What do you understand by a sole proprietorship firm? Explain its merits and limitations.
Or
"One can explore or may lose the chance of being a sole trader". In the light of this statement, state the merits and limitations of sole proprietary business.
Sole tradership or proprietorship is the oldest form of business organisation. It is also known as individual proprietorship or single entrepreneurship. This type of organisation is very simple and easy to form.
“Sole proprietorship is the form of business which is owned, managed and controlled by an individual. It is the simplest form of business, established with the limited resources, ability and capital of the individual known as sole trader or entrepreneur.”
A sole tradership enjoys the following merits
(i) Ease of Formation The establishment of a sole tradership concern is easier as compared to other forms of organisation. A person with small amount of capital can start the business without undergoing much legal formalities.
(ii) Flexibility The sole trader is free to change the nature and scope of his business operation, whenever the situation demands.
(iii) Quick Decision-making Sole tradership facilitates quick decision-making and prompts action as the sole trader has exclusive control over his business.
(iv) Secrecy of Information It is easy to preserve secrecy in business in case of sole proprietorship.
A sole tradership has following limitations
(i) Limited Financial Resources The financial resources which a sole trader can raise are limited. He can either depend on his personal resources or on his borrowing capacity.
(ii) Limited Managerial Ability The sole proprietor has to take all the decisions and he may not be an expert in all the matters of business. Also, due to financial constraints, he may not he able to use services of professionals and experts.
(iii) Limited Life of a Business Concern In the eyes of law, owner and business are considered one and the same. Therefore, illness death or insolvency of the owner affects the business and can lead to its closure.
(iv) Unlimited Liability The liability of the sole trader is unlimited in the sense that the business creditors