NCERT Textbook - Forms of Business Organisation | Business Studies (BST) Class 11 - Commerce PDF Download

 Page 1


Chapter 2
Forms o F Business 
o rganisation LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
identify different forms of business organisation;
•	
explain features, merits and limitations of different forms of business 
organisations;
•	
distinguish between various forms of organisations; and
•	
discuss the factors determining choice of an appropriate form of 
business organisation.
Chapter 2.indd   26 13-01-2021   09:40:59
2024-25
Page 2


Chapter 2
Forms o F Business 
o rganisation LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
identify different forms of business organisation;
•	
explain features, merits and limitations of different forms of business 
organisations;
•	
distinguish between various forms of organisations; and
•	
discuss the factors determining choice of an appropriate form of 
business organisation.
Chapter 2.indd   26 13-01-2021   09:40:59
2024-25
27 FORMS OF BUSINESS ORGANISATION
Neha, 	 a	 bright	 final 	 year 	 student 	 was	 waiting 	 for	 her	 results 	 to 	 be	 declared. 	 While	
at home she decided to put her free time to use. Having an aptitude for painting, 
she tried her hand at decorating clay pots and bowls with designs. She was excited 
at the praise showered on her by her friends and acquaintances on her work. She 
even managed to sell a few pieces of unique hand pottery from her home to people 
living in and around her colony. Operating from home, she was able to save on 
rental payments. She gained a lot of popularity by word of mouth publicity as a sole 
proprietor. She further perfected her skills of painting pottery and created new motifs 
and designs. All this generated great interest among her customers and provided a 
boost to the demand for her products. By the end of summer, she found that she 
had	 been	 able	 to	 make	 a 	 profit 	 of	 Rs.	 2500	 from	 her 	 paltry 	 investment	 in	 colours, 	
pottery and drawing sheets. She felt motivated to take up this work as a career. 
She has, therefore, decided to set up her own artwork business. She can continue 
running the business on her own as a sole proprietor, but she needs more money 
for doing business on a larger scale. Her father has suggested that she should form 
a partnership with her cousin to meet the need for additional funds and for sharing 
the responsibilities and risks. Side by side, he is of the opinion that it is possible 
that the business might grow further and may require the formation of a company. 
She 	 is	in	a 	fix 	as	 to 	 what 	form	 of	 business	organisation	she 	 should 	go 	in 	for?
2.1 i ntroduction If one is planning to start a business 
or is interested in expanding an 
existing one, an important decision 
relates to the choice of the form of 
organisation. The most appropriate 
form is determined by weighing the 
advantages and disadvantages of each 
type of organisation against one’s own 
requirements. 
Various forms of business 
organisations from which one can 
choose the right one include:
 (a) Sole proprietorship,                
 (b) Joint Hindu family business, 
 (c) Partnership,
 (d) Cooperative societies, and 
 (e) Joint stock company.
Let us start our discussion with 
sole proprietorship — the simplest form 
of business organisation, and then 
move on to analysing more complex 
forms of organisations.
2.2 s ole Pro Prietorshi P
Do you often go in the evenings to buy 
registers, pens, chart papers, etc., 
from a small neighbourhood stationery 
s t o r e ? 	 W e l l , 	 i n 	 al l 	 pr ob abi l i t y 	 i n 	 t he	
course of your transactions, you have 
interacted with a sole proprietor.
Sole proprietorship is a popular 
form of business organisation and 
is the most suitable form for small 
businesses, especially in their initial 
years of operation. Sole proprietorship 
refers to a form of business organisation 
which is owned, managed and 
Chapter 2.indd   27 13-01-2021   09:40:59
2024-25
Page 3


Chapter 2
Forms o F Business 
o rganisation LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
identify different forms of business organisation;
•	
explain features, merits and limitations of different forms of business 
organisations;
•	
distinguish between various forms of organisations; and
•	
discuss the factors determining choice of an appropriate form of 
business organisation.
