LESSON 1

A business enterprise refers to a unit of any business organization which is actively involved in production and distribution of a good or service. In economics a unit of a business enterprise is called a firm.

SOLE PROPRIETORSHIP

Sole proprietorship refers to a business unit under the control and management of one person. Or Refers to a business unit started, financed, controlled and managed by one person.

It is one-man business and he alone provides the capital, makes decisions, takes all the profits and losses etc. Therefore, a sole proprietor refers to a person who owns finances and manages a business alone.

Sole proprietorship is the most common type in developing countries such as in farming, sole trade in retailing and wholesaling among others.

Features of sole proprietorship

Capital is contributed by the owner
The owner is the organizer and manager, although he can be assisted by family members or a few outsiders.
The owner is responsible for the success and failure of business (bears the risks and entitled to all profits)
Mostly are small-scale enterprises.
The business depends largely on the owner’s personal skills and directions.
A sole proprietor has unlimited liability.

Advantages of sole proprietorship

The business is easy to start up since it requires less capital and does not need many formal procedures. One just starts after getting capital and a license.
Quick decision making because it does not require consultations and hence delays are avoided. Therefore, urgent issues are easily attended to.
A sole proprietor does not blame anybody in case of losses but only answerable to himself.
All profits and benefits go to the sole proprietor himself, and this encourages him to work hard and can easily change from one line to another.
A sole proprietor is independent from other people and therefore organizes his business without restrictions.
He enjoys top secrecy/ privacy. He is the only one who knows his business secrets and has a better chance to preserve them than any other form of ownership.
Easy to manage and organize due to the small size. The owner is able to establish a direct contact both with his employees and the customer (adapted to customers’ special needs and easily controls the small staff).
The business is very flexible. He can make policy changes in a short time and can change the nature of the business or premises without seeking approval from others.

Disadvantages of sole proprietorship

Limited/narrow scope of capital and this makes expansion of his business difficult; since he/she raises capital from own savings or borrows on own risk.
A sole proprietor faces unlimited liability. He is responsible for debts incurred in business and his personal property can be seized to settle, should the business become insolvent.
In most cases the business lacks continuity and thus usually collapses/closes down on the death of the owner, bankruptcy, severe illness or imprisonment.
He bears all the risks of the business unlike other business organizations –the success or failure depends on him. However, some risks are hard to overcome alone and at times the business collapses.
Low level of output in this business due to small scale operations—which implies low turnover and hence low income.
There is low employment creation due to small scale operation.
There can be a standstill in the event of sickness of the sole proprietor or even became closed.
Lacks trustworthy in financial institutions and thus cannot easily obtain loans. In most cases he lacks collateral security to acquire loans.
Every person has limitations and hence a sole proprietor lacks a wide range of skills and ideas—leading to inefficiency. Remember a good salesman may not be a good accountant or buyer.
The sole proprietor performs a wide range of activities some of which he may have no experience in. therefore there is less time for leisure each day since most or all the work is waiting for his effort.
Inability to carry out research in business. This is due to small size of capital and fear of risk of loss yet research is useful in competitive production.
It is more difficult to transfer parts of sole proprietorship business than to transfer shares in a company.

SELF CHECK ONE

Qn. Account for the dominance of sole proprietor businesses in your country