Sole Proprietorship SS1 Commerce Lesson Note

This is a business established and controlled by a person who provides all the capital. It is a type of business unit in which one person provides the capital, bears the risks and takes full responsibility for the firm. A sole proprietorship is the oldest and simplest form of business organization.

FEATURES OR CHARACTERISTICS OF SOLE PROPRIETORSHIP

1. Ownership, management and control is by one person.
2. Unlimited liability: The liability of an owner of a one-man business is unlimited. It extends to even their private property.
3. Not a legal entity: Legally, the business is not separate from the owner i.e. the business is not a separate entity.
4. There is no perpetual existence: The sole proprietorship’s existence lacks continuity since the death or retirement of its owner may lead to the folding up of the business.
5. Capital is provided by the owner.
6. The owner bears all the risks alone.
7. There are usually no formal procedures for its formation except in businesses like pharmacies, bars etc. where the license is required.
8. The owner enjoys all the profits alone.
9. It is common in small retail businesses and artisanship.
10. The motive of its formation is to make a profit.

ADVANTAGES OF SOLE PROPRIETORSHIP

1. It is easy to set up.
2. It requires small capital.
3. It is easy to run or manage.
4. The decision-making process is fast i.e. the owner can make quick business decisions.
5. Flexibility in business operations.
6. The owner takes (enjoys) the profits alone.
7. The owner enjoys privacy in his business activities.
8. Pride of ownership is enhanced i.e. The owner enjoys a feeling of independence.
9. There is a close and cordial relationship with workers and customers.

DISADVANTAGES OF SOLE PROPRIETORSHIP

1. Inability to raise enough capital or finance.
2. Unlimited liability of the owner

It is not a separate legal entity.

3. The owner bears all the risks and losses alone.
4. Limited scope for expansion of the business.
5. Lack of continuity i.e. the death of the owner may force the business to liquidate.
6. Limitation in the scope of decision/policy making.
7. Difficulty in facing stiff competition due to its small size.
8. Lack of holiday/leave/period of rest and late retirement for the owner etc.

SOURCES OF CAPITAL/FINANCE FOR A SOLE PROPRIETORSHIP 

1. Personal savings of the owner.
2. Loan from friends/relatives.
3. Loan and overdrafts from banks.
4. Trade credits i.e. credit purchases

Retained profits (or ploughed back profits).

5. Grants from friends/relations

Grants/loans from the government or its agencies e.g. NAPEP, NDE.

6. Other credit facilities e.g. hire purchase.