freedom in making business decisions.
2.Confidential and secrecy : 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 the firm’s accounts.
3.Direct incentive : A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profits.
4.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 instills a sense of accomplishment and confidence in one’s abilities.
Limitations : Sole proprietorship has a some limitation, which are as follows :
1.Limited resources : Resources of a sole proprietor are limited to his/her personal savings and borrowings from others.
2.Limited life of a business concern : In the eyes of law, the proprietor and the owner are considered one and the same. Death, insolvency or illness of a proprietor affects the business and can lead to its closure.
3.Unlimited liability : A major disadvantage of sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not only from the business assets, but also from the personal assets of the proprietor.
4.Limited managerial liability : The owner has to assume the responsibility of varied managerial tasks, such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas.