Sole proprietorship may be defined as a form of business enterprise owned, financed and managed by one person with the primary aim of maximising profit. The sole proprietorship, also popularly referred to as one-man business, is the oldest and the most common type of business organisation.It is an unincorporated business unit owned by one person who provides the capital, runs the business and undertakes the risks and profits of the business alone.
Examples of sole proprietorship are found in primary industries like farming and fishing; in secondary industries like small scale manufacturing, printing, etc. and majorly in tertiary (or service) industries like lawyers, doctors, tailors, barbers, hairdressers, musicians and traders.
FEATURES OR CHARACTERISTICS OF SOLE PROPRIETORSHIP
- Ownership: The business enterprise is owned by one person.
- Objective: The main objective of the one man business is to make profit.
- Source of capital: The capital required to set up and run the business is provided by the proprietor.
- Liability: The sole proprietor has unlimited liability.
- Legal entity: It is not a legal entity as the owner is not separated from the business.
- Management: The business is controlled and managed by the sole proprietor himself.
- Life span: The life span depends on the owner. The enterprise can fold up any time.
SOURCE OF CAPITAL OF A SOLE PROPRIETORSHIP
The sole proprietor can obtain his capital from the following sources:
- Personal savings: A sole proprietor can obtain capital from his previous savings; he can use his personal income as initial capital.
- Loan from friends: He can also raise capital by borrowing from friends and relatives.
- Trade credit: They can obtain capital by purchasing goods on credit from the suppliers, producers or wholesalers.
- Loan and overdraft from banks: The sole proprietor can also obtain capital from financial institutions. This can be in the form of loan or an overdraft.
- Grants/loans from government: Government can release capital to its agencies in support of certain programmes, e.g. the Government of Nigeria under its Poverty Alleviation Programme can release some funds in the form of loans to unemployed graduates, among others, to set up small scale businesses. This constitutes a source of capital for a sole proprietor.
ADVANTAGES OF SOLE PROPRIETORSHIP
- It involves small capital: The sole proprietorship requires very small capital to set up.
- It is easy to establish: The one-man business is easy to establish because of the small capital requirement and it may not involve much protocol or procedures when setting up the business.
- Taking of quick decisions: Quick decisions are easily taken by the sole proprietor alone without the consent of other workers in the organisation.
- It is easy to manage: The sole proprietor can easily manage the operations of the enterprise without expert management from outside.
- It requires small operation: The sole proprietorship serves fragmented markets in West Africa and as such, large operations would not be necessary.
- All profits belong to the owner: All the profits derived from the business belong to the owner of the business because the capital outlay or provision came from him.
- It can thrive in all business environment: The sole proprietor can thrive in almost all business environment, be it rural or urban environment because of its simplicity in establishment.
- There is privacy in conducting business affairs: The sole proprietor can keep his business matters secret. He is not required to publish his account or submit an audited balance sheet to the Registrar of Companies.
- There is a close relationship between owner and employee: In a one-man business the workers are personally known to the owner. This makes supervision easy and ensures effectiveness of business operations.
- There is a close relationship between owner and customers: The close relationship between the owner and customers allows the former to give special attention to the latter. Also, he can easily find out the special requirements of customers and satisfy them.
- The sole proprietor enjoys personal rewards: He has a personal interest in the business and invest his time, money, and effort so as to get reward at the end of the day.
- There is effective planning: The sole proprietor embarks on effective planning and formulation of policies alone and these will guide him in the smooth running of the enterprise by way of taking prompt business advantages, e.g. in sales and purchases.
DISADVANTAGES OF SOLE PROPRIETORSHIP
- Problem of continuity: In the event of the death of the owner, the business may also die with him, especially when there is no successor to take over from him.
- Inadequate capital: The sole proprietor is always faced with inadequate” capital because of the small size of his business and his inability to source funds outside his business.
- He bears all risks alone: The risk required in operating the business is borne solely by the owner. If the business is successful, he rejoices but when it fails, he suffers it all alone.
- It has unlimited liability: In the event of business failure, his assets and properties have to be sold to pay his creditors.
- It is not a separate legal entity: In law there is no difference between the owner of sole proprietorship and the business itself. The business cannot sue or be sued in its own right.
- He lacks specialisation: The owner is personally involved in every section of the business. He works very hard; he may not take public holidays, and scarcely has rest. In most cases, when he is absent, the business may close down temporarily.
- There is limitation in expansion: The sole proprietorship suffers from expansion, both in ideas and business, as a result of inadequate capital.
REASONS FOR THE CONTINUED EXISTENCE OF SMALL SCALE BUSINESS UNITS
- Small capital requirement: The small scale business requires small capital to set up.
- Easy to establish: The small scale business units are easy to set up or establish since no formalities are required.
- Provision of incentive for hard work: There is always incentive for hard work since ownership instills pride and drive for success.
- They enjoy customer’s loyalty: Small scale business units always enjoy customers’ loyalty and good relationship, which ensure continued patronage.
- Ability to change policies: The policies of the business can be easily and quickly changed to meet with the changing needs of the customers.
- Low level of risks: The small scale business outfit usually involves low level of risks.
- Low overhead cost: The overhead cost involved in small scale business is usually very low.
- They meet the special needs of customers: Small scale business meets the peculiar needs of customers by keeping variety of goods from which consumers can choose.
- Availability of goods in remote areas: The small scale business also ensures that goods are distributed to remote areas.
- Some serve the need of larger firms: Many small scale businesses serve the need or provide the requirements of larger firms.