what do you understand by a sole proprietorship firm? explain it's merits and limitations
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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.
•Flexibility The sole trader is free to change the nature and scope of his business operation, whenever the situation demands.
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Quick Decision-making Sole tradership facilitates quick decision-making and prompts action as the sole trader has exclusive control over his business.
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•Flexibility The sole trader is free to change the nature and scope of his business operation, whenever the situation demands.
•
Quick Decision-making Sole tradership facilitates quick decision-making and prompts action as the sole trader has exclusive control over his business.
hope helps
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Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the incipient of all profits and bearer of all risks. The word “sole” implies “only” and “proprietor” refers to “owner”. Hence, a sole proprietor is the only owner of a business. This form of business is particularly common in small scale business and areas of personalized services.
Merits of Sole Proprietorship
♡Prompt Decision Making The decision making is prompt under sole proprietorship as there is considerable degree of freedom in making business decisions and there is no need to consult others. This results in timely capitalization of market
♡Confidentiality All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority rests with the proprietor. A sole proprietor is also not bound legally to publish firm’s accounts.
♡ Direct Incentive The sole proprietor receives all the business profits as a reward for bearing the business risk. He/she is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.
♡Sense of Accomplishment There is a sense of personal satisfaction involved in working for oneself. It instills a sense of accomplishment and confidence in the individual.
♡Ease of Formation and Closure An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.
Limitations of Sole Proprietorship
●Limited Resources Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks and other financial institutions hesitate to provide long term loan to a sole proprietor and hence, the size of the business generally remains small.
● Limited Life of a Business Concern Death, insolvency or illness of a proprietor has a detrimental effects on the business and can lead to its closure.
●Unlimited Liability A major disadvantage of sole proprietorship is the unlimited liability of the owner. In case of failure of business, the creditors can recover their dues not only from the business assets but also from the personal assets of the proprietor.
● Limited Managerial Ability An individual may not be good in all managerial tasks such as purchasing, selling, financing, etc. Thus, decision making of a sole proprietor may not be effective in all the cases. Though sole proprietorship suffers from certain limitations, many entrepreneurs opt for this form of organization because it requires less amount of capital and is best suited for small businesses and where customers demand personalized services.
Merits of Sole Proprietorship
♡Prompt Decision Making The decision making is prompt under sole proprietorship as there is considerable degree of freedom in making business decisions and there is no need to consult others. This results in timely capitalization of market
♡Confidentiality All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority rests with the proprietor. A sole proprietor is also not bound legally to publish firm’s accounts.
♡ Direct Incentive The sole proprietor receives all the business profits as a reward for bearing the business risk. He/she is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.
♡Sense of Accomplishment There is a sense of personal satisfaction involved in working for oneself. It instills a sense of accomplishment and confidence in the individual.
♡Ease of Formation and Closure An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.
Limitations of Sole Proprietorship
●Limited Resources Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks and other financial institutions hesitate to provide long term loan to a sole proprietor and hence, the size of the business generally remains small.
● Limited Life of a Business Concern Death, insolvency or illness of a proprietor has a detrimental effects on the business and can lead to its closure.
●Unlimited Liability A major disadvantage of sole proprietorship is the unlimited liability of the owner. In case of failure of business, the creditors can recover their dues not only from the business assets but also from the personal assets of the proprietor.
● Limited Managerial Ability An individual may not be good in all managerial tasks such as purchasing, selling, financing, etc. Thus, decision making of a sole proprietor may not be effective in all the cases. Though sole proprietorship suffers from certain limitations, many entrepreneurs opt for this form of organization because it requires less amount of capital and is best suited for small businesses and where customers demand personalized services.
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