What are the advantages and disadvantages of sole-proprietorship in business ownership?
Sole proprietorships are still the most common form of private business ownership. Although they are used in a variety of industries, they are concentrated primarily among small businesses such as repair shops, small retail outlets, and service organizations.
If the firm is very profitable, this can be an important advantage. Retention of all profits (and responsibility for all losses) provides sole proprietors with the incentive to operate the business as efficiently as possible.
A minimum of legal requirements makes it easy to go into (and out of) business. Usually the only legal requirements for starting a sole proprietorship are registering the business name at the country courthouse (this guarantees that two firms do not use the same name) and taking out any necessary licenses (restaurants, motels, barbershops, retail stores, and many repair shops require certain kinds of licenses).
Some occupational licenses require the firm to have specific types of insurance, such as public liability coverage. The fact that it is easy to discontinue a business set up as a sole proprietorship is an attractive feature for certain types of enterprises.
This is particularly true for businesses that set up for a limited time period and are involved in a minimum of transactions - for example, the business created by an individual to organize a rock concert at a local sports arena.
Ownership flexibility is another advantage of sole proprietorships. The owner has no one to consult about management decisions. He or she can take prompt action when needed and can preserve trade secrets where appropriate.
Such flexibility can also contribute to the proprietor's personal satisfaction as exemplified by the common saying, "I like being my own boss."
If the firm's assets cannot cover its debts, the owner is required to pay them with personal funds. A sole proprietor may even be forced to sell personal property - home, furniture, and automobile - to pay off business debts. The unlimited liability of a sole proprietorship can mean financial ruin to an owner if the business fails.
The financial resources of a sole proprietorship are limited to the owner's personal funds and money that can be borrowed. Sole proprietors usually do not have easy access to large amounts of capital, because they are typically small business people with limited personal wealth.
Banks and other financial institutions are sometimes reluctant to risk giving loans to such small organizations. Financing limitations can, in turn, retard the expansion of the sole proprietors business.
The manager of the sole proprietor is usually the owner. This person has to be able to handle a wide range of managerial and operative activities. As the firm grows, the owner may be unable to handle all duties with equal effectiveness and may experience difficulty attracting managerial personnel.
Sole proprietorships often offer little hope of promotion (except for the owner's offspring), fewer fringe benefits than can be found in other organizations, and less employment security. But they do offer employees an excellent chance to learn about a particular type of enterprise.
Finally, sole proprietorships lack long-term continuity. Death, bankruptcy, retirement, or change in personal interests can terminate a business organization as a sole proprietorship.
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Below, we look into the advantages and disadvantages of sole proprietorship.
Advantages of sole proprietorships
Sole proprietorships offer advantages not found in other forms of business ownership, such as retention of all profits, ease of formation and dissolution, and ownership flexibility. All profits - as well as losses - of a sole proprietorship belong to the owner (except, of course, that part going to the government for personal income taxes).If the firm is very profitable, this can be an important advantage. Retention of all profits (and responsibility for all losses) provides sole proprietors with the incentive to operate the business as efficiently as possible.
A minimum of legal requirements makes it easy to go into (and out of) business. Usually the only legal requirements for starting a sole proprietorship are registering the business name at the country courthouse (this guarantees that two firms do not use the same name) and taking out any necessary licenses (restaurants, motels, barbershops, retail stores, and many repair shops require certain kinds of licenses).
Some occupational licenses require the firm to have specific types of insurance, such as public liability coverage. The fact that it is easy to discontinue a business set up as a sole proprietorship is an attractive feature for certain types of enterprises.
This is particularly true for businesses that set up for a limited time period and are involved in a minimum of transactions - for example, the business created by an individual to organize a rock concert at a local sports arena.
Ownership flexibility is another advantage of sole proprietorships. The owner has no one to consult about management decisions. He or she can take prompt action when needed and can preserve trade secrets where appropriate.
Such flexibility can also contribute to the proprietor's personal satisfaction as exemplified by the common saying, "I like being my own boss."
Disadvantages of sole proprietorships
Disadvantages associated with sole proprietorship include unlimited financial liability (except in cases of bankruptcy), limitations on financing, management deficiencies, and lack of continuity. Because there is no legal distinction between the business and its owner, the sole proprietor is financially liable for all debts of the business.If the firm's assets cannot cover its debts, the owner is required to pay them with personal funds. A sole proprietor may even be forced to sell personal property - home, furniture, and automobile - to pay off business debts. The unlimited liability of a sole proprietorship can mean financial ruin to an owner if the business fails.
The financial resources of a sole proprietorship are limited to the owner's personal funds and money that can be borrowed. Sole proprietors usually do not have easy access to large amounts of capital, because they are typically small business people with limited personal wealth.
Banks and other financial institutions are sometimes reluctant to risk giving loans to such small organizations. Financing limitations can, in turn, retard the expansion of the sole proprietors business.
The manager of the sole proprietor is usually the owner. This person has to be able to handle a wide range of managerial and operative activities. As the firm grows, the owner may be unable to handle all duties with equal effectiveness and may experience difficulty attracting managerial personnel.
Sole proprietorships often offer little hope of promotion (except for the owner's offspring), fewer fringe benefits than can be found in other organizations, and less employment security. But they do offer employees an excellent chance to learn about a particular type of enterprise.
Finally, sole proprietorships lack long-term continuity. Death, bankruptcy, retirement, or change in personal interests can terminate a business organization as a sole proprietorship.
What are the advantages and disadvantages of sole-proprietorship in business ownership?
Reviewed by BP Admin
on
August 08, 2017
Rating:
Reviewed by BP Admin
on
August 08, 2017
Rating:
Very Informative and useful. Keep it up the great job. You may also visit us here as well to learn more about such business types.
ReplyDeletesole propietorship- The biggest disadvantage of a sole proprietorship is that the sole proprietor is personally liable for all of the debts and liabilities of the business. If the business is unable to pay its debts, the sole proprietor may be forced to sell off their personal assets to satisfy creditors.
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