The characteristics of sole-proprietorship business
The sole-proprietorship is a form of business structure. It is usually included in the list of business structures such as; partnership, limited liability companies, and co-operatives.
It can be defined as a business established by an individual, financed and managed by him, with the aim of making profit.
You would agree that there is in existence this form of business. You have likely heard about someone who established a business without communal effort, sourced money for it from his pulse and manages it.
So many are this kind of business, time would not allow us to mention them by name. In every country there are thousands and thousands of sole proprietorships.
When we observe all of them, we would find that they have certain things in common, that defines them.
Irrespective of how proprietorships vary, in operation and niche, they always have certain generalities, that form a bulk of the aspects of their nature.
Learning about them, is no bad idea. After all we may want to start this kind of business. Or we know someone that would want to. It is also a way of building up on our knowledge.
THE CHARACTERISTICS OF SOLE PROPRIETORSHIPS
1. FORMATION IS DONE BY THE PROPRIETOR
Thinking about how to learn the characteristics of sole proprietorship is imperative, it is something that we want to learn. We could do so only through certain means. So we begin to wonder just how we could. Is there really a way to acquire this knowledge? There is, one unique way to draw the feature of sole-proprietorship. It is through its definition. A definition of an entity could serve as the mirror that gives you a view to it's characteristic. To illustrate it, if someone is defined as powerful, you can assert that he possess one of the characteristics of the powerful, which is sovereignty or occupies a position of authority, even if you have never met this person for the first time.
Likewise, we could draw the characteristics of sole proprietorships from the definition. It's definition is informative on this, in that it indicates that it is a business established by an individual.
We need not then, dispute this fact. And that is how authorities on the subject considers it.
If more than one person establishes a business, it, is not a sole proprietorship, because individual ownership defines sole-proprietorship.
By standard and tradition only one man owes this business. We know very many myriads of sole-proprietorships. All of them were established by an individual. In imitation of tradition, those who want to establish this kind never indulge others in the formation. The very individual that establishes it is identified with the designation- proprietor. That is to say, anybody that forms a sole-proprietorship is a sole-proprietor. As stated, there can never be such a thing as 'two-sole-proprietors', for a sole-proprietorship business. This fact has been established. Only one does all of this business structures have. Never think that it is like partnerships business where many persons usually form the business. It is not like that.
The proprietor plays a crucial role in the formation of the business. Business results when the steps to create them are taken. He is usually the one that takes all of them. The niche of the business is the result of his thought. When he comes up with the idea of the operation of the business, he is the one that plans, sources for capital, obtains permit, and starts a business.If he never does; if he never plays formative roles, they never come to birth. That very role is what defines the proprietor.
One of the major drives of business formation processes is capital. It is used to fund research, planning, registration etc. If a business is meant to be a corporation, the team that wishes to start it would each contribute to the capital. Or they could offer ownership in exchange for capital. But only the proprietor wants to start a Proprietorship business, he must play this role, and he alone usually does.
ILLUSTRATION
Truck-pushing is an example of sole-proprietorship. It involves the sale of water with the usage of Gallons, by distributing it to customers through Trucks. Mr Jacks, wants to start a sole-proprietorship, and choose Truck pushing as his niche. He decides to make a business plan; in how to raise the capital, where he would base his operations, the kind of equipment he needs. After making the plan, he source capital from his personal savings, and purchases Trucks and Gallons for the business and obtains permit to do the business from authorities. Then he starts business by buying from boreholes or commercial water sources and distributes it to those in demand. What does that illustration show?
Jacks typically undertook all the processes of formation of the business. His example, not only shows how possible it is for one person to start a business, but mirrors to us what a sole-proprietorship formation is like. As Jacks, started his business by himself, not with any other person, so does all those who want to start sole-proprietorship start it alone. The world is a thousand thousands years old. And throughout history no one has ever broken this standard, neither would anyone.
The definition of sole proprietorship as established is an authority on its characteristic. But suppose we want to make versatile the means through which we could learn about this business, we could include observation as a method of drawing knowledge.
We have observed very many sole-proprietorships. Right from the time we were children upwards, we have seen and heard about this kind of business. And all of them that we have seen, are usually managed by one man- the proprietor. The proprietor usually exercises sovereignty over the; policy, business direction, standard, and overall management of the business. He does not share this authority with anyone.
Sometimes when there is the need members of the owners of partnerships usually call for a round table. They would deliberate and come up with a conclusion, perhaps implementation of a policy or removal of existing one. Though, sometimes this is done by those whom they entrusted the duty duty to- the management.