Chapter 2.indd   26 13-01-2021   09:40:59
2024-25
27 FORMS OF BUSINESS ORGANISATION
Neha, 	 a	 bright	 final 	 year 	 student 	 was	 waiting 	 for	 her	 results 	 to 	 be	 declared. 	 While	
at home she decided to put her free time to use. Having an aptitude for painting, 
she tried her hand at decorating clay pots and bowls with designs. She was excited 
at the praise showered on her by her friends and acquaintances on her work. She 
even managed to sell a few pieces of unique hand pottery from her home to people 
living in and around her colony. Operating from home, she was able to save on 
rental payments. She gained a lot of popularity by word of mouth publicity as a sole 
proprietor. She further perfected her skills of painting pottery and created new motifs 
and designs. All this generated great interest among her customers and provided a 
boost to the demand for her products. By the end of summer, she found that she 
had	 been	 able	 to	 make	 a 	 profit 	 of	 Rs.	 2500	 from	 her 	 paltry 	 investment	 in	 colours, 	
pottery and drawing sheets. She felt motivated to take up this work as a career. 
She has, therefore, decided to set up her own artwork business. She can continue 
running the business on her own as a sole proprietor, but she needs more money 
for doing business on a larger scale. Her father has suggested that she should form 
a partnership with her cousin to meet the need for additional funds and for sharing 
the responsibilities and risks. Side by side, he is of the opinion that it is possible 
that the business might grow further and may require the formation of a company. 
She 	 is	in	a 	fix 	as	 to 	 what 	form	 of	 business	organisation	she 	 should 	go 	in 	for?
2.1 i ntroduction If one is planning to start a business 
or is interested in expanding an 
existing one, an important decision 
relates to the choice of the form of 
organisation. The most appropriate 
form is determined by weighing the 
advantages and disadvantages of each 
type of organisation against one’s own 
requirements. 
Various forms of business 
organisations from which one can 
choose the right one include:
 (a) Sole proprietorship,                
 (b) Joint Hindu family business, 
 (c) Partnership,
 (d) Cooperative societies, and 
 (e) Joint stock company.
Let us start our discussion with 
sole proprietorship — the simplest form 
of business organisation, and then 
move on to analysing more complex 
forms of organisations.
2.2 s ole Pro Prietorshi P
Do you often go in the evenings to buy 
registers, pens, chart papers, etc., 
from a small neighbourhood stationery 
s t o r e ? 	 W e l l , 	 i n 	 al l 	 pr ob abi l i t y 	 i n 	 t he	
course of your transactions, you have 
interacted with a sole proprietor.
Sole proprietorship is a popular 
form of business organisation and 
is the most suitable form for small 
businesses, especially in their initial 
years of operation. Sole proprietorship 
refers to a form of business organisation 
which is owned, managed and 
Chapter 2.indd   27 13-01-2021   09:40:59
2024-25
28 BUSINESS  STUDIES
Sole trader is a type of business unit where a person is solely responsible for 
providing the capital, for bearing the risk of the enterprise and for the management 
of business.
J.L. Hansen
The individual proprietorship is the form of business organisation at the head of 
which stands an individual as one who is responsible, who directs its operations 
and who alone runs the risk of failure.
 L.H. Haney
controlled by an individual who is the 
recip ient 	 of 	 all 	 p rofi ts 	 an d 	 b earer 	 of	
all risks. This is evident from the term 
itself. The word “sole” implies “only”, 
and “proprietor” refers to “owner”. 
Hence, a sole proprietor is the one who 
is the only owner of a business.
This form of business is particularly 
common in areas of personalised 
services such as beauty parlours, hair 
saloons and small scale activities like 
running a retail shop in a locality.
the owner is personally responsible 
for payment of debts in case the assets 
of 	 the 	 business 	 are 	 not 	 sufficient 	 to	
meet all the debts. As such the owner’s 
personal possessions such as his/her 
personal car and other assets could be 
sold for repaying the debt. Suppose 
the total outside liabilities of XYZ dry 
cl eaner , 	 a 	 sol e 	 pr opr i et or shi p	 fir m , 	 are	
Rs.	 80,000	 at	 the 	 time	 of 	 dissolution, 	
but 	 its	 assets 	 are	 Rs.	 60,000 	 only. 	 In	
such a situation the proprietor will 
Features
Salient characteristics of the sole 
proprietorship form of organisation 
are as follows:
(i) Formation and closure: There 
is no separate law that governs sole 
proprietorship. Hardly any legal 
formalities are required to start a 
sole proprietary business, though 
in some cases one may require a 
license. Closure of the business can 
also be done easily. Thus, there is 
ease in formation as well as closure 
of business.
