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Advantages and Disadvantages of Sole Proprietorship

Advantages and Disadvantages of Sole Proprietorship

The sole proprietorship is a legal form of business enterprise in which an individual owns the business assumes all risks and operates it for his own personal interest. Sole proprietor here is the sole owner manager, controller, financer and risk bearer. He wears many hats of financial planning marketing development, business strategies risk etc.

The individual runs the business alone though he may obtain the support of a few paid employees. the sole trader ship is very popular with small scale business such as retailers accounting legal profession, general store, tailoring, hair dressing etc the earnings earned by a sole proprietor are measured his personal income and is subject to personal income tax imposed by the state. The sole proprietor forms of business ownership are very popular in Pakistan and India. Its prospects here are also quire bring the main advantages which the sole trader enjoys are under.

Advantages of Sole Proprietorship:

Advantage of sole proprietorship are as follows;

Easy of Establish: Sole trading concern can be established very quickly and easily. Anybody who wants to start a business can do so, whenever, he likes. In Nepal, only nominal legal formality of registration is necessary.

Easy to Dissolve: Dissolution of sole trading concern equally simple. There are no legal formalities in this regard. Proprietor can dissolve business whenever he likes to do so.

advantages of sole proprietorship
advantages of sole proprietorship

Effective Control: In this form of business organization proprietor is responsible for all types of activities. He controls all functions and takes decisions at appropriate time. So, the business is controlled in an effective way. He controls all functions and takes decisions at appropriate time. So, the business is controlled in an effective way.

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Direct Motivation: The direct relationship between effort and reward serves as a powerful incentive to the proprietor to manage the concern efficiently. The proprietor being entitled to the entire profits of the concern tries to maximize profits by utilizing his talents and activities in the best possible way.

Personal Supervision: The proprietor is able to supervise every work of the business himself. This helps to build up a close and cordial relationship with the employees. He can take personal interest in his customers and he can meet their individual and typical needs easily and adequately. It ensures effectively and economy in the operation.

Benefit of Unlimited Liability: The proprietor can obtain loan on his personal credit. The liability being unlimited, the creditors feel secure in extending credit.

Prompt Decision: The owner has full control over his business. So he is able to take decision promptly without consulting anybody. If more than one person is involved in decision making, then delay is bound to occur.

Secrecy: The proprietor can maintain business secrets. There is no legal regulation regarding the disclosure of business information. So he can maintain secrecy from his competitors. Secrecy is very vital for business success.

Flexible: Sole trader enjoys the maximum flexibility in his business. If any change in business is required, he does not have to consult any one and can make the change without delay. No legal formalities are required for making changes in operations. This gives flexibility to this type of business.

Power to start and close the business: the sole traders can start any lawful business. He has also the right to close the business as and when he likes.

Social Importance: From social viewpoint sole trading concern is important because: (a) It is a means for earning livelihood independently. (b) It avoids concentrating wealth in few hands. (c) It brings competition among sole proprietors, so they provide goods in cheaper rates to the society. (d) Qualities like self-reliance, self-confidence, tact and initiative are developed in this organization.

Disadvantages of Sole Proprietorship:

 Disadvantage of sole proprietorship are as follows:

Limited Capital: The capital of one proprietor is usually small. It is limited to his personal savings and borrowing on personal security. Hence, he cannot undertake further expansion and development lack of excess capital and fails to enjoy the internal and external economics of scale.

Limited Management Ability: In the present competitive world complexities of managerial jobs are increasing every day. One man cannot be expert in each and every function of the business. For lack of resources he may not be able to use the services of experts. So limited managerial ability will hinder the growth of the firm.

disadvantages of sole proprietorship
disadvantages of sole proprietorship

Unlimited Liability: The unlimited liability of sole proprietorship is a great disadvantage. A loss in business may deprive the proprietor of his assets too. So big business firms requiring more economic risk are not established under this organization.

Uncertain Life: The success of this type of business depends on the personal capacity of proprietor. In case of his death business may be discontinued. The successors may not have the same degree of self-reliance and ability. Thus, there is no continuous existence of the firm.

Dull and Boring Work: The proprietor has the sole right on profit of the business. So he tries to work more to earn more profit. Consequently, the work becomes dull and monotonous. His health is badly affected and he is deprived of pleasant social relations and cordial family life.

No Large Economics and Specialization: A small scale business cannot economies in purchases, production and marketing. Similarly, the benefit of specialization of service of experts cannot be obtained.

Loss in Absence: A sole trading has to suffer from the long illness of the proprietor. In his absence business comes to a standstill. This can lead to heavy losses. Employees may not be efficient or they may not take sincere interest.

Possibility of Wrong Decision: In sole trading a businessman alone makes all the decisions. Hence, decisions may not be always right and wise. When a considerable number of people are involved in decision making process a wise and mature decision is possible.

Lake of continuity: the continuity or permanence of a sole proprietorship is normally difficult to maintain. If the proprietor dies, falls sick, gets imprisonment is disabled and there is no suitable successor to him the business is adversely affected the business may be closed sold or liquidated.

advantages and disadvantages of sole proprietorship
advantages and disadvantages of sole proprietorship

About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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