Sole Proprietorship Advantages and Disadvantages

Tue, 10/06/2015 - 01:01 -- Umar Farooq

Advantages of Sole Proprietorship

Sole proprietorship enjoys the following benefits over other forms of business organizations

Easy Formation

Setting up a sole proprietorship is very simple, because there are no special legal formalities like permission from government; preparation of necessary documents, registration etc. required to start the business as Sole proprietorship. One can start it at any time and at any place according to his financial capacity. This feature attracts most of the potential investors to invest.

Easy Dissolution

The dissolution is also very simple just like its formation. When the owner feels that the business is going to suffer the losses, he may dissolve and makes his investment safe in some other sector.

Taxation

Sole proprietorship enjoys the tax advantages over other forms of business organizations. For the purpose of income tax owner and business are treated as same thing, Income is treated as the personal income of owner, hence taxed as an individual and not as a business unit. Moreover, the income tax rate is low for sole proprietor.

Prompt Decisions Making

As One man Show, it is considered best to take quick decisions. There is no need to consult any other person, so the sale trader can take quick decisions on all important issues. This enables the owner to avail business opportunities. The owner makes timely and quick decisions according to market trends and gets a competitive edge

Best Customