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Mr.Jayan, still an unemployed youth, after two years of his post-graduation, decided to start a restaurant. In order to meet the capital requirements, he seeks his father’s help. His father agreed to give sufficient capital but asks him what prompted him to start this sort of a business. Jayan explains the essential factors he has considered for starting the restaurant. 

1. Identify the business. 

2. Explain the merits of the proposed business.

1 Answer

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1. Sole Proprietorship 

2. Advantages of Sole Proprietorship

Sole proprietorship: 

Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. It is the most common form of business organization.

Features 

1. The sole trader is the single owner and manager of the business. 

2. The formation of a sole proprietorship is very easy. There are no legal formalities to form and close a sole proprietorship. 

3. The liability of a sole trader is unlimited, i.e. in case of loss, his personal properties can be used to pay the business liabilities. 

4. The entire profit of the sole trading business goes to the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. 

5. The sole trader has full control over the affairs of the business. So he can take quick decisions. 

6. A sole trading concern has no legal existence separate from its owner. 

7. The death, insolvency etc. of a sole trader causes discontinuity of business.

Merits 

1. Easy formation:- 

The formation of a sole proprietorship is very easy. There are no legal formalities to form and close a sole proprietorship. 

2. Quick Decision: 

The sole trader has full control over the affairs of the business. So he can take quick decisions and prompt actions in all business matters.

3. Motivation: 

The entire profit of the sole trading business goes to the sole proprietor. It motivates him to work hard. 

4. Secrecy: A sole trader can keep all the information related to business operations and he is not bound to publish the firm’s accounts. 

5. Close Personal Relation : 

The sole proprietor can maintain good personal contact with the customers and employees and thus, business runs smoothly.

Limitations 

1. Limited capital: 

A sole trader can start business only on a small scale because of limited capital. 

2. Lack of Continuity: 

Death, insolvency or illness of a proprietor affects the business and can lead to its closure. 

3. Limited managerial ability: 

A sole proprietor may not be an expert in every aspect of management. 

4. Unlimited liability: 

The liability of a sole trader is unlimited, i.e. in case of loss, his personal properties can be used to pay off the business liabilities. 

5. Suitability: 

Sole proprietorship is suitable in the following cases. 

  • Where the market is limited, localized and customers demand personalized services. 

Eg. tailoring, beauty parlour etc. 

  • Where goods are unstandardised like artistic jewellery.
  • Where lower capital, limited risk & limited managerial skills are required as in case of retail store.

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