Sole proprietorship

Businesses can be grouped by who owns them. The simplest form is the sole proprietorship: 'sole' means one, and the 'proprietor' is the owner. One person owns, manages and controls the business, takes all the profit and bears all the loss. Walk into almost any small shop near your home: the person at the counter is usually its sole proprietor.

Its features:

• Formation and closure are easy: no separate law governs it and there are few formalities (at most a basic licence).
• Unlimited liability: if the business cannot pay its debts, the owner must pay from personal property.
• Sole risk bearer and profit recipient: nobody shares the profit, and nobody shares the loss.
• Control rests fully with the owner.
• No separate legal entity: the law sees the owner and the business as one and the same.
• Lack of continuity: if the owner falls ill, goes away or dies, the business may simply stop.

An example of unlimited liability: XYZ dry cleaner has liabilities of ₹80,000 but assets of only ₹60,000. The owner must pay the remaining ₹20,000 from personal sources, such as savings or even the family's own property.

Merits:

• Quick decisions: the owner asks nobody.
• Confidentiality: the accounts need not be published. A big company's profits are public, but you can only guess what the shop next door earns.
• Direct incentive: if the owner's new offer raises sales, the whole gain is the owner's.
• Sense of accomplishment: the satisfaction of running something of your own.
• Ease of formation and closure.

Limitations:

• Limited resources: one person's savings and borrowing power cannot turn a small shop into a mall.
• Limited life of the business.
• Unlimited liability, which makes owners careful about taking risks.
• Limited managerial ability: one person may be good at selling but weak at finance or stock-keeping. One great batsman cannot win a cricket match on his own; you need the whole team.