Topic 3: Sole Proprietorship - Business Studies Form One Notes
OUTLINE OF THE TOPIC
The Concept of Sole Proprietorship
— Meaning of Sole Proprietorship
— Features of Sole Proprietorship
— Advantages of Sole Proprietorship
— Disadvantages of Sole Proprietorship
Formation of Sole Proprietorship
Challenges Facing Sole Proprietorship
— Challenges Facing Sole Proprietorship
— Solution to Challenges Facing Sole Proprietorship
THE CONCEPT OF SOLE PROPRIETORSHIP
MEANING OF SOLE PROPRIETORSHIP
Sole proprietorship is a business which is owned, managed, and controlled by one person namely, the sole proprietor. The term ‘sole’ means single, ‘proprietorship’ means the state of owning a business, and ‘proprietor’ means the owner of a business.
Examples of sole proprietorships are:
— small shops
— salons
— butchers
— hawkers
— restaurants
— fruits and food vendors
FEATURES OF SOLE PROPRIETORSHIP
The following are important features or characteristics of sole proprietorships
1. Single owner:
Sole proprietorship business is owned and often operated by one person. In some cases, a sole proprietor may hire trusted employees or family members.
2. Flexibility:
The owner can easily change the location, product type, design or increase the variety of products depending on the customers’ needs. or even choose to change the type of business. For instance, a sole proprietor may change from a restaurant to a stationery shop.
3. No profit and loss sharing:
A sole proprietor incurs all the benefits and risks associated with the business. The sole proprietor does not share the profit or loss gained in the business with anyone else.
4. Unlimited liability:
There is no legal separation between the owner and the business. Assets and liabilities of the business belong to the owner. Thus, in case of loss, the business assets, along with the personal possessions of the sole proprietor, can be used to settle the business debts.
5. Start-up capital:
6. Stability:
Stability and continuity of the sole proprietorship significantly depend upon the capacity, competence, experience, and life span of the proprietor.
lf the sole proprietor is competent and committed enough to the business, the business will most likely expand and grow.
7. Minimal Government Regulation
A sole proprietorship is that it is subject to fewer legal and regulatory requirements compared to other business structures like partnerships and companies. This makes it easier to start and operate.
ADVANTAGES OF SOLE PROPRIETORSHIP
Advantages of a sole proprietorship There are advantages of operating as a sole proprietorship. The following are some of those advantages:
1. Easy to form a business:
Sole proprietorship is quick and easy to establish as the decision for set up depends on one person, it requires minimal initial capital and few legal restrictions.
2. Quick decision making:
A sole proprietor has the final say in all decisions regarding the business operations. When a single person makes decisions for the business there are few unnecessary delays in taking actions.
3. Independence in decision making:
The sole proprietor is free to make decisions independently without the interference of others. For example, a sole proprietor can make any business transactions without seeking approval from anyone else.
4. Easy to supervise:
It is easy to supervise a sole proprietorship because owners usually have close and direct contact with customers and employees.
5. Small start-up capital:
Sole proprietorships may require a small amount of capital for start-up. For example, someone setting up a vitumbua business only requires buying cooking ingredients, a cooking pot and a cooker.
6. Direct relations with customers:
Since most sole proprietors have close contact with their customers, they are able to serve and satisfy customers’ needs. They can receive orders from customers and learn their taste and preferences.
7. Enjoys all the business profit:
Sole proprietors enjoy all the benefits associated with the business. They do not share the profit with anybody else. This means sole proprietors keep all the business profit.
8. Flexibility in Operations
The business can be quickly adapted to meet changing market conditions, as the owner has complete control over how the business runs.
DISADVANTAGES OF SOLE PROPRIETORSHIP
The following are the disadvantages of sole proprietorship:
1. Unlimited liability:
If the business suffers loss, the personal property of the sole proprietor may be sold to meet the liability if the business assets are not enough to clear it.
2. Limited skills:
The business owner may not have all the necessary skills on financing, marketing, purchasing, producing, and supervising the business operations. This limits the sole proprietor to perform all duties and functions efficiently.
3. Uncertainty in continuity:
The life span of a sole proprietorship is uncertain and difficult to predict. The sole proprietorship may be closed down or sold when the proprietor faces challenges such as death, sickness or imprisonment that may affect supervision of the business.
