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S N KANSAGRA SCHOOL Grade 9: Commercial Application

Ownership Structure – Sole Proprietorship and Joint

Hindu Family Business

This is the oldest form of ownership

structure. It is more common and

simplest and natural structure. In this

structure, business is completely

controlled by one person who is

known as ‘owner’ or ‘Proprietor’.

We go to the market to buy items of our daily needs. In the market we find

a variety of shops- some of them

small and some of them big. We may find some persons selling vegetables,

peanuts, newspapers etc. on the roadside. We may also find cobbler

repairing shoes on the footpath. Every-day you come across such

types of shops in your locality. But

have you ever tried to know how these businesses are run? Who are

the owners of these businesses? What exactly does an owner do for

any business? You may say, the owner invests capital to start the

business, takes all decisions relating to business, looks after the day to day

functioning of the business and

finally, is responsible for the profit or loss. In this lesson let us find out more

about the business in which a single individual takes all initiatives to start

and run the business.

Apart from trading business, small manufacturing units,

fabrication units, garages, beauty-parlour, etc., can also

be run by a sole proprietor.

Sole proprietorship is a

one man show where

an individual by his

cleverness, courage,

ability, honesty,

education and co-

operation tries to make

his business a success.


Meaning and Definition:

Features of Sole Proprietorship:

Single Ownership

• One man control

• No seperate Legal entity

Unlimited Liability

• No Profit Sharing

• Small Size

No legal Formalities

• Management and Control

• Secrecy

Sole means ‘Single’ and Proprietorship means ‘Ownership’. A sole

proprietor is a person who carries on business exclusively by and for

himself. He bears all the responsibility for all the risks involved. He is

not only owner of the capital but is usually the organiser and

manager and takes all the profits or bear all the loss.

A sole proprietorship has no legal existence apart from the

proprietor himself. He is the firm. – Peterson and Plowmen

Sole Proprietorship is a form of

business where the individual

proprietor is the supreme judge of all

matters pertaining the business, -

Kimbell and Kimbell.

A business owned, managed and

controlled by one person who bears

all the risks and takes all the profit –

such kind of business structure is

known as Sole Proprietorship.


1. Single Ownership:

A sole proprietorship firm is completely owned by one individual.

The individual supplies the total capital from its own wealth or

from borrowed funds.

2. One man control:

This kind of business is completely controlled by the proprietor and

he takes all the necessary and important decisions pertaining to

the business. He is not required to consult anyone. Ownership and

management rests with one person. Some persons may be

employed to help him.

3. No Separate Legal Identity:

Sole Proprietorship has no separate legal identity, it is not separate

from the owner. The law makes no distinction between the

proprietor and business. Business and owner exist together. If

owner dies or become insolvent the business is dissolved.

4. Unlimited liability:

The owner (proprietor) is personally liable for all the debts of the

business. In case the assets are insufficient to meet its debts, the

personal property of the proprietor can be attached.

5. No profit Sharing:

The sole trader alone is entitled to all the profits and losses of the

business. He bears the complete risk and there is nobody to share

the profit or losses.

6. Small Size:

The scale of operations carried on by sole proprietorship is

generally small. A sole trader can arrange limited funds and

managerial ability. Therefore, the area of operation is generally

local and limited.

7. No legal Formalities:

No legal formalities are required to start, manage and dissolve sole

trader business. Only a licence is necessary in certain types of a

business.


8. Capital Contribution:

The proprietor alone has to arrange for necessary capital and other

assets essential for starting and subsequent operations of his

business. The proprietor provides entire capital, either from his

personal belongings or borrowing form relatives or friends.

9. Management and Control:

Proprietor has full authority over the affairs of the business. He is

free to take decisions. There is no need for consultation with any

person. The working of the firm is entirely based on his own

discretion and decision

Merits of Sole Proprietorship:

1. Easy to start and Easy to dissolve:

Sole Proprietorship can be started easily and quickly. No legal

formalities and expenditures are involved in the establishment of

proprietorship, there is no need of association or any agreement.

Only a licence is needed in some cases. Similarly he can dissolve his

proprietorship at his wish.

2. Motivation to work:

Sole Proprietor is alone entitled to receive all the profits of the

business and he has to bear all the loss associated with the

business. There is direct relationship between work and reward


here. There is also an incentive to work hard. Proprietor is

motivated to make the best use of his skills and resources to

maximise his profit.

