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Chapter 5 Forms and Formation of Business Enterprises
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5.1 Introduction There are different forms of business organization ranging from small scale one man business to large scale limited companies. Following are the important forms of organization in the private sector.
5.2 Sole Proprietorship A business owned and controlled by a single individual is known as sole proprietorship organization. The owner of such business is known as sole proprietor. He contributes all the capital. He is responsible for all the management decisions. The proprietor need not share the profits of the business with anyone. At the same time, if the business makes any loss, the proprietor has to bear the entire loss.
5.2.1 Features of Sole Proprietorship 1. Individual Ownership A sole proprietorship business is owned and controlled by a single individual who is known as the sole proprietor.
2. Risk bearing The sole trader is the single owner who is entitled to take out the whole profits of the business. There is no sharing of profit or sharing of risk. Similarly the proprietor is solely responsible for making all decisions.
3. Unlimited Liability There is no restriction as to the amount upto which the owner is to bear the losses of the business. If the assets of the business are not sufficient to pay off the liabilities, the owner has pay them off from his private wealth.
4. Freedom of operation The sole proprietor is free to run his business according to his wish. He need not approval from others in running the business. Government restrictions are very limited in case of sole proprietorship business.
5. Control The proprietor has personal control over all the matters related to the business. Even if he appoints a manager the proprietor will continue to hold control over the business.
5.2.2 Merits of Sole Proprietorship
1. Ease of Formation A sole proprietorship organization is easy to form. There is hardly any legal formality in setting up this type of organization. It is not governed by any specific law. A sole proprietor should only comply with the general laws and regulations regarding commercial activities.
2. Flexibility of operation In a sole proprietorship business, all decisions are made by a single person. There are no delays in decision making process. The business can respond quickly to changes in business environment. 3. Sole Beneficiary of profits The profit earned in sole proprietorship business is not shared with anyone. There is direct relation between effort and reward. This motivates the proprietor to work hard.
4. Suitability for small scale operations The sole proprietorship form is generally adopted for small scale businesses where personal attention to details is required. When capital availability is limited sole proprietorship form is the most appropriate form of organizations.
5.2.3 Limitations of Sole Proprietorship
1. Unlimited Liability The sole proprietorship business has the basic disadvantage of unlimited liability. When the business funds are not sufficient to pay off the business liabilities the proprietor has to arrange money from his personal savings to meet the needs of the business.
2. Limited Capital The sole proprietor has limited scope for raising capital. He mainly depends his own savings for investment. This reduces the scope of expansion of business.
3. Limited managerial skill Managerial skills are essential for successful running and expansion of business. The lack of managerial ability is a serious hindrance for the growth of a sole proprietorship business.
4. Lack of continuity The business is dependent on a single individual. If he becomes incapable of running the business it is most likely that the business will be closed down.
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