(ii) Liability: Sole proprietors have 
unlimited liability. This implies that 
have	 to 	 bring	 in	 Rs. 	 20,000	 from 	 her	
personal sources even if she has to 
sell her personal property to repay the 
firm’s 	 debts. 	
(iii) Sole risk bearer and profit 
recipient: The risk of failure of 
business is borne all alone by the sole 
proprietor. However, if the business 
is successful, the proprietor enjoys 
all 	 the 	 benefits. 	 He 	 receives 	 all 	 the	
business 	 profits 	 which 	 become 	 a 	 direct	
reward for his risk bearing.
(iv) Control: The right to run the 
business and make all decisions lies 
absolutely with the sole proprietor. He 
can carry out his plans without any 
interference from others.
Chapter 2.indd   28 13-01-2021   09:40:59
2024-25
Page 4


Chapter 2
Forms o F Business 
o rganisation LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
identify different forms of business organisation;
•	
explain features, merits and limitations of different forms of business 
organisations;
•	
distinguish between various forms of organisations; and
•	
discuss the factors determining choice of an appropriate form of 
business organisation.
Chapter 2.indd   26 13-01-2021   09:40:59
2024-25
27 FORMS OF BUSINESS ORGANISATION
Neha, 	 a	 bright	 final 	 year 	 student 	 was	 waiting 	 for	 her	 results 	 to 	 be	 declared. 	 While	
at home she decided to put her free time to use. Having an aptitude for painting, 
she tried her hand at decorating clay pots and bowls with designs. She was excited 
at the praise showered on her by her friends and acquaintances on her work. She 
even managed to sell a few pieces of unique hand pottery from her home to people 
living in and around her colony. Operating from home, she was able to save on 
rental payments. She gained a lot of popularity by word of mouth publicity as a sole 
proprietor. She further perfected her skills of painting pottery and created new motifs 
and designs. All this generated great interest among her customers and provided a 
boost to the demand for her products. By the end of summer, she found that she 
had	 been	 able	 to	 make	 a 	 profit 	 of	 Rs.	 2500	 from	 her 	 paltry 	 investment	 in	 colours, 	
pottery and drawing sheets. She felt motivated to take up this work as a career. 
She has, therefore, decided to set up her own artwork business. She can continue 
running the business on her own as a sole proprietor, but she needs more money 
for doing business on a larger scale. Her father has suggested that she should form 
a partnership with her cousin to meet the need for additional funds and for sharing 
the responsibilities and risks. Side by side, he is of the opinion that it is possible 
that the business might grow further and may require the formation of a company. 
She 	 is	in	a 	fix 	as	 to 	 what 	form	 of	 business	organisation	she 	 should 	go 	in 	for?
2.1 i ntroduction If one is planning to start a business 
or is interested in expanding an 
existing one, an important decision 
relates to the choice of the form of 
organisation. The most appropriate 
form is determined by weighing the 
advantages and disadvantages of each 
type of organisation against one’s own 
requirements. 
Various forms of business 
organisations from which one can 
choose the right one include:
 (a) Sole proprietorship,                
 (b) Joint Hindu family business, 
 (c) Partnership,
 (d) Cooperative societies, and 
 (e) Joint stock company.
Let us start our discussion with 
sole proprietorship — the simplest form 
of business organisation, and then 
move on to analysing more complex 
forms of organisations.
2.2 s ole Pro Prietorshi P
Do you often go in the evenings to buy 
registers, pens, chart papers, etc., 
from a small neighbourhood stationery 
s t o r e ? 	 W e l l , 	 i n 	 al l 	 pr ob abi l i t y 	 i n 	 t he	
course of your transactions, you have 
interacted with a sole proprietor.
Sole proprietorship is a popular 
form of business organisation and 
is the most suitable form for small 
businesses, especially in their initial 
years of operation. Sole proprietorship 
refers to a form of business organisation 
which is owned, managed and 
Chapter 2.indd   27 13-01-2021   09:40:59
2024-25
28 BUSINESS  STUDIES
Sole trader is a type of business unit where a person is solely responsible for 
providing the capital, for bearing the risk of the enterprise and for the management 
of business.
