Business organizations can be run through different forms such as a proprietorship, partnership and being formed as a limited companies.
A proprietor is an individual who runs a business on his own being the sole owner of the business entity.
The sole proprietor runs a business being unincorporated entity and has a legal owner of the assets of the entity and its business operations.
There are different cycles in the life of every business entity. The business at its inception usually operates in the form of a sole proprietor. However, when a business grows further, it becomes challenging to manage the business by a single individual.
To enhance the credibility and trust of the individuals involving in managing the entity, the sole proprietor, in most cases, has to issue shares in a business to employees.
Upon issuance of such a share, the proprietorship business converts into a partnership firm. The shortage of capital situation also compels the proprietor to issue shares to the general public to have more capital for business expansion.
In order to fulfil this purpose the business being a proprietorship or partnership, now converts into incorporated company.
There are many pros and cons with each type of business operation. For example, a proprietor is liable to discharge all its liability personally, and all the incomes and expenses are related to the individual running the business as a proprietor.
The debtor can sue the proprietor personally to recover all the money extended to such proprietor. However, in the case of the companies, the liability of the shareholders is limited to the number of shares taken or contracted to be taken by each shareholder. The individual is not personally liable to pay the debts taken to run the entity’s business operations.
The proprietorship business is the simplest form of business with only a limited number of employees and owner-managed business usually. Thus it provides a great opportunity for the owner to keep a close eye on every aspect of the business organization.
All the measure decisions are taken by the owner and also ensures the applicability of those decisions. The close coordination of the owner forms a good working relationship between the owner and every employee.
The owner also evaluates the performance of every individual by himself and remunerates accordingly. This increases the competition among the employees and also enhances productivity.
The problem with this type of business usually occurs upon the business expansion. The unplanned business without forming a business structure of the organization may ruin the business upon its expansion.
Upon expansion of the business, the proprietor has to delegate the decision-making authority in day-to-day operations. The unplanned delegation of powers to the staff without any check and balance can harm the business badly.
The owner-manager brilliantly runs many organizations, but most organizations start loss-making businesses due to unplanned expansion.
Upon expansion of the business, the sole proprietor loses his close coordination with every individual, which ultimately weakens accountability. Employees with more rights in decision-making in day-to-day operations without an efficient accountability mechanism encourage them to embezzlement assets and involvement in illegal activities.
As a result the business entity loses its identity and if not cope with it in a proper manner may also result the closure of business at a sole proprietorship level.
Many business entities are currently working as a proprietor in every economy of the world. The nature of such business, in most cases, does not allow them to run their business while forming a limited liability company. Some examples of such businesses are discussed as under:
- A person being a business professional can extend their accounting and auditing services as a sole proprietor.
- A doctor, engineer, or valuer can also serve the clients in their individual capacity.
- A hairdresser, cobbler, mason, painter, electrician, etc., can also provide services to their clients being a proprietor.
- A singer or writer can also play their role as a sole proprietor.
- Any person can now become a proprietor while extending its services as a freelancer, YouTuber, tik toker, and providing other digital services online.
- Teachers are quite a suitable example providing services as an individual.
There are many more examples of sole proprietorship. This form of business is the simplest among all types of businesses. Thus, every individual normally starts his/her business as a sole proprietor.