There is no such a thing as sharing of sovereignty in sole-proprietorship. Only the proprietor chariots the business. He takes decisions at will, consults no one to, and implements whatever he wants to.There is no such thing as members coming together for a meeting on what to do and when. The proprietors takes all decisions, weather it is favourable or not.
Management in a sense, is exercise of sovereignty. Sovereignty of a business is due the creator. The proprietor secures the sovereignty by establishing the business. No one besides the proprietor chariots the business. He controls the affairs of the business; the policies, the direction, and over all management.
For instance in other business structures, you would find board of directors; those possessing experience, and remotes the business, and ensures that it adheres to ethical business practices. The sole proprietorship does not feature anything like board of directors. Only the proprietor plays those roles.
ILLUSTRATION
Jacks whose example we cited, is a sole-proprietor. He has just started a Truck-pushing business. In the morning he sourced water from the commercial water sellers; purchased from them and filled it into his Gallons, which he put in his Truck. He begins to drive it along a street, where someone saw him, and made a demand and paid for water. He conveyed the water to the persons house which was just a walk from that place. So did he continue from house to house selling, until he finished that particular water, and bought another one. When the Truck was no longer as efficient as it used to be, Jacks decided without consulting anyone to buy another one. Shortly afterwards, his customers increased. And he took the decision to buy a larger Truck. Somehow he learnt that there was a place where he could buy water cheaper. Without being advised by anyone, he concluded that it would be more economical for him to be buying from that place, and implanted his decision. Jacks decides the time that he would start his business each day, when to retire, and how much he would save from his profit.
What you don't know, is that Jacks illustration not only shows that the sole-proprietor exercises sovereignty over the business affairs, but that it also alligns with fact.
I drew that fact from interviews of so many sole-proprietors. All of them, from what I learnt from them, manages their business. All the managerial duties, are performed by no one else but them.
Scholars also support this claim with their fact. As all of them teaches that sole-proprietorship is a personal wagon, run by one man.
For critics of this possibility, Jacks' example shows just how possible it is for one person to manage a sole-proprietorship.
It is like growing a farm on your garden, you manage it alone. No one else lives with you. No one else could manage it with you. Living alone, you, decide; when to water it, the measurements of water to pour on it, how and when to prune it.
3. ONLY THE PROPRIETOR OWES THE BUSINESS
Whenever we discover any business, there is one judgement that we would make. We would conclude that someone established it. We know that businesses are not natural entities that stemmed their existence from nature. But are man made entities. All businesses are the children of men, for men always create them. Sole proprietorship business also has this nature. As it is applicable with every business, so is it with sole-proprietors. They are creations of men.
We know from history that two people could come together, and exert efforts to create an entity. If two men communally creates an entity, both of them are the owners of the entity. What makes one a creator is taking steps that results in creation. Therefore, since the both of them indulged in the steps, they are the owners of the business. They would certify themselves as the owners. Both of them, would be recognized as the owner.
Thus truth also applies to a business. If two or more people creates a business, all of them would be considered the owners of that business.
As we know, two people can never create a sole-proprietorship.
Jacks whose example we cited perfectly illustrates that only one person indulges in the creation processes of sole-proprietorship.
He took the basic steps, without involving anyone in the creation. And in the permit he obtained, he registered only his name to it, which makes only him the owner. The government recognized only him as the owner.
It is not in tune with the standards of sole proprietorships to have more than one owner. If a business has more than one owner, then it is not a sole proprietorship. The most distinguishing feature of this business from others, is ownership by an individual. As we have observed, all sole proprietorships have one owners only. It is unheard of for sole proprietorships to have more than one owner.
4. PROFIT IS REAPED BY ONLY THE PROPRIETOR
Traditionally shareholders and business starters are the beneficiaries of business; the profit is their wage. When they start business with the aim of making profit, they reap the benefits.
In sole-proprietorship there is only one shareholder, which is the proprietor. He it is that reaps the dividends of the business.
What makes one a beneficiary of a business is ownership, or purchase of shares. If you do not own a business or buy a share with the business, you do not have access to it's profit.
Having no other person as co-maker, the sole-proprietor stands as the only beneficiary, and usually reap the dividends of their business alone.
Think about the Truck pusher. He does not have anyone else that forged the business with him. No one else contributed the capital to forge the business. And when the business yields profit, no one else is entitled to it.
