Classwork Series and Exercises {Commerce – SS1}: Sole Proprietorship

Commerce SS1 Week 4

Topic – Sole Proprietorship

Contents

1. Meaning of sole proprietorship
2. Characteristics of sole proprietorship
3. Sources of capital for a sole proprietorship
4. Advantages and Disadvantages of sole Proprietorship

Meaning of a Sole Proprietorship

The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts.

A sole proprietorship is a form of business enterprise owned, financed, and managed by one person with the primary aim of making profit.  A sole proprietor is a one man business; it is the oldest and cheapest means of business organization.

Examples of a sole proprietorship are found in primary industries like farming, doctor, lawyer etc.

Features and Characteristics of a Sole Proprietorship

1. Objective: The main objective of a sole proprietorship is to make profit.
2. Source of capital: The source of capital for a sole proprietorship business is provided by the owner of the business.
3. Legal entity: A sole proprietor business is not a legal entity as it is not because the owner is not separated from the business.
4. Lifespan: The lifespan of the business depends majorly on the owner, it can fold up anytime. The death of the owner brings the business to a close.
5. Management: The business is controlled and managed by the sole proprietor himself.

Sources of Capital of a Sole Proprietorship

The sole proprietor can obtain his/her capital from the following sources

1. Loan and overdraft from banks: The sole proprietor can also obtain capital from financial institutions; this can be in form of loans or an overdraft.
2. Trade credit: They can obtain capital by purchasing goods on credit from the suppliers, producers, wholesalers.
3. Personal savings: A sole proprietor can obtain capital from his previous savings; he can use his personal income as the initial capital.
4. Grants and loan from Government: The government can grant loan and release capital to its agencies in support of certain programmes.

Advantages of Sole Proprietorship

1. It is very easy to establish: The one man business is easy to establish since it involves little capital to start with. It does not involve much protocol or procedures to set it up.
2. Decision making is fast: Quick decision is easily taken by the sole proprietor alone without the consent of other workers in the organization which makes decision making very fast.
3. Personal rewards: The sole proprietor enjoys the reward and all the profit of the business alone because he invests his time, money and effort so as to get reward.
4. It requires small operation: The sole proprietorship serves fragmented markets in West Africa and as such, large operations would not be necessary.
5. There is privacy: There is privacy in the operation of business operation and can decide to keep the matter and affairs of the business private without anybody interacting.
6. There is a close relationship between the owner and the customer: The close relationship between the owner and customers allows the former to give special attention to the latter.
7. It involves small capital: A sole proprietorship business needs little capital to start with.

 Disadvantages of Sole proprietorship

1. There is limitation to expansion: A sole proprietorship suffers from ideas, expansion as a result of small capital.
2. He bears the risk alone: He bears all the risk of the business alone, when the business fails; he suffers it alone.
3. It has unlimited liability: In the event of business failure, his assets and properties have to be sold to pay his creditors.
4. Problems of continuity: The death of the owner can actually bring the business to a close especially when there is nobody to take over the business from the person.
5. Inadequate capital: He is always faced with inadequate capital because of the small size of his business and his ability to source fund.
6. He lacks specialization: The owner is personally involved in all section of the business and therefore those not have any area of specialization.

Test and Exercise

1. The aim of a sole proprietor is (a) To sell at a cheaper price (b) to maximize profit (c) to have a relationship with their customers (d) To see to their environment.
2. One of the features of a sole proprietorship that states that the business is owned by one person is (a) source of capital (b) Objective (c) Liability (c) ownership.
3. All of the following are sources of capital to a sole proprietor except (a) loans from banks (b) personal savings (c) trade credit (d) the startup capital.
4. One of the disadvantages of a sole proprietor (a) problem of continuity (b) it involve small capital (c) it is easy to manage (d) decision making is fast.
5. One of the advantages of a sole proprietor is this (a) the death of the man can bring the business to a close (b) It has unlimited liability (b) It is easy to establish (d) he bears all the risk alone. http://passnownow.com/classwork-support/