4. Working long hours:
As the sole owner and operator of the business, the sole proprietor is responsible for all aspects of its operation. Thus, sole proprietors may find themselves working extended hours.
5. High cost of production:
Being a small business with small scale production, sole proprietors may not reap the benefit of economies of large scale production. This may result in a high cost of production. Also, sole proprietors may
6. Limited Capital
It can be harder to raise large amounts of capital, as the business relies mainly on the owner’s savings or personal loans and small loans from small financial institutions.
7. Difficulty in Expansion
Growing a sole proprietorship into a larger business can be difficult due to limited access to capital and resources.
8. Perceived Lack of Credibility
Some clients or suppliers may perceive sole proprietorships as less reliable or established than corporations or partnerships
9. Difficulty Competing with Larger Businesses
Larger companies with more resources can often offer lower prices, better services, or more sophisticated marketing strategies, making it hard for sole proprietors to compete effectively.
FORMATION OF SOLE PROPRIETORSHIP
Starting a sole proprietorship in Tanzania is relatively simple and involves a few legal and administrative steps. Below is a step-by-step guide to set up a sole proprietorship business.
1. Choose a Business Name and Register It
Choose a unique and suitable name for your business and register it with the BRELA (Business Registrations and Licensing Agency) to get a Business Name Certiflcate.
2. Get a Business License
Apply for a Business License. This license is issued by the Municipal or District Council where your business is located. Once approved, you will receive your Business License, which must be displayed at your business premises.
3. Obtain a Taxpayer Identification Number (TIN)
Every business in Tanzania must be registered for tax purposes. To do this, you need to apply for a Taxpayer Identification Number (TIN) from the Tanzania Revenue Authority (TRA). The TIN Certificate allows you to pay business taxes.
4. Obtain Additional Permits (If Required)
Depending on the type of business you are starting, you may need special permits before you begin operations. For example, food-related businesses need health permits, while manufacturers may require approval from the Tanzania Bureau of Standards (TBS). Businesses dealing with medicines or cosmetics need a license from the Tanzania Medicines and Medical Devices Authority (TMDA).
5. Open a Business Bank Account (Optional but Helpful)
Although not mandatory, it is a good idea to open a separate business bank account. This helps keep your business finances separate from your personal money, making it easier to track income and expenses. It also build trust to customers.
6. Start the Business and Follow Rules
Once you have completed the above steps, you can officially start your business operations. It is important to keep records of all transactions, pay taxes on time, and renew your Business License every year. Following the government rules and regulations.
CHALLENGES FACING SOLE PROPRIETORSHIP
The disadvantages of sole proprietorship explained in this chapter are essentially major challenges that sole proprietors face when running their businesses.
SOLUTION TO CHALLENGES FACING SOLE PROPRIETORSHIP
The following are the suggested ways of solving the challenges encountered by sole proprietors:
1. Insure the business:
To solve the challenge of unlimited liability that may result from risks such as fire, it is important for a sole proprietor to insure the business. This involves the proprietor paying a premium to an insurance company for coverage against potential risks and losses.
2. Contractual hiring:
The business owner may hire some experts for help in various business issues when a need arise. Examples accountant for financial report preparations.
3. Succession planning:
If sole proprietors wish the business to continue and succeed even in their absence they should plan for the succession of the business. For example, transferring ownership of the business to the next generation while they are still in charge of the business.
4. Delegation of some roles:
Sole proprietors may delegate some of their roles to employees in order to overcome the habit of overworking themselves. This will help them to dedicate their efforts in other aspects of business operation.
5. Expansion of the business:
To enjoy the economies of scale, a sole proprietor needs to expand its business. The fund for expanding the business may be obtained through micro-financing. This will help to reduce operating costs and generate more profits
6. Attending business training
The sole proprietor can attend business training, take Online courses, or hire professionals like accountants and marketing experts. Networking with business associations and mentors can provide valuable knowledge and guidance.
7. Seeking further capital
The sole proprietor can seek small business loans, government grants, or microfinance options to increase capital. Attracting investors or business partners can also help raise funds.
8. Building trust
Sole proprietors can build trust by registering the business legally, maintaining good financial records, and offering high-quality services. Getting certifications or industry recognition can also enhance credibility.