Chapter 1.1 (Business Studies F2)

Unincorporated Business Organisations. Sole Proprietorship


By the end of the topic, the learner should be able to:

  1. Identify various forms of business units.
  2. Explain characteristics of each form of unit.
  3. Discuss management and formation of each form of business unit.
  4. Discuss sources of capital for each form of business unit.
  5. Discuss the role of the stock exchange as a market for securities.
  6. Explain advantages and disadvantages of each form of business unit.
  7. Recognise the circumstances under which the various forms of business units may be dissolved.
  8. Discuss trends in business ownership.

Business Units

Business units are enterprises involved in the production and provision of goods and services to satisfy human wants with the aim of making a profit. They are also known as business organisations.

Unincorporated Business Organisations

Business organisation that have no legal separate from the owner. The business and the owner are one and the same. When the owner is absent the business closes down. They include sole proprietorship and partnership.

Sole Proprietorship

A business organisation owned and managed by one person.

Features of a Sole Proprietorship

  1. It is owned and managed by one person.
  2. The owner of the business provides all the capital required and is responsible for all the debts of the business.
  3. The owner may or may not employ some people to assist in the operations of the business.
  4. The law does not distinguish the owner of the business from the business. 
  5. The owner has unlimited liability. Therefore, if the business owes debts which it is unable to pay, the owner of the business will be required to pay the debts from personal sources. Personal property may have to be sold to pay the debts.
  6. All the profits of the business belong to the owner.
  7. All business decisions are made by the owner, who does not have to consult any one else.
  8. When the business makes losses, the owner bears them all. This means losing part or all of the capital invested in the business.

Formation of Sole Proprietorship

Formed by one person who raises capital and applies for a trading license from the local authority.

Ownership of Sole Proprietorship

The business is owned by one person known as a sole trader.

Management of Sole Proprietorship

The management and control of a sole proprietorship is the responsibility of the owner. The owner makes all decisions on the running and operations of the business. The owner may employ other workers with special skills, talents and experience to assist in the management of the day-to-day operations of the business. The sole proprietor may use immediate family members to assist in the daily operations of the business.

Fig 1.1: A kiosk is a form of sole proprietorship business unit

Sources of Capital for Sole Proprietorship

The sole proprietor raises all the capital required by the business from various sources such as:

  1. Personal savings: This is the main source of capital for the business.
  2. Contribution of personal property for use in the business: Such property may include furniture, motor vehicle and other equipment.
  3. Grants and donations from friends and relatives.
  4. Inheritance from parents and other close relatives.
  5. Loans: The owner of the business may arrange for a loan from a bank or from other organisations such as co-operative societies. The sole trader can also obtain loans from special government agencies established to support the development of small scale business enterprises. Examples of such organisations include the Kenya Industrial Estates and the Youth Enterprise Fund.
  6. Trade credit: The owner of the business may arrange with the suppliers of goods for sale on credit. This enables the proprietor to trade with money that actually belongs to the supplier.
  7. Retained profits of the business: The owner may choose not to withdraw the profit from the business that is, plough it back into the business.

Advantages of a Sole Proprietorship

  1. Easy to form
    ​Since it only requires a trade license.
  2. Small capital requirement
    ​Most sole proprietorship businesses are small in scale and require a relatively small amount of capital to start which is easy to raise.
  3. Easy to manage and control
    ​Most sole proprietorship businesses are small scale and therefore easy to manage and control since they don’t employ.
  4. Independence in running the business
    ​The sole proprietor enjoys a lot of independence in the management and running of the business. He or she is free to put into action his or her ideas, dreams and plans about the business without any interference and consultations.
  5. Flexibility of the business
    ​The business organisation is very flexible in that the proprietor can choose any kind of goods or services to sell and the working hours when the business opens and closes.
  6. Fast decision-making
    ​Decisions are easy and fast to make and implement since the owner does not have to make consultations or discussions on any decision arrived at before implementation.
  7. Enjoyment of profits
    ​The sole proprietor enjoys all profits made by the business since he is alone.
  8. Personal customer service or Personal touch
    ​Due to the size of the business and the small number of customers, the owner has close contact with the clients and can give personal service and attention to each of the customers. This ensures customer satisfaction and loyalty to the business.
  9. High level of confidentiality
    ​A sole proprietor is the only person who knows the secrets behind the success of the business and is able to keep such information private and confidential and hence continue enjoying the profit while keeping ahead of other business competitors.
  10. Low risk
    ​The small size of the business reduces the loses the sole proprietor is likely to encounter in the event of danger as only few goods can be destroyed.

Disadvantages of a Sole Proprietorship

  1. Unlimited liability of the owner
    ​In case the business is not able to pay its debts, the owner of the business is held fully responsible to pay all the debts from personal resources. Personal property may be sold to pay the debts.
  2. Long working hours
    ​A sole proprietor often has to work for very long hours without assistance and rest. There may be no holidays, recreation or adequate rest periods leading to mental fatigue and stress, hence poor health and low productivity.
  3. Limited capital resources
    ​The size of a sole proprietorship business largely depends on the amount that the owner can raise from personal savings. Most sole proprietors cannot afford to raise large sums of money because businesses tend to be small, and do not have the necessary collateral required by the lending institutions.
  4. Inability to expand
    ​A sole proprietor has limited ability to raise more money to increase the capital and expand the business. This is because most sole proprietors cannot manage to obtain loans from banks and other lending institutions due to lack of security and the high interest rates charged.
  5. Lack of business continuity
    ​The daily operations and activities of the business can continue only when the owner is present, active and in good health. In case of absence, sickness or death of the owner, the business activities may stop.
  6. Lack of consultation
    ​A sole proprietor does not usualy consult when making business decisions. Such decisions could turn out to be wrong or decisions implemented in a hurry and may result into heavy losses for the business.
  7. Inadequate skills and expertise
    ​This is because the sole proprietor works alone yet may be limited in skills and knowledge.
  8. The proprietor suffers the loss alone
    ​If a sole proprietorship business makes a loss, the owner of the business bears that loss alone since there is no one to share the burden with.

Dissolution of Sole Proprietorship

Terminating the life of a business. A sole proprietorship can be dissolved under the following circumstances:

  1. When the business makes heavy losses such that it can no longer continue operating. The owner may terminate the operations of the business.
  2. When the owner of the business dies. If the owner dies, the business also dies and ceases to operate.
  3. Voluntary dissolution. Sometimes, the owner of the business may choose to wind up the business after achieving objective formation.
  4. Order by a court of law. The dissolution of a sole proprietor business can also result from an order of a court of law if it’s not engaged in a lawful practice.

The Role of Sole Proprietorship in the Economy

Sole proprietorship businesses play an important role in the economy of the country. Sole proprietorships provide:

  1. A source of income for many families. People earn money from such businesses to meet their basic needs such as food, shelter and clothing.
  2. Employment to many people hence improving their standard of living and facilitating economic growth.
  3. Income to the government through taxes. The taxes and licence fees paid by sole proprietors to start and operate businesses provide revenue to the government.
  4. An opportunity to the exploit the country’s economic resources for the growth of the country’s economy.
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