Advantages and Disadvantages of Sole Proprietorship

Meaning of Sole Proprietorship

Sole proprietorship (also, called sole trade organization) is the oldest form of business ownership in India. In a sole proprietorship, the enterprise is owned and controlled by one person. He is the master of his show. He sows, reaps, and harvests the output of this effort. He manages the business on his own.

If necessary, he may take the help of his family members, and relatives and employ some employees. A sole proprietorship is the simplest and easiest to form. It does not require legal recognition and attendant formalities. This form is the most popular form in India due to the distinct advantages it offers.

Below that read the advantages and disadvantages of sole proprietorship one by one.

Advantages of Sole Proprietorship

The following are the advantages of sole proprietorship:

  1. Easy and Simple Formation
  2. Direct and Exclusive Control
  3. Promptness in Decision-Making
  4. Direct Motivation and Incentive to Work
  5. Maintenance of Secrecy
  6. Personal Touch with Customers
  7. Economy in Management
  8. Minimum Government Regulation
  9. Socially Significant

Easy and Simple Formation

A sole trading concern can be formed without any difficulty. Unlike other forms, no legal formalities are necessary for its formation. It can be started and can also be closed according to the wishes and whims of the sole trader. Thus, there are no legal formalities for the expansion, contraction, or dissolution of the business enterprise.

Direct and Exclusive Control

The proprietor has full authority to manage the business. He is not accountable to anyone and nobody interferes in his work. Thus, there is no problem of co-ordination; he is in a better position to maintain good relations with all his employees, if any.

Promptness in Decision-Making

The sole trader is the sole dictator of the business and is relatively free from outside interference. He is capable of taking prompt action so necessary for business success.

Direct Motivation and Incentive to Work

The owner enjoys the entire profits of the concern alone. The existence of the direct relationship between the effort and the reward serves as a powerful incentive and makes the sole trader work very hard and manage his concerns most efficiently.

Maintenance of Secrecy

In any business enterprise, maintenance of business secrecy is an important factor; and it is in this individual entrepreneurial organization that the sole trader will get this object fulfilled as there is no need to give publicity to accounts and affairs of his business.

Personal Touch with Customers

As the enterprise is generally small and most often the proprietor himself manages it, he can develop close personal relations with his customers. This promotes customer satisfaction which, subsequently, adds to the goodwill of the concern.

Economy in Management

The business of sole proprietorship is mostly supervised, managed, and controlled by the sole proprietor alone or with the help of his relatives and friends and sometimes by one or two paid assistants; hence the costs of management are comparatively lower.

Minimum Government Regulation

The operations of a sole proprietor are regulated by the Government and law to the minimum extent. He, of course, has to comply with tax and Labour laws, but otherwise, he is free from interference. There are no legal formalities in the formation, expansion, or dissolution of the business enterprise.

Socially Significant

A sole proprietorship is important from a social point of view. It is a means for earning a livelihood independently. The owner is his own master. It ensures diffusion of business ownership and, thus, concentration of wealth and power in a few hands is avoided.

Read Also  5 Major Functions of Modern Office

It further, helps in the development of entrepreneurial qualities such as self-reliance, self-confidence, responsibility, tact and initiative, etc. in individual entrepreneurs.

Disadvantages of Sole Proprietorship

The following are the disadvantages of sole proprietorship:

  1. Limited Financial Resources
  2. Limited Managerial Ability
  3. Unlimited Liability
  4. Uncertainty of continuity
  5. Diseconomies of Small Size
  6. Limited Growth

Limited Financial Resources

A single individual normally does not possess enough capital. His borrowing capacity is also limited. Therefore, a soil proprietorship firm suffers from a lack of financial resources. Consequently, it has to confine its activities within a limited range.

Limited Managerial Ability

The limitation of managerial ability is as glaring as that of capital. An individual, however, capable and qualified maybe cannot manage all functions of the business. He is not supposed to possess knowledge of all the functional areas of the business.

Moreover, because of the small size of the business and the limited financial resources available to him, he may not be in a position to appoint expert managers. Thus, in the modern competitive world of business where different aspects are managed by experts, sole proprietors are likely to suffer from stagnation in the absence of required managerial ability.

Unlimited Liability

The unlimited liability of the single proprietor is a great disadvantage to him; because business debts run against his entire property and not merely against the amount invested in the business. This discourages the risk-taking instinct of the entrepreneur.

Uncertainty of continuity

Continuity of the sole proprietor’s business is difficult to maintain. When the proprietor dies there is no guarantee for the continuity of the business; because there is no legal obligation to continue the same concern. The legal heir of the proprietor may lack requisite qualities or may not have any liking for the same business.

As a result, the business may come to an end. There is also no legal obligation that once a business is started, it must be continued under any circumstances. Thus, the continuity of the business solely depends on the sole proprietor and his legal heir.

Diseconomies of Small Size

A small-scale firm cannot have economies in purchase, production, and marketing. In a sole trader’s concern, overhead cost is also more. Thus, a sole proprietorship firm suffers from diseconomies of small scale and is not in a position to compete with the large-scale organizations having economies of large scale.

Limited Growth

Growth is a normal rule of life. A business firm is bound to grow in size; as it is a living organism. Practically, due to the limitations of capital and managerial ability as discussed above, the growth of the sole trader’s business is affected adversely; it is never in a position to bloom fully.

FAQs Section

What are the advantages of sole proprietorship?

Sole proprietorships offer several advantages, which make them an attractive choice for many entrepreneurs. Some of these advantages include:
1. Easy and Simple Formation
2. Direct and Exclusive Control
3. Promptness in Decision-Making
4. Direct Motivation and Incentive to Work
5. Maintenance of Secrecy
6. Personal Touch with Customers
7. Economy in Management
8. Minimum Government Regulation
9. Socially Significant.

What are the disadvantages of sole proprietorship?