You might have heard people talking about business of a person or a person being a partner in a business. When a business owned by a person or co-owned by few persons we may call it as Proprietary concerns. Full ownership & control of the business under this category remains with one or few individuals. The business or firm’s name does not have any legal status or existence.
Sole Proprietorship
This form of business is fully owned by one person and this single person runs the show, may be with the help of family members or relatives or may be employing one or more persons to assist. . He or she has to arrange capital for the business and he alone is responsible for its management. He or she is therefore, entitled to the profits and has to bear the loss of business, however, he/she can take the help of family members and also make use of the services of others such as a manager and other employees. This type of business organisation is also called single ownership or single proprietorship.
Any person who is competent to enter into contract can start a sole proprietary concern. As per law a person, who has attained the age of majority, of sound mind and who is not disqualified (for a period) by insolvency law or any other law, can enter into a contract. Small factories and shops are often found to be sole proprietorship organisations. It is the simplest and most easily formed business organization. This is because not much legal formality is required to establish it. The sole proprietor is entitled for all the profits and shall also bear all the risks and losses.
Advantages
- Easy formation with formal license only
- Freedom available to the sole proprietor to take action enables quick decisions and prompts action. There is no need to consult anyone.
- Personal contacts with customers & employees
- Business secrecy can be maintained and hereditary business is enabled
- There is direct relationship between the economical & efficient effort and rewards. Hence costs are also controlled effectively.
- Since the business is conducted alone or with a tight family structure, there is no necessity for formal organizational structure and hence absolute flexibility is there.
- Business Tax procedures are relatively simple with all income from business getting reported in the owner’s individual tax return. The owner can take maximum benefits of tax concessions given for individuals
Disadvantages
- The capital structure (capital and borrowings) of the business is limited to personal wealth and credit standing of the proprietor
- Limited managerial and technical skills
- The owner is responsible for all the debts and the liability is unlimited dipping into personal assets like house property, vehicles, furniture, appliances etc
- Since the business is dependent upon the health & wealth and life of the owner, there is no continuity
- This form of business is suitable where personal skills & contacts are important.
Features of Sole Proprietorship:
The important features of a sole-proprietary organization include the following
- Individual Initiative: One person is the owner in a sole proprietary form of organisation.
- Risk Bearing: The proprietor is the sole beneficiary of profits in this form organisation. If there is a loss he alone has to bear it. Thus the risks of business are borne by the proprietor himself.
- Management and control: Management and control of this type of organisation is the responsibility of the sole proprietor. He may, however, employ a manager or other people for the purpose.
- Minimum government regulations: The government does not interfere with the working of the sole proprietorship organisation. However, they have to comply with the general laws and rules laid down by government.
- Unlimited liability: The sole proprietor has to bear the losses and is responsible for the liabilities of the business. If the business assets are not sufficient to meet the liabilities, he may also have to sell his personal property for that purpose.
- Secrecy: All important decision taken by the owner himself. He keeps all the business secrets only to himself.
Partnership
A Partnership is an association of two or more persons (maximum of 10 in case of banking and 20 in case of other businesses) for carrying out a business as co-owners for a profit. In India, Partnerships are governed by the provisions of The Indian Partnership Act, 1932 which defines partnership as “the relation between two or more persons who have agreed to share profits of a business, carried on by all or any of them acting for all.” The term business includes all trades, occupation and professions.
The owners of a partnership business are individually called partners and collectively called as firm. The name of the business is called ‘firm name’ which has no legal status though it might accumulate reputation or build image resulting in goodwill. Partners can be sued individually and jointly in respect of the business and the liability is unlimited. So each partner is a principal for the outside world and each partner is an agent to other partners.
Advantages
- Communication across the network is cheap and fast.
- Increased Capital Raising Power and Managerial & Technical expertise compared to sole proprietorship.
- Easy formation compared to joint stock companies & easy dissolution as agreed by all the partners or 14 days notice to other partners in case of partnership at will.
- Business Secrecy can be maintained since there is no requirement by law for publication of final accounts
Disadvantages
- Partnership has a less capital raising power and Managerial or Technical expertise as compared to joint stock companies.
- Unlimited liability renders the partnership unsuitable to take up large scale operations.
- Absence of separate legal status for the business and continuity
- The partnership is not transferable unless all the partners agree for the same
In Europe and America, there is a system of Limited Partner-ship wherein two types of partners – General and Limited / Special Partners – will be there. The liability of the Limited / Special Partners are limited to the extent of their investment only whereas the liability of General partners is unlimited whose personal assets are also liable for the actions of the business.
