As his borrowing capacity is limited he cannot raise unlimited amounts of money. Limited capital and managerial ability and unlimited liability of the owner act as brakes to the development and expansion of business. Get Legal Help Setting Up Your Sole Proprietorship. Indeed, the direct relationship between effort and reward acts as a stimulus to maximum exertion for a sole proprietor. The biggest disadvantage of a sole proprietorship is that there is no separation between business assets and personal assets. 3. What are the Disadvantages of a Sole Proprietorship. Personal Touch. All profits go directly to the business owner. There is no need to wait for a go-signal from other people to implement new rules and regulations. When it comes to making serious decisions, there will be different views which will provide balance in the management. Sole proprietorship suffers from the following drawbacks or cons: By its very nature, proprietary concerns cannot grow big. B. the business can be difficult to relocate. Direct and Personal Relation or Contact with Customers and its Employees: In sole proprietorship the capital investment is small therefore, size of the business is also small and limited. An Individual is always thinking of expanding his business, but sometimes he does not have the ability to raise and run the business because they have limited capacity, efficiency, ideas, and these things go on ahead as a disadvantage for him. Such persons are obviously of independent spirit and would not care to serve under others. The process is easy to do. The implementation of such decisions is also done quickly without delay. This helps him to build up goodwill for himself. The sole proprietor of a business is generally at a disadvantage in raising sufficient capital. Many entrepreneurs choose to begin their businesses as sole proprietorships, then switch to a different structure at a later time — such as an S Corporation, LLC, or partnership — when the business grows. The effort-reward relationship often excites people to chase creative ideas and turn them into successful ventures. Trade secrecy can be maintained in this form of organisation. Some of the disadvantages of sole proprietorship are:-, 1. An individual can easily start the business under this form and can easily dissolve the same. Direct Motivation. 4. Perhaps, choosing the right form depends on the nature of the business since there are more sustainable business endeavors run by a sole owner while there are those that will benefit from having more investors and owners. In summary, here are the clear advantages for sole proprietors: An individual with a sole proprietorship can choose to have employees or not. Unlimited liability is the major disadvantage borne by the sole proprietorship. He can run the show in sync with changing customers’ tastes and preferences. Changing Your Business Legal Type From One Type to Another. That is why he is able to keep direct and personal relationship with his customers and employees. Taxes Another drawback of single-handedly owning and running a business is paying taxes personally. Google Chrome, When the proprietor dies or is no longer able to run the business, the business may come to an end, if there is no one capable enough to take his place. Thus, it functions under the minimum government control. Fear of unlimited liability also makes the proprietor conservative. Opportunity to Develop Personality and Earn Respect: Under this form of business, the sole proprietor has to invest, manage, control, and has to take decision himself. He can take steps to eliminate wastages of all kinds. There is no need to go for any registration or enter into an agreement with someone. But let's look at the advantages first. Business is dynamic in character. – The sole proprietorship has unlimited liability. This helps to eliminate waste. In this form of business organisation, there is a direct relationship between the efforts and profits. That means the taxable income amount of sole proprietors can be lowered substantially. A sole proprietor faces the disadvantage of working too hard on the business. Social Advantages of Individual Proprietorship: The sociological significance of individual proprietorship in the form of a small shop consists in rendering some important, nay, indispensable services to the community and at the same time providing the basis of an independent livelihood for many. If the risks, losses, or debts could not be met out of the business assets and resources, his personal property also is attached and sold to satisfy the debts and claims of the creditors. Along with having all the responsibility for making decisions, a sole proprietor is also responsible for all business obligations. He may, therefore, at times make wrong decisions which would increase the cost of production and decrease his profits. (v) Ease of Formation and Closure – Sole proprietorship is easy to start as no legal formalities are required to start it (though in some cases, one may require a licence). Customers get what they want in nearby places. If you have any questions about the legal implications of a sole proprietorship, a lawyer may be able to help. This provides maximum incentive to the sole trader to work hard. If you want to launch with more protections, you can always consider a limited liability company instead, as this also offers various legal structures for solo entrepreneurs looking to set up a business. If a sole proprietorship is sued, the sole proprietor is personally liable for any judgment against that firm. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply. Because of his business profits and prosperity, he can enjoy a respectful life in the society and can get love and affection from the, citizens. Right or wrong, he takes charge of the situation. (g) Where the operation is simple and does not require skilled management. Having only one owner with complete control of the firm eliminates the chance of conflicts during the decision-making process. This is the fifth disadvantages of sole proprietorship and it means in today’s era, everybody wants to be a sole proprietor and he has, due to which gradually its competition is also increasing. No one has right to interfere in his business affairs. Moreover, if the business only has few employees, health care insurance coverage is not really an obligation of the business owner. In this point, the sole proprietor defines the form of individuality i.e., every type of business activities are controlled or managed by himself, no one person can help them for improving their business tasks and achieve its goals also. Unfortunately, the revenue is barely sufficient to pay salaries to your employees, and you terminate the firm. Banks and other lending institutions may hesitate to extend a long term loan to a sole proprietor. It means private property of the trader also is liable to pay off the business debts. There is no intervention by the government in day to day functioning of the business. Setting up your proprietorship often does not require registration of the business. (e) Where the market is limited e.g., retail trade, laundry, fruit sellers, etc. Tax Return Due Dates for 2019 Small Business Taxes, Line-by-Line Instructions for Completing Form W-9, The Balance Small Business is part of the. This can become a problem if the owner faces legal actions about the business. Since a business set up as a sole proprietorship is not taxed corporately, the profits and losses are assumed by the sole proprietor. Because of this, he cannot develop or expand his business beyond a certain limit. Flexibility in operation – In this form of organisation there is a great deal of flexibility in policy-making. 1. Control over the business B. It's a possibility that his personal life and family life could suffer. All round personality can thus, be developed by him. He talks all major or minor decisions. Due to limited resources, sole proprietor may not be able to employ and retain talented and ambitious employees. The assets of the firm along with his resources outside the firm (i.e., his private property and investments) will all help to build up his credit-worthiness with the result that the suppliers and other institutions will readily extend him credit. If you are planning to use another name or business name to operate your company, state laws will require a trade name registration or filing of your company name. An individual, however capable, can­not be expected to possess full knowledge of all branches of a business and is bound to fritter away his energies in doing things which could best be left to others in a partnership or a company. He can take spot decisions as and when required. | Last updated February 16, 2018. – The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc.

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