In this class, we will discuss Business organizations – sole proprietorship.
Business Organizations – Sole Proprietorship
Definition
Types (forms) of business units
Sole proprietorship
Forms of business units
Business units can be divided into two broad classes, namely, the private sector or private enterprise and the public sector or public enterprise. The private sector or enterprise is made up of all the business enterprises owned and controlled by private individuals, whereas the public sector or enterprise covers all enterprises owned and controlled by the government.
There are five main forms of business units under the private sector or enterprise, namely:
1. The sole proprietorship – i.e., the sole Trader or One-man business
2. The Partnership
3. The Private Limited Liability Company
4. The Public Limited Liability Company
5. The Co-operative Society
Public enterprises (also called Public Corporations or Statutory Corporations), as mentioned earlier, are owned, controlled and financed by the government.
Factors influencing the form of a business unit
1. The amount of capital available for setting up the business
2. The personal ability or experience/skill of the entrepreneur
3. Type or nature of the business
4. Size or extent of the market (i.e., the demand for the products of the business
5. Degree of risk or uncertainty involved in the business
6. Personal interest/motive/objective of the entrepreneur
7. Government policies – i.e., the economic, legal, social and industrial policies of the government.
Sole proprietorship
This is a business established and controlled by a person who provides all the capital. It is a type of business unit in which one person provides the capital, bears the risks, and takes full responsibility for the firm. The sole proprietorship is the oldest and simplest form of business organization.
Features or characteristics of a sole proprietorship
1. Ownership, management, and control is by one person
2. Unlimited liability: The liability of an owner of a one-man business is unlimited. It extends to even their private property.
3. Not a legal entity: Legally, the business is not separate from the owner i.e. the business is not a separate entity
4. There is no perpetual existence: The sole proprietorship’s existence lacks continuity since the death or retirement of its owner may lead to the folding up of the business
5. Capital is provided by the owner
6. The owner bears all the risks alone
7. There is usually no formal procedures for its formation except in business like pharmacy, bars etc. where a license is required
8. The owner enjoys all the profits alone
9. It is common in small retail businesses and artisanship
10. The motive of its formation is to make profit
Advantages of a sole proprietorship
1. It is easy to set up
2. It requires small capital
3. The decision-making process is fast i.e. the owner can make a quick business decision
4. It is easy to run or manage
5. Flexibility in business operations
6.. The owner takes (enjoys) the profits alone
7. The owner enjoys privacy in his business activities
8. Pride of ownership is enhanced i.e., the owner enjoys a feeling of independence
9. There is a close and cordial relationship with workers and customers
Review questions
1. Explain five characteristics of a sole proprietorship
2. What are the advantages of a sole trade business
Disadvantages of a sole proprietorship
1. Inability to raise enough capital or finance
2. Unlimited liability of the owner
3. It is not a separate legal entity
4. The owner bears all the risks and losses alone
5. Limited scope for expansion of the business
6. Lack of continuity i.e. the death of the owner may force the business to liquidate
7. Limitation in the scope of decision/policy making
8. Difficulty in facing stiff competition due to its small size
9. Lack of holiday/leave/period of rest and late retirement for the owner etc.
Sources of capital/finance for a sole proprietorship
1. Personal savings of the owner
2. A loan from friends/relatives
3. Loans and overdrafts from banks
4. Trade credits i.e., credit purchases
5. Retained profits (or ploughed–back profits)
6. Grants from friends/relations
7. Grants/loans from the government or its agencies e.g. NAPEP, NDE
8.. Other credit facilities e.g. hire purchase
Review questions
1. State five disadvantages of a sole proprietorship
2. Explain four sources of capital available to a sole proprietorship business.
General self-evaluation
1. Explain five activities involved in Commerce
2. Explain five advantages of home trade over foreign trade
3. State five advantages of air transport
4. Explain five factors affecting the choice of transport of frozen products
5. With the aid of diagrams, show five examples of the channel of distribution
Theory
1. Mention five factors that will determine the form a business unit will take
2. State two limitations that a sole trader is likely to meet as his business continues to expand
Next class, we will discuss Partnership. Send your questions in the comment section below, and we will respond.