Chapter 5- Sole Proprietorship

by • 10/06/2011 • B.COM PART 1 Introduction to BusinessComments (2)1295

Q1- What factors will you consider in the selection of a particular type of business ownership?

FACTORS OF THE SELECTION OF A TYPE OF OWNERSHIP

A businessman has many choices of ownership before starting a business. He may start his business as:

1.   Sole proprietorship

2.   Partnership

3.   Company

4.   Cooperative society

His selection of particular type depends on the consideration of the following factors.

1.   Business Risk:

If the business involves low amount of risk sole proprietorship is the best choice managing small capital all alone is not highly risky. If the business involve risk, the partnership or company may be set up to distribute it over a number of individuals.

2.   Life Of A Business:

Some businesses requires a greater stability than others. Manufacturing is one of such activities that must continue without any hindrance. Sole proprietorships and partnerships are by their nature weakly established. They come to an end by admission, retirement, death, insanity of the owner of partner. But the company doesn’t end for such reasons. So if the business nature requires stability, company is the best choice.

3.   Amount Of Capital:

If the amount needed is great the choice of the company is the best. Around 50 percent of the capital can be had from the public in addition to the investment of the promoters. The partnership is the second choice for raising a large amount of capital. Sole proprietorship is the best for business requiring small amount of capital.

4.   Geographical Expansion:

If the business is geographically expanded selection if the company is the best. Sole proprietorship and partnership are suitable for geographically limited business.

5.   Desire To Control:

If the owner is of the opinion to control the most, the sole proprietorship is the best. Here maximum authority is possible. In the partnership and the company control is divided among partners and directors and shareholders respectively.

6.   Tax Payment & Organization Expenses:

The company has to pay many taxes. The sole proprietorship and partnership are free from such expenditure. The addition advantage available to the partnership is the saving of income tax. If the tax is the most important criterion partnership is the best.

7.   Government Interference:

In the company the government interference is maximum. If the businessman doesn’t think such interference fit he can choose the sole proprietorship or the partnership.

Q2- Explain sole proprietorship form of business ownership. What are its merits and demerits?

SOLE PROPRIETORSHIP

It is the business which is owned by a single owner who is also referred to as sole proprietorship. It enjoys many benefits which other ownership cannot. Secrecy and ownership of full profit are some of its chief characteristics. However, it inherently suffers some setbacks embodying uncertain life, limited capital, and difficulty in operations.

ADVANTAGES OF SOLE PROPRIETORSHIP

Following are the advantages of sole proprietorship.

1.   Ownership Of All Profits:

A sole proprietorship has only a single owner and hence it has no concept of distribution of profit, and is wholly owned by him. On the other hand in company and partnership profits are distributed among owners.

2.   Ease Of formation:

It is quite easy to form a business as sole proprietorship. It formation does not require any permission from the government. It does not incur any expenditure as it required in the formation of partnership and company.

3.   Ease Of Dissolution:

It is quite easy to dissolve sole proprietorship. No much time or cost is required in bringing it to an end. But is quite difficult to dissolve company. Its dissolution involves much time and money.

4.   Tax Savings:

Sole proprietorship enjoys the advantage of saving various type of taxes. In this form of business income tax on owner is imposed only once, and there is no income tax on the form of business. But in the case of company the income is imposed twice. First on the company’s profit and then on the dividend of the shareholders.

5.   Personal Interest:

In this form of business the owner takes personal interest and offers maximum of his services and energy for the growth of his business. But in the company the work is not carried out that energetically because the whole operation of business is executed by the employees, who are not seriously interested in its development.

6.   Minimum Legal Constraints:

The company and the partnership have to follow many laws, rules, regulations from which the sole proprietorship is exempted.

7.   Secrecy:

Secrecy is an important element of any business, which can easily be maintained here. But in the company secrecy of business and accounts cannot be maintained here because all these affairs have to be printed so that they can be distributed to all shareholders, bankers and stock exchange.

8.   Low Cost:

The information of sole proprietorship doesn’t involve any formation cost. On the other hand, the formation of a company involves heavy expenditure.

DISADVANTAGES OF SOLE PROPRIETORSHIP

Following are the disadvantages of sole proprietorship.

1.   Unlimited Liability:

It is one of the major disadvantage of this form of business organization. If the asset of this business are insufficient to discharge its liability the proprietor will have to resort to his personal property to make up any deficiency in meting his business obligations.

2.   Difficulties In Management:

Since the form of business organization cannot afford the costly services of highly qualified personnel its management is in the hands of low or non qualified personnel. This fact causes difficulties in running the business smoothly.

3.   Limited Size:

The business usually doest not grow to a high level because of limited amount of capital and non availability of highly qualified personnel.

4.   Lack Of Opportunities For Employees:

Sole proprietorship does not offer career opportunities to its employees because of its limitation on size. But the partnership and company offer such opportunities.

5.   Uncertain Life:

The life of business depends on the efficiency or life of the single owner. If the owner is inefficient or dies the business will come to an end. But the company will not close down is its owner dies.

Pin It

2 Responses to Chapter 5- Sole Proprietorship

  1. namra rana says:

    plz answer this question: why sole proprietorship business is common in pakistan? just in 5 heading

  2. sardar ALy says:

    Awsome notes on sole proprietorship i really enjoyed by reading these ….. thanks for uploading such kind of important and useful stuff.

    Regards,
    ALy Sardar

Leave a Reply