J.L. Hansen
The individual proprietorship is the form of business organisation at the head of 
which stands an individual as one who is responsible, who directs its operations 
and who alone runs the risk of failure.
 L.H. Haney
controlled by an individual who is the 
recip ient 	 of 	 all 	 p rofi ts 	 an d 	 b earer 	 of	
all risks. This is evident from the term 
itself. The word “sole” implies “only”, 
and “proprietor” refers to “owner”. 
Hence, a sole proprietor is the one who 
is the only owner of a business.
This form of business is particularly 
common in areas of personalised 
services such as beauty parlours, hair 
saloons and small scale activities like 
running a retail shop in a locality.
the owner is personally responsible 
for payment of debts in case the assets 
of 	 the 	 business 	 are 	 not 	 sufficient 	 to	
meet all the debts. As such the owner’s 
personal possessions such as his/her 
personal car and other assets could be 
sold for repaying the debt. Suppose 
the total outside liabilities of XYZ dry 
cl eaner , 	 a 	 sol e 	 pr opr i et or shi p	 fir m , 	 are	
Rs.	 80,000	 at	 the 	 time	 of 	 dissolution, 	
but 	 its	 assets 	 are	 Rs.	 60,000 	 only. 	 In	
such a situation the proprietor will 
Features
Salient characteristics of the sole 
proprietorship form of organisation 
are as follows:
(i) Formation and closure: There 
is no separate law that governs sole 
proprietorship. Hardly any legal 
formalities are required to start a 
sole proprietary business, though 
in some cases one may require a 
license. Closure of the business can 
also be done easily. Thus, there is 
ease in formation as well as closure 
of business.
(ii) Liability: Sole proprietors have 
unlimited liability. This implies that 
have	 to 	 bring	 in	 Rs. 	 20,000	 from 	 her	
personal sources even if she has to 
sell her personal property to repay the 
firm’s 	 debts. 	
(iii) Sole risk bearer and profit 
recipient: The risk of failure of 
business is borne all alone by the sole 
proprietor. However, if the business 
is successful, the proprietor enjoys 
all 	 the 	 benefits. 	 He 	 receives 	 all 	 the	
business 	 profits 	 which 	 become 	 a 	 direct	
reward for his risk bearing.
(iv) Control: The right to run the 
business and make all decisions lies 
absolutely with the sole proprietor. He 
can carry out his plans without any 
interference from others.
Chapter 2.indd   28 13-01-2021   09:40:59
2024-25
29 FORMS OF BUSINESS ORGANISATION
A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor!
The product that has given the world its best-known taste was born in Atlanta, 
Georgia, 	 on 	 May 	 8, 	 1886. 	 Dr. 	 John 	 Stith 	 Pemberton, 	 a 	 local 	 pharmacist, 	 produced	
the syrup for Coca-Cola
®
, and carried a jug of the new product down the street to 
Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed on 
sale	 for	 five 	 cents	 a	 glass 	 as	 a 	 soda 	 fountain	 drink. 	 Dr. 	 Pemberton 	 never	 realised	
the potential of the beverage he created. He gradually sold portions of his business 
to various partners and, just prior to his death in 1888, sold his remaining 
interest in Coca-Cola to Asa G. Candler. An Atlantan with great business acumen,  
Mr. Candler proceeded to buy additional business rights and acquire complete 
control. 
On May 1, 1889, Asa Candler published a full-page advertisement in The Atlanta 
Journal, proclaiming his wholesale and retail drug business as “sole proprietors 
of Coca-Cola ... Delicious. Refreshing. Exhilarating. Invigorating.” Sole 
ownership, which Mr. Candler did not actually achieve until 1891, needed an 
investment 	of	 $	2,300.
It was only in 1892 that Mr. Candler formed a company called The Coca-Cola 
Corporation.
Source: Website of Coca Cola company. 
(v) No separate entity: In the eyes of 
the law, no distinction is made between 
the sole trader and his business, as 
business does not have an identity 
separate from the owner. The owner 
is, therefore, held responsible for all 
the activities of the business.