3. Quick decision:

Sole Proprietor is completely free to take any decision and to

implement them. He needs not to consult or to take any approval

from anybody. Quick decision and prompt action help to improve

the efficiency of business operation.

4. Independent Control:

Sole Proprietor is the supreme judge in all the matters related to his

business. He enjoys complete freedom of action. No legal

formalities and no interference of anyone. Full authority and

responsibility are vested in the same person. Personal supervision

helps to improve efficiency of the business.

5. Secrecy of affairs:

Sole trader is not liable to publish accounting records to anyone.

He is not expected to share his secrets with others. Complete

secrecy is maintained and it provides a great strength to the

business.

6. Personal Touch:

The Sole Proprietor can maintain personal contacts with his

customers and employees. He can fulfil the requirements of each

and every customers and employees as he is in direct touch with

them. He can also build healthy relationship with them.

7. Inexpensive management:

The sole proprietor is the owner, manager and controller of the

business therefore the expense of the management are minimum.

Of course he can employ persons and professionals for this work

but he exercise full control over them.

8. Flexibility:


Sole Proprietorship is usually a small in size and very simple in

structure. It can therefore be adjusted easily whenever necessary.

The proprietor can easily change or modify the business to suit the

changing conditions of the market, without consulting anybody.

There is not legal restriction on sole proprietor.

9. Social Desirability:

Sole Proprietorship is very useful to the society as it provides self-

employment, it is an independent way of life, it offers equal

opportunities to all to use their talent.

Demerits of Sole Proprietorship


Limited Capital: Capital resources are limited to the

personal savings and borrowings of the sole

proprietor. His own assets may be insufficient and

borrowing capacity is limited. Therefore there is very

limited scope of expansion and growth.

Limited managerial skills: A single person is unlikely to

possess all the necessary business skills. He may not be

able to manage the business efficiently. There is a lack

of specialisation in Sole Proprietorship. The proprietor

may feel overburdened sometime and feel pressure.

Moreover he cannot afford to employ professionals.

Unlimited Liability: Sole Proprietor is personally liable

for all the debts and responsibilities of the firm. If he

cannot meet the obligations his personal assets are

attached, it means his personal assets may be sold to

pay off the liabilities of his firm.

Lack of Continuity: The life of Sole Proprietorship is

uncertain. Illness, insolvency or death of proprietor

may lead to termination of the business.

Limited Scope of Expansion: Due to the

limitations of the capital and management,

proprietorship business cannot grow and

expand to a large size. Advantages of large

scale of operation cannot be obtained.

Risk of Wrong decisions: Sole Proprietor may

not necessarily be an expert in all the fields of

business. Hence one wrong decision can bring

a downfall to his business. He may have

employees but they are not liable for any

decision.


Suitability of Sole Proprietorship:

Risk of long absence: If a Sole Proprietor is

absent for few days in his business, whole

structure and process of business is

hampered. He may appoint few employees

but key decisions are to be taken by him.

Hence whole business will be suffered

because of absence of owner.

Limited scope for employees: Sole

Proprietorship is for small scale business

and firms. It is very difficult for the growth

and development of employees. Imparting

training and arranging seminars are too

costly for sole proprietor to arrange for the

growth of its employees.

Suitability of Sole Proprietorship:

Sole Proprietorship business is very suitable for

the following types of business

1) Where market is local e.g. small scale

retailers

2) Where personal attention is needed

and preference of customers is essential

like barber, tailor etc.

3) Where fashion changes frequently like

jewellery

4) Where small amount of capital is

required but personal skills are more

important

5) Where quick decisions and prompt

actions are necessary e.g. stock broker

6) Where risk involved is negligible e.g.

doctor, lawyer, CA.


Joint Hindu Family Business:

1. Membership:

Features of Joint Hindu Family Business

Right to Account

Management Liability

Dissolution

Members

The Joint Hindu Family Business

refers to a business which is owned

and managed by the members of a

Joint Hindu Family. It is also known as

Hindu Undivided Family Business. It is

governed by Hindu Succession Act.

This kind of business is created by the

law of succession. It is the form of

business in which the family

possesses some inherited property.

The share of inherited property is

inherited by male member from his

father, grand-father and great grand-

father. All the male members having

share in family property are known as

Coparceners. The oldest male

member is known as Karta.