Business is a tool that can be used to make money. A man creates this tool. If the tool starts yielding money, whom would reap the money? It is he, and he- the creator.
Think about partnership for example. In a sense, all the members, built the tool- the business. They own the tool. When it starts to vomit money, all of them would reap it, it belongs to them all after all.
In contrast, there is no joint ownership of profit in sole-proprietorship. The enjoyment of dividends alone, is the supremest, benefit characteristic, of sole-proprietorship.
Remember that the proprietor created the business to acquire wealth for himself, not another person. If it were, then he would give the interest to that person.
Some businesses have multiple owners. We know of businesses like that. The partnerships and limited liability companies are example. And all of them who are owners, are entitled to profits.
Members - those who constitutes owners of a business usually have individual accounts. At the end of a business transaction or perhaps each month, they receive their share of profits. They receive it through their individual accounts. Their share would be credited into their account. Whatever goes into an individual's account belongs to him. They could use it however they want.
But in addition to their individual accounts, their is another account, that is not owned by one person, but the general members; the business account. Everyone usually has a share in it in accordance to the capital he contributed. Joint ownership is the nature of such account. But in sole-proprietorships there is no such thing as joint ownership of business accounts. The sole-proprietor is the only benefactor of the business account, by virtue of his ownership of business. And as such, he alone has the access to the money in it, and enjoys unlimited share in it's content.
A sole-proprietor is at liberty to use his personal account for business transactions. He may choose not to have a distinct account from his personal account. This means that whatever interest he makes would be credited into his personal account. Not only is he at liberty, but that most sole-proprietors put this into practice. And if no one else is a beneficiary of his personal account, no one else could reap the profits with him.
I derived the greatest evidence that sole-proprietors reap alone the dividends of their business, from interviews. I was able to interview most of them on this, and what they said tallied with scholastic assertions on this matter. So I concluded that this must be true.
5. IT DOES NOT REQUIRE REGISTRATION TO START
Business registration is encouraged. In almost every country, if not all, those who want to start a business are required to register it. This is important; it helps the business to gain the right standing before the law; ensuring that it is a legitimate entity, that is recognized by the state the business is located.
Those who do not register conflicts the government's standards; an offense punishable by law; something that could make the business become unrecognized, for non-compliance means the business is illegitimate. There is variation in the legal requirements of business from country to country. But we know that business men are usually required to register their business.
We always find people who start new business trying to fulfil this requirement. When they start a new business, they take steps to register it.
We have observed that whenever people start Partnerships or co-operatives companies, they usually register it. Infact eagerness, zeal and speed marks the manner at which they do it. What then could motivate them to continue to keep up with this tradition, with much enthusiasm? Something has to account for this. We would make this judgement particularly when we discover that sole-proprietors do not usually do so. All partnerships as we discover are registered. But all sole-proprietorships are not. When we make a research we would discover that there is a variation in the legal requirements of partnership and sole-proprietorships.
Other business structures like partnerships and co-operatives requires you to register with the state, which involves filling many forms. The forms I tell you are very many. But sole-proprietorship is void of this requirement. You aren't expected to register before you can start it. You simply become a business entity by merely doing business. The only requirement you are expected to fulfil is to get a permit or business license depending on your states law. To obtain those, you aren't expected to go through the long process of filling many many forms.
Those forms are usually many, and time consuming. You would fill one after the other. And have to wait for feedback after filling them. This delay can result in the delay of starting a partnership or co-operative. Thus, voidance of this delay, means a reduction in what could delay formation of sole-proprietorship. This is why it is characteristically easy to start.
6. LESS BUSINESS FEES
We have already established that government's usually require co-operatives and partnerships to register with them before they can start activities. This registration has a negative outcome for those who complies with it. They must also pay monthly or yearly fees to maintain their registration. Those fees are usually expensive. We did not find this feature in sole-proprietorship. Instead of featuring it, is void of it, because the law applies to only registered business.
7. STRAIGHT-FORWARD BANKING
The sole-proprietorship is void of a business checking account. There is no distinct account used for business transactions, from the proprietors private account. The proprietors' private account is also the business account, unlike in other business forms where there is a special account used for transaction.
8. ALL THE RISKS ARE BEARED BY THE
PROPRIETOR
Business is not void of risks. It rather features risks; dangers and uncertainties. Very many that have started business encountered certain dangers. Infact the attitude of people towards business formation shows that they know that they could encounter dangers while running their business. For example there is the requirement for commercial banks to entrust a certain sum of wealth with the central bank, so that in the event of liquidation or gross loss on their part, they could tap from that wealth and use it to run their business so that it does not affect their business. That this provision is put in place implies that that danger could affect a business, and that business risks losing their capital due to any reason at all.
