What is a sole Proprietorship and examples? Advantages and Disadvantages

Sole proprietor

Business organizations can be classified based on various criteria. One of the major ways of classifying a business is based on ownership. Here, we are going to explain the meaning of a type of business organization known as sole proprietorship. A sole proprietorship is a one-man business. In this type of business, a single man provides the capital, takes every decision, shoulders the entire responsibilities of the management and operations. He also takes all the risks in the business. Looking at this explanation, you will understand that he is solely responsible for the success or failure of the business. He reaps the benefits and rewards from the business, if the business fails, he bears the loss.

The person that owns such a business is known as the sole proprietor. One of the things that you need to know about the legal status of sole proprietorship is that it is not a separate legal entity from its owner and therefore, it can sue or be sued with the owners name.

In West Africa, the one man business is popular. This can be attributed to the amount of capital and resources needed for its formation and operation which is not much. Examples of businesses where sole proprietorship is mostly observed is in farming, retail trades, service trades with examples as Shoe makers, Tailors, Mechanics, Carpenters, and also in some professional services such as medical doctors, surveyors and architects.

Advantages of Sole Proprietorship

This type of business organization has its own advantages, which I am going to discuss below;

1. The business is properly managed to avoid loss

One of the reasons for establishing such a business is to make profit. Knowing fully well that he, “sole proprietor”, puts up the capital and resources needed for the running of the business, will motivate him to be more efficient so as to minimize lost and maximize profit. He try very hard inorder to ensure the smooth running of his business so as to reap the entire rewards.

2. Decisions are easy to take and implement

Due to the fact that the business is his own, taking decisions can be very easy. Not only this, he does not have the need to refer matters of policy issues or any change that affects his business to anyone. He takes decisions easily and also implements it. This is not the case in other forms of jointly owned organizations where it will take time for decisions to be made or implemented. In most cases, a considerable amount of loss may have taken place before decisions are taken or implemented.

3. There is a quick response to customers and employees needs

The proprietor is always available to give his customers and employees his personal attention. He can quickly and effectively cater for the individuals requests. He will ensure that his customers are satisfied knowing fully well that all these will guarantee the success of his business.

4. It is very easy to establish

One of the reasons why this type of business is popular in developing countries is that it requires small capital for formation. Thus, it can be established with personal savings, borrowing from family and friends and from other loan rendering service institutions.

5. Most times, do not require a high level of expertise

Most sole proprietorship business owners do not have much qualifications to operate such a business. It is not surprising to hear that some will know more about the business in the process of doing it. Others got their knowledge through apprenticeship. Thus, making it very easy to establish. It is mostly practiced in some professional services such as medical doctors, surveyors and architects and others that do not require a high level of expertise.

Disadvantages of Sole Proprietorship

I have discussed the advantages of this business type, now, it is time to know its disadvantages;

1. The sole proprietor is responsible for unlimited liability

Being a one-man business, he reaps the reward as well as the benefit as we said earlier. Where the owner of such a business encounters more challenges or when his business becomes insolvent, he alone will shoulder the debts. There are some cases of such business owners whom they level of debts incurred from their enterprises warranted them to sell off their personal belongings in order to settle their debts.

2. Limited Capital for further expansion

For a business to keep on flourishing, enough capital is needed. It is not encouraging operating a business that remains stagnant. This is another setback in a one-man business. His capital resources being mainly provided by himself or from other sources will limit his business from further expansion. It is evident that the larger a business is, the more benefit it will reap from large scale production or bulk purchasing of necessary necessary products and goods.

3. It can come to an abrupt end at any time

This type of business can stop operating because of several reasons. The death or retirement of the owner can lead to such. The liquidation of the business organization can be another reason. Unavailability of capital can also be another reason. It is pertinent to also note that the success or failure of such a business lies solely on the proprietor. At times, such an owner maybe inexperienced to effect the smooth running of such a business.

4. The choice of services and goods available is made by the proprietor

The owner of the business detects the type of services to be rendered or the choice of goods to be made available. He can choose all these based on his personal preference. At times, it may not be the best for his customers, but he chooses it because he is knowledgeable only in that area. He can equally do so if such service or goods is earning a good profit for him.

5. Employees in such businesses are most times underpaid

Some employees in such business organizations works more than their earnings. They are made to take up additional tasks with little to no addition of money to their salary. This accounts for one of the reasons why there is a high turnover of employees in such a business. The fear of losing their jobs may prevent them from voicing out their grievances.

I believe I have answered your question on “what is a sole proprietorship and examples?”. The advantages and disadvantages of Sole proprietorship will guide you when making a choice of the type of business that you want to establish.

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