The person becomes member in HUF by the virtue of his birth in

the family. No formal agreement is necessary between the family

members. The membership is restricted to three successive

generations. Only male members can be Coparceners. Only

female member of deceased male member have right to share in

business after his death. Minor is also a full-fledged member of

HUF. There is no limit to the number of members.

2. Management:

The management of HUF is rested only in the hands of Karta. The

karta may, however may associate few members to assist him in

the management.

3. Liability:

The liability of the Karta is unlimited. The liability of other members

is limited to the extent of their share in the property of the family

business.

4. Right to Account:

Coparceners are not entitled to inspect or check accounts of the

business. However, a Coparcener leaving the business may

demand a copy of the account from the karta.

5. Dissolution:

HUF business is not dissolved on the death of any Coparcener. It

only comes to an end when all members notify that they are not

the members of Joint Hindu Family business.

Merits of HUF:

1. Ease of Formation:

A joint Hindu Family Business can be started easily and quickly. No

legal formalities are involved and it runs for long time. Registration

of HUF is not compulsory. It also will get an advantage of ancestral

goodwill means prestige and reputation.

2. Freedom of Action:


The karta has complete control on the family business. The

management of the business is centralised in the hands of the

eldest member and most experienced man. No other family

member can interfere in his management.

3. Personal Contact:

A joint Hindu Family Business can maintain direct and intimate

contact with its employees and customers. It can provide personal

attention to the requirement of the customer.

4. Utmost Secrecy:

The secrets of the business are known to karta only. There is,

therefore no danger of the trade secrets being disclosed to the

outsiders or rivals. Secrets of the business are not known even to

other members of the family.

5. Limited Liability:

The liability of all the members except karta is limited and restricted

to their share in the business property. Their risk is limited and

known.

6. Continuity:

The existence of joint Hindu Family Business is not in danger by

the death or insolvency of any member or the karta. It is stable and

comes to an end only after the total breakdown of the joint Family.

7. Incentive to work:

Same as Sole Trader

8. Ancestral Goodwill:

A joint Hindu Family Business enjoys the benefit of ancestral

goodwill. The creditworthiness of the business is high due to the

large property of the family and unlimited personal liability of the

karta.

9. Quick Decisions:

The karta alone is authorised to take all important decisions of the

family business. He had not to consult other family members for


any decisions. His decision is final and cannot be challenged by

any member.

10. Economy:

Expenses of the management are low as karta is the sole manager

and controller of the Joint Hindu Family Business.

Demerits of HUF:

Limited Capital: The Capital of Joint Hindu

Family Business is limited to the ancestral

property. The family property gets divided on

the birth of every child in the family. The

business cannot expand and grow due to the

shortage of capital.

Unlimited Liability: The liability of Karta is

unlimited. His private properties are liable to pay

the debts of the business. The liability of the

remaining members is limited. Their private

properties are not attached to the obligation of

the HUF business.

Limited managerial ability: Same as Sole

Trader

Hasty Decisions: Karta is the only person

handling business activities hence

decisions taken by Karta may sometimes

be hasty, biased and unbalanced. This is

because sometimes he is overburdened

of work.


Difference between: HUF and Sole Proprietorship

Basis of Difference Sole Proprietorship HUF

Formation

Members

Females

Liability

Minor

Management

Division of Profit

Existence

Law

Activity for You:

Conflict: Exclusive power by the Karta often

creates lack of trust on the part of other

members. Suspicion and conflicts may arise

because the Karta alone knows all the

secrets of the business. This may lead to

split in the HUF.

Misuse of Power: Being the senior most

members of the family, the Karta has

complete control on the family business. He

may misuse his authority for the personal

gains.

Extra:

The HUF is a unique form of the business organization found in India. There are two

systems of the inheritance of the Joint Hindu Family Businesses- DAYABHAGA and

MITAKSHARA.

DAYABHAGA – is prevalent only in West Bengal ; under it both males and females

can be a member of the family business. MITAKSHARA – is operative in rest of the

India. Here only males can be a members of Joint Family Business.


ACTIVITY

i. Survey the shops in your nearby market and make a list of different shops. Identify at least five business units owned by

single individuals.

ii. Ask any shopkeeper of a small shop in your locality about the problems faced by him in expanding his business activities.

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