(vi) Lack of business continuity: The 
sale proprietorship business is owned 
and controlled by one person, therefore 
death, insanity, imprisonment, 
physical ailment or bankruptcy of the 
sole proprietor will have a direct and 
detrimental effect on the business 
and may even cause closure of the 
business.
Merits
Sole proprietorship offers many 
advantages. Some of the important 
ones are as follows:
(i) Quick decision making: A sole 
proprietor enjoys considerable degree 
of freedom in making business 
decisions. Further the decision making 
is prompt because there is no need to 
consult others. This may lead to timely 
capitalisation of market opportunities 
as and when they arise.
(ii)  Confidentiality   of  information:  
Sole decision making authority 
enables the proprietor to keep all 
the information related to business 
operations	 confidential 	 and 	 maintain 	
secrecy. A sole trader is also not bound 
by	 law	to	 publish	firm’s 	 accounts.
(iii) Direct incentive: A sole proprietor 
directly 	 reaps	 the 	 benefits 	 of 	 his/her 	
efforts as he/she is the sole recipient 
of 	 all 	 the 	 profit. 	 The 	 need 	 to 	 share	
profits 	 does	 not	 arise	 as	 he/she 	 is	 the 	
Chapter 2.indd   29 13-01-2021   09:40:59
2024-25
Page 5


Chapter 2
Forms o F Business 
o rganisation LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
identify different forms of business organisation;
•	
explain features, merits and limitations of different forms of business 
organisations;
•	
distinguish between various forms of organisations; and
•	
discuss the factors determining choice of an appropriate form of 
business organisation.
Chapter 2.indd   26 13-01-2021   09:40:59
2024-25
27 FORMS OF BUSINESS ORGANISATION
Neha, 	 a	 bright	 final 	 year 	 student 	 was	 waiting 	 for	 her	 results 	 to 	 be	 declared. 	 While	
at home she decided to put her free time to use. Having an aptitude for painting, 
she tried her hand at decorating clay pots and bowls with designs. She was excited 
at the praise showered on her by her friends and acquaintances on her work. She 
even managed to sell a few pieces of unique hand pottery from her home to people 
living in and around her colony. Operating from home, she was able to save on 
rental payments. She gained a lot of popularity by word of mouth publicity as a sole 
proprietor. She further perfected her skills of painting pottery and created new motifs 
and designs. All this generated great interest among her customers and provided a 
boost to the demand for her products. By the end of summer, she found that she 
had	 been	 able	 to	 make	 a 	 profit 	 of	 Rs.	 2500	 from	 her 	 paltry 	 investment	 in	 colours, 	
pottery and drawing sheets. She felt motivated to take up this work as a career. 
She has, therefore, decided to set up her own artwork business. She can continue 
running the business on her own as a sole proprietor, but she needs more money 
for doing business on a larger scale. Her father has suggested that she should form 
a partnership with her cousin to meet the need for additional funds and for sharing 
the responsibilities and risks. Side by side, he is of the opinion that it is possible 
that the business might grow further and may require the formation of a company. 
She 	 is	in	a 	fix 	as	 to 	 what 	form	 of	 business	organisation	she 	 should 	go 	in 	for?
2.1 i ntroduction If one is planning to start a business 
or is interested in expanding an 
existing one, an important decision 
relates to the choice of the form of 
organisation. The most appropriate 
form is determined by weighing the 
advantages and disadvantages of each 
type of organisation against one’s own 
requirements. 
Various forms of business 
organisations from which one can 
choose the right one include:
 (a) Sole proprietorship,                
 (b) Joint Hindu family business, 
 (c) Partnership,
 (d) Cooperative societies, and 
 (e) Joint stock company.
Let us start our discussion with 
sole proprietorship — the simplest form 
of business organisation, and then 
move on to analysing more complex 
forms of organisations.
2.2 s ole Pro Prietorshi P
Do you often go in the evenings to buy 
registers, pens, chart papers, etc., 
from a small neighbourhood stationery 
s t o r e ? 	 W e l l , 	 i n 	 al l 	 pr ob abi l i t y 	 i n 	 t he	
course of your transactions, you have 
interacted with a sole proprietor.