Consider, a business, a company precisely may borrow loan to engage in mass production. They hope that they would make much revenue from the sells of the products they would produce. And derive the money they would use to settle for the loan from the revenue. But then, the business may receive little or no patronage, which would make it impossible to recover the money they want to use for their loan. If the product is perishable then, it may even lead to complete loss if they never make sale before it perishes. The loan may never be recovered. Every business risks losing their capital, due to lack of patronage. After investing heavily into production when there is no sale, the entire capital channeled into it cannot be recovered.
A business may choose to procure equipments because the one they use has become obsolete. After procurement, all those equipment may become engulfed in fire, and the business lose the property, which would result in the deduction from the capital, the money which would be used to make purchase of another set of equipment as the company cannot do production without equipment. All those illustration and instances alone shows that business can be affected by danger, and illustrates the particular dangers that could affect it.
Perhaps the greatest evidence to us that businesses could be affected by dangers, is scholastic assertions. All scholars of business have agreed that business involves danger. You would find this theory in textbooks. You would learn it from teachers in the classroom.
The danger could affect any kind of business irrespective of its niche and structure.
The risks involved in business differs from one business to the other and is dependent on the kind of business operation and location.
The negative effect of any danger could lead to either; constraints in it's growth, production, reduction in it's capital etc. And we know that whatever affects a business affects the owner. Inability to recover loan for instance has a direct bearing on the borrower- the owner. If a business has more than one owner, then all of them would be affected by any danger that could occur in business. If a business has many owners all of them stand to be affected by any danger that would occur, during the activities of business, or that could occur as a result of bad decision. All of them would have their share of the risk. Characteristically sole-proprietorships have only one owner. Thus he alone bears every business risks. If you own a business alone, you would also bear the risk alone. But if you own it with others, they would share it with you. It is like being on a ship alone, no one else is journeying with you, to help pull you out if you are drowning. No one else is usually victims of risks besides the proprietors.
Since he takes decision alone, he risks bearing the negative effect alone. If he collects a loan, he risks not recovering it. Only his properties which he willed as collateral would be taken.
For critics of sole-proprietorship this is usually the aspect of sole-proprietorship that makes it disadvantageous to start.
We established the example of Jack's a Truck pusher. As the sole-proprietor, he risks losing his Truck. It could be stolen. It may become obsolete and no longer function we. When this eventualities occurs, it affects only him directly, because there are no co-owners whom would bear this risk with him.
In the case where there are more than one owner, all of them would have there share of the risks. They would for instance source the capital for buying new truck from their various purses. They would each contribute to the capital for purchasing new Gallons in the event of lose.
For the sole-proprietor as Jack's example shows, he is the only one to be affected and to tackle any danger that would affect him.
9. LESS TAX REQUIREMENT
The tax requirement for sole-proprietorships are generally easier to fulfil. In some countries they are not expected to pay taxes. They sometimes receive tax discounts from government. Other business structures do not enjoy those benefits from the government. In the countries where they are expected to pay, the amount they are expected to pay is always very cheap, as compared with other business structures, where the owners have to pay expensive fees to maintain their papers.
10. IT IS VOID OF LEGAL PROTECTION
Legal protection in the context of business simply means personal asset protection. A provision made possible by what is collectively called, ''corporate veil'', offered by the law, that distinguishes the wealth and of business owners from the business assets; ensuring that the business owners properties are not taken or laid claim to by those the buy owes.
This provision is offered to partnerships and other forms, because they are registered with and recognized by the government and are considered distinct entities from their owners, but we did not find it in sole-proprietorship.
Businesses that are registered becomes distinct entities from their owners. When you sue the business you do not sue directly the owners. But the proprietorship which isn't registered isn't like that. The proprietor became a legal entity himself by simply doing business. Thus when you sue the business you also sue him.
In some countries there is no legal protections given to sole-proprietorships ps to restrict those they owe, from seizing their properties to compensate for their debts, as is with other business.
Sole-proprietorships is the only form of business that receives less protection from the law, like the one established and other kinds enjoyed by partnerships.
We have established the many characteristics of sole-proprietorships. There may be others, but the ones we established are the major ones, that collectively gives us a picture of what sole-proprietorship is all about.
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