Sole proprietorship, what is sole proprietorship? this maybe defined as a form of business enterprise owned, financed and managed by one person with the primary’ aim of maximizing profit.
Sole proprietorship explained
The sole proprietorship, also popularly referred to as one-man business, is the oldest and the most common type of business organization.
It is an unincorporated business unit owned by one person who provides the capital, runs the business and undertakes the risks and profits of the business alone.
Can a sole proprietorship business be incorporated?
Most sole proprietorship has a way to incorporate their business using name incorporation through the corporate affairs commission
Examples of sole proprietorship business
Examples of sole proprietorship are found in primary industries like farming and fishing; in secondary industries like small scale manufacturing, printing, etc. and majorly in tertiary (or service) industries like lawyers, doctors, tailors, barbers, hairdressers, musicians and traders.
FEATURES OR CHARACTERISTICS OF SOLE PROPRIETORSHIP
Simply saying how do we recognize a sole proprietorship business? A sole proprietorship business can be known o r identify through the following ways
- Ownership: The business enterprise owned by one person.
- Objective: The main objective of the one man business is to make profit.
- Source of capital: The capital required to set up and run the business is provided by the proprietor.
- Liability: The sole proprietor has unlimited liability.
- Legal entity: It is not a legal entity the owner is not separated from the business.
- Management: The business is controlled and managed by the sole proprietor himself
- Life span: The life span depends on owner. The enterprise can fold up time.
SOURCE OF CAPITAL OF A SOLE PROPRIETORSHIP
The sole proprietor can obtain his capital from the following sources:
- Personal savings: A sole proprietor obtains capital from his previous saving he can use his personal income as initial capital.
- Loan from friends: He can also raise capital by borrowing from friends
- Trade credit: They can obtain capital by purchasing good on credit from the suppliers, producers or wholesalers.
- Loan and overdraft from banks: The sole proprietor can also obtain capital from financial institutions. This can be in the form of loan or an overdraft
- Grants/loans from government: Government can release capital to its agencies in support of certain programme, e.g.
- the Government of Nigeria under its Poverty Alleviation Programme can release some funds in the form of loans to unemployed graduates, among others, to set up small scale businesses. This constitutes a source of capital a sole proprietor
ADVANTAGES OF SOLE PROPRIETORSHIP
- sole proprietorship involves small capital: The sole proprietorship requires very small capital to setup.
- sole proprietorship is easy to establish: The one-man business is easy to establish because of the small capital requirement and it may involve much protocol or procedures setting up the business.
- sole proprietor Taking of quick decisions: Quick decisions are easily taken by the sole proprietor alone without the consent of other workers in the organization
- sole proprietorship is easy to manage: The sole proprietor can easily manage the operations of the enterprise without expert management from outside
- It requires small operation: The sole proprietorship serves fragmented markets West Africa and as such, large operations would not be necessary
- All profits belong to the owner: All the profits derived from the business belong to the owner of the business because the capital outlay or provision came from him.
- sole proprietor can thrive in all business environments: The sole proprietor can thrive in almost all business environment, be it rural or urban environment because of its simplicity in establishment.
- There is privacy in conducting business affairs: The sole proprietor can keep his business matters secret. He is not required to publish his account or submit an audited balance sheet to the Registrar of Companies.
- There is a close relationship between owner and employee: In a one-man business the workers are personally known to the owner. This makes supervision easy and ensures effectiveness of business operations.
- There is a close relationship between owner and customers: The close relationship between the owner and customers allows the former to give special attention to the latter. Also, he can easily find out the special requirements of customers and satisfy them.
- The sole proprietor enjoys personal rewards: He has a personal interest in the business and invest his time, money, and effort so as to get reward at the end of the day.
- There is effective planning in sole proprietorship : The sole proprietor embarks on effective planning and formulation of policies alone and these will guide him in the smooth running of the enterprise by way of taking prompt business advantages, e.g. in sales and purchases.
DISADVANTAGES OF SOLE PROPRIETORSHIP
- Problem of continuity: In the event of the death of the owner, the business may also die with him,
especially when there is no successor to take over from him.
- Inadequate capital to fund sole proprietorship: The sole proprietor is always faced with inadequate capital because of the small size of his business and his inability to source funds outside his business.
- He bears all risks alone: The risk required in operating the business is borne solely by the owner. If the business is successful, he rejoices but when it fails, he suffers it all alone.
- It has unlimited liability: In the event of business failure, his assets and properties have to be sold to pay his creditors.
- It is not a separate legal entity: In law there is no difference between the owner of sole proprietorship and the business itself. The business cannot sue or be sued in its own right.
- He lacks specialization: The owner is personally involved in every section of the business. He works very hard; he may not take public holidays, and scarcely has rest. In most cases, when he is absent, the business may close down temporarily.
- There is limitation in expansion: The sole proprietorship suffers from expansion, both in ideas and business, as a result of inadequate capital.