Sole proprietorship is a popular 
form of business organisation and 
is the most suitable form for small 
businesses, especially in their initial 
years of operation. Sole proprietorship 
refers to a form of business organisation 
which is owned, managed and 
Chapter 2.indd   27 13-01-2021   09:40:59
2024-25
28 BUSINESS  STUDIES
Sole trader is a type of business unit where a person is solely responsible for 
providing the capital, for bearing the risk of the enterprise and for the management 
of business.
J.L. Hansen
The individual proprietorship is the form of business organisation at the head of 
which stands an individual as one who is responsible, who directs its operations 
and who alone runs the risk of failure.
 L.H. Haney
controlled by an individual who is the 
recip ient 	 of 	 all 	 p rofi ts 	 an d 	 b earer 	 of	
all risks. This is evident from the term 
itself. The word “sole” implies “only”, 
and “proprietor” refers to “owner”. 
Hence, a sole proprietor is the one who 
is the only owner of a business.
This form of business is particularly 
common in areas of personalised 
services such as beauty parlours, hair 
saloons and small scale activities like 
running a retail shop in a locality.
the owner is personally responsible 
for payment of debts in case the assets 
of 	 the 	 business 	 are 	 not 	 sufficient 	 to	
meet all the debts. As such the owner’s 
personal possessions such as his/her 
personal car and other assets could be 
sold for repaying the debt. Suppose 
the total outside liabilities of XYZ dry 
cl eaner , 	 a 	 sol e 	 pr opr i et or shi p	 fir m , 	 are	
Rs.	 80,000	 at	 the 	 time	 of 	 dissolution, 	
but 	 its	 assets 	 are	 Rs.	 60,000 	 only. 	 In	
such a situation the proprietor will 
Features
Salient characteristics of the sole 
proprietorship form of organisation 
are as follows:
(i) Formation and closure: There 
is no separate law that governs sole 
proprietorship. Hardly any legal 
formalities are required to start a 
sole proprietary business, though 
in some cases one may require a 
license. Closure of the business can 
also be done easily. Thus, there is 
ease in formation as well as closure 
of business.
(ii) Liability: Sole proprietors have 
unlimited liability. This implies that 
have	 to 	 bring	 in	 Rs. 	 20,000	 from 	 her	
personal sources even if she has to 
sell her personal property to repay the 
firm’s 	 debts. 	
(iii) Sole risk bearer and profit 
recipient: The risk of failure of 
business is borne all alone by the sole 
proprietor. However, if the business 
is successful, the proprietor enjoys 
all 	 the 	 benefits. 	 He 	 receives 	 all 	 the	
business 	 profits 	 which 	 become 	 a 	 direct	
reward for his risk bearing.
(iv) Control: The right to run the 
business and make all decisions lies 
absolutely with the sole proprietor. He 
can carry out his plans without any 
interference from others.
Chapter 2.indd   28 13-01-2021   09:40:59
2024-25
29 FORMS OF BUSINESS ORGANISATION
A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor!
The product that has given the world its best-known taste was born in Atlanta, 
Georgia, 	 on 	 May 	 8, 	 1886. 	 Dr. 	 John 	 Stith 	 Pemberton, 	 a 	 local 	 pharmacist, 	 produced	
the syrup for Coca-Cola
®
, and carried a jug of the new product down the street to 
Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed on 
sale	 for	 five 	 cents	 a	 glass 	 as	 a 	 soda 	 fountain	 drink. 	 Dr. 	 Pemberton 	 never	 realised	
the potential of the beverage he created. He gradually sold portions of his business 
to various partners and, just prior to his death in 1888, sold his remaining 
interest in Coca-Cola to Asa G. Candler. An Atlantan with great business acumen,  
Mr. Candler proceeded to buy additional business rights and acquire complete 
control. 
On May 1, 1889, Asa Candler published a full-page advertisement in The Atlanta 
Journal, proclaiming his wholesale and retail drug business as “sole proprietors 
of Coca-Cola ... Delicious. Refreshing. Exhilarating. Invigorating.” Sole 
ownership, which Mr. Candler did not actually achieve until 1891, needed an 
investment 	of	 $	2,300.
