Sole Proprietorship Advantages And Disadvantages

In this topic we will concern with the various sole proprietorship advantages and disadvantages in the business organisation

Before we go into that, we should first know what sole proprietorship is all about and it includes the definition of sole proprietorship.

What is Sole Proprietorship

Sole proprietorship is a business that is owned (and usually operated) by a person. Sole proprietorship is the simplest form of Ownership and the easiest to start. In most instances, the (the sole proprietor) simply decides he is in business and begins operation.

Sole proprietorship

Sole Proprietorship Examples

Some sole proprietorship examples includes Leventis Nig Plc, Pz Cussons Nig Plc, Guinness Plc, coca cola Plc started out a tiny, in many cases, struggling sole proprietorships.

Let’s head into the sole proprietorship advantages in business organisation

Sole Proprietorship Advantages

Sole proprietorship

Most of the sole proprietorship advantages arise from the two main characteristics of this form of ownership simplicity and individual control

1. Ease and low cost of formation and dissolution

No contracts agreements or other legal documents are required to start a sole proprietorship. Most are established without even an attorney. A state or city license may be required for certain types of business, such as restaurants or catering services that are regulated in the interest of public safety. But beyond that  a sole proprietorship pays no special start up fees or taxes, nor are there any minimum capital requirements.

If the enterprise does not succeed or if the owner decides to enter another line of business  the firm can be be closed as easily as it was opened.

Creditors must be paid of course. But generally, the owner does not have to go through any legal procedure before hanging up an “Out of Business” sign.

2. Retention of all profit

Another sole proprietorship advantages, because all the profits earned by the sole proprietorship become the personal earning of the owner, has a strong perhaps the strongest incentive to succeed. This direct financial reward attracts many entrepreneurs to sole proprietorship form of business and, if the business succeeds, is a source of great satisfaction.

3. Flexibility

The sole owner of a business is completely free to make decision about the firm operations. Without asking or waiting for anyone’s approval  a proprietorship can switch from relating to wholesaling, move a shop’s location  open a new store, or close an old one.

Also owner can also respond to changes in market conditiond much more quickly than the partnership or corporate forms of business. Suppose the sole owner of an application store finds that many customers now prefer to shop on Sunday afternoons. He or she can make an immediate change in business hours to take advantage of that information.

The manager of one store in a large corporate chain may have to seek the approval of numerous managers before making such changes. Furthermore, a sole proprietor can quickly switch suppliers to take advantages of a low price, whereas such a switch could take weeks in a more complex business.

4. Possible Tax Advantages

The sole proprietorship profits are taxed as a personal income of the owner. Thus a sole proprietor does not pay a special state and federal income taxes that a corporation pay.

5. Security

Sole Proprietorship advantages is security  as they are not required by federal or state government to publicly reveal their business plans, profit or other vital facts. Therefore, competitors cannot get their hands on this information  Of course  sole proprietorship must report certain financial information on their personal tax form, but information is kept secret by taxing authorities.

Sole Proprietorship Disadvantages

Sole proprietorship

For a profitable business run by a capable owner, many of the following disadvantages cause no problem. Individuals who start out with few managing skills or little money are most a risk of these problems. Below are the major sole proprietorship disadvantages

1. Unlimited Liability

This is the major sole proprietorship disadvantage  This is a legal concept that holds a sole proprietor responsible for all the debts his business. This means there is no legal difference between the debt of the business the debt of the proprietor. If the business fails, the owner personal property including house  savings, and other assets can be seized to pay creditors.

Unlimited liability is thus the other side of the owners keep the profit coin  It is perhaps the major factor that tends to discourage would be entrepreneurs with substantial personal assets from using this form of business organisation.

2. Lack of Continuity

Legally  the sole proprietor is the business. If the owner dies or is declared legally incompetent  the business essentially ceases to exist. In many cases  however  the owner’s heir take over the business and either sell it or continue to operate it. This is basically true if it is profitable

3. Limited Liability to Borrow

Another major sole proprietorship disadvantages is the limited liability to borrow. Bank suppliers and other lenders are usually unwilling to lend large sum to sole proprietorships. Only one person the sole proprietor can be held responsible for repaying such loan, and the asset of most sole proprietors are fairly limited.

Moreover, these assets may already have been used as the basic for personal borrowing or for a short term credit from suppliers. Lenders also worry about the lack of continuity of the sole proprietorship  who will repay on loan if the sole proprietor is incapacitate or dies. The limited liability to borrow can prevent a sole proprietorship from growing.

4. Limited Business Skills and Knowledge

The sole proprietor is often the sole manager in addition to being the sole salesperson  buyer’s accountant, and on occassion the janitor. Even the most experienced business owner is unlikely to have expertise in all these areas. Consequently, unless he or she obtains the necessary expertise by hiring assistants or consultants, the business can suffer in the area in which the owner is less knowledgeable.

5. Lack of opportunity for Employees

The sole proprietor may find it hard to attract and keep competent help  Potential investors may feel that there is no room for advancement in a firm whose owner assume all managerial responsibilities.  And when those who are hired are ready to take on added responsibility, they may find that the only way to do so is to quit the sole proprietorship and work for a large firm or start their own business.

The above are the advantages and disadvantages of sole proprietorship(one man business) you can still help us and add more to this.




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