Advantages and Disadvantages of Sole Proprietorship

A sole proprietorship is the most popular, oldest and simplest form of business organization. It is basically made up of two words, one is ‘sole’, which means “one” and the second is ‘proprietor’, which means “owner”. So, Sole Proprietorship means a business with a single owner, also known as a sole proprietor. Sole proprietorship is defined as a form of business organization in which the business is owned, managed, and controlled by a single person. The sole proprietor is the sole recipient of all profits and bearer of all losses of the business. It is suitable for enterprises that require personal attention, personalized services, and limited capital, such as Grocery Shops, beauty parlours, boutiques, etc. Other names of sole proprietorship are Individual Entrepreneurship, Sole Trader, and Individual Proprietorship. 

Advantages of Sole Proprietorship

The advantages of Sole Proprietorship are as follows:

1. Quick Decision Making

Total Management and control of the firm lies in the hands of the sole proprietor. He enjoys the freedom of action, and has all the authority to make decisions and run the business in the way, he/she desires. It leads to quick decision-making as the owner does not have to consult with others, and can take all minor and major decisions. Besides, timely decisions also help the owner in taking advantage of different market opportunities. 

2. Easy to Form and Dissolve

In a sole proprietorship, hardly any legal formalities are required for setting up the business, except in some cases where a license is required. For example, in the case of pharmacy business, Drug License is required. Also, the owner can close the business whenever he desires by paying back its debts. Therefore, it is easy to form and close this type of business organization. 

3. Personal Touch

In a sole proprietorship, all the work is done by the owner himself. So, he is in direct contact with the employees and customers of the organization and can make changes in the product according to the demands of the customer. Also, he will be able to solve the problems faced by the employees easily.

4. Maximum Incentive

In this type of business organization, there is a direct relationship between rewards and efforts. If the proprietor puts extra effort into the business, then the profits increase and the proprietor get an extra reward for the efforts. Similarly, the owner gets maximum incentive, if he/she performs better. 

5. Confidentiality of Information 

To make the business successful, it is essential for the owner to maintain secrecy within the organization. The sole proprietor does not have to share the information with others and can keep it confidential, as he/she has the sole decision-making authority. Also, it is not legally required for the owner to publish business accounts. So, it is easy for him/her to maintain secrecy.  

Disadvantages of Sole Proprietorship

The disadvantages of Sole Proprietorship are as follows:

1. Limited Resources

It is very difficult to raise capital in a sole proprietorship as compared to a partnership and corporation because a sole proprietor has limited resources to the extent of his personal assets and borrowings. The credit-raising capacity of the owner is also limited, which reduces the scope for business growth. 

2. Unlimited Liability

This is one of the biggest disadvantages of sole proprietorship. The sole proprietor has unlimited liability, which means the personal assets of the owner can be used to pay the debts of the business. This puts a financial burden on the owner. If the business does not have adequate funds to pay for obligations, the personal assets of the owner will be used to pay off the debts.

3. Lack of Continuity of Business

The life of a business depends on the sole proprietor only because the law considers the owner and the business as the same (no separate legal entity). Therefore, if the proprietor falls ill, becomes bankrupt or insolvent, or dies, then the business may come to an end. 

4. Lack of Professional Skills and Expertise

The proprietor may lack professional skills and talent. His knowledge is only limited to his area of study and may not have the necessary skills to face competition to cope with changes taking place in the environment, like changes in fashion, technology, etc. For example, an owner may be a good salesperson, but not a good manager. It is very difficult to find all the skills in one person. The sole proprietors cannot afford to appoint expert employees. Thus, the proprietor is burdened with too many tasks.

5. Risk of Wrong Decisions

The sole proprietor is the only owner of the organization, and he has to take every decision on what to do, when to do it, and how to do it. Also, he does not have experts in the organization from whom he can take advice. Therefore, there is a possibility that he will make the wrong decisions, which can lead to problems in the business.

Even though sole proprietorship has many disadvantages, it is chosen by many because of its vast advantages. This form of business organization is suitable for small-scale businesses, where the owner has to fulfil the personalized demands of consumers.