It was only in 1892 that Mr. Candler formed a company called The Coca-Cola 
Corporation.
Source: Website of Coca Cola company. 
(v) No separate entity: In the eyes of 
the law, no distinction is made between 
the sole trader and his business, as 
business does not have an identity 
separate from the owner. The owner 
is, therefore, held responsible for all 
the activities of the business.
(vi) Lack of business continuity: The 
sale proprietorship business is owned 
and controlled by one person, therefore 
death, insanity, imprisonment, 
physical ailment or bankruptcy of the 
sole proprietor will have a direct and 
detrimental effect on the business 
and may even cause closure of the 
business.
Merits
Sole proprietorship offers many 
advantages. Some of the important 
ones are as follows:
(i) Quick decision making: A sole 
proprietor enjoys considerable degree 
of freedom in making business 
decisions. Further the decision making 
is prompt because there is no need to 
consult others. This may lead to timely 
capitalisation of market opportunities 
as and when they arise.
(ii)  Confidentiality   of  information:  
Sole decision making authority 
enables the proprietor to keep all 
the information related to business 
operations	 confidential 	 and 	 maintain 	
secrecy. A sole trader is also not bound 
by	 law	to	 publish	firm’s 	 accounts.
(iii) Direct incentive: A sole proprietor 
directly 	 reaps	 the 	 benefits 	 of 	 his/her 	
efforts as he/she is the sole recipient 
of 	 all 	 the 	 profit. 	 The 	 need 	 to 	 share	
profits 	 does	 not	 arise	 as	 he/she 	 is	 the 	
Chapter 2.indd   29 13-01-2021   09:40:59
2024-25
30 BUSINESS  STUDIES
single owner. This provides maximum 
incentive to the sole trader to work 
hard. 
(iv) Sense of accomplishment: There 
is a personal satisfaction involved in 
working for oneself. The knowledge 
that one is responsible for the success 
of the business not only contributes to 
self-satisfaction but also instils in the 
individual a sense of accomplishment 
and	confidence 	in 	 one’s	 abilities.
(v) Ease of formation and closure: An 
important merit of sole proprietorship is 
the possibility of entering into business 
with minimal legal formalities. There 
is no separate law that governs sole 
proprietorship. As sole proprietorship 
is the least regulated form of business, 
it is easy to start and close the business 
as per the wish of the owner.
Limitations
Not with standing various advantages, 
the sole proprietorship form of 
organisation is not free from limitations. 
Some of the major limitations of sole 
proprietorship are as follows:
(i) Limited resources: 	 Resources 	 of	
a sole proprietor are limited to his/
her personal savings and borrowings 
from others. Banks and other lending 
institutions may hesitate to extend a 
long term loan to a sole proprietor. 
Lack of resources is one of the major 
reasons why the size of the business 
rarely grows much and generally 
remains small.
(ii) Limited life of a business 
concern: The sole proprietorship 
business is owned and controlled 
by one person, so death, insanity, 
imprisonment, physical ailment or 
bankruptcy of a proprietor affects the 
business and can lead to its closure.
(iii) Unlimited liability: A major 
disadvantage of sole proprietorship is 
that the owner has unlimited liability. 
If the business fails, the creditors can 
recover their dues not merely from 
the business assets, but also from the 
personal assets of the proprietor. A 
poor decision or an unfavourable 
circumstance can create serious 
financial 	 burden 	 on 	 the 	 owner. 	 That 	 is	
why a sole proprietor is less inclined 
to take risks in the form of innovation 
or expansion.
(iv) Limited managerial ability: The 
owner has to assume the responsibility 
of varied managerial tasks such as 
purchasing, 	 selling, 	 financing, 	 etc. 	 It 	 is	
ra re 	 to 	 find 	 an 	 individual 	 who 	 excels 	 in	
all these areas. Thus decision making 
may not be balanced in all the cases. 
Also, due to limited resources, sole 
proprietor may not be able to employ 
and retain talented and ambitious 
employees.
Though sole proprietorship suffers 
from various shortcomings, many 
entrepreneurs opt for this form of 
organisation because of its inherent 
advantages. It requires less amount of 
capital. It is best suited for businesses 
which are carried out on a small 
scale and where customers demand 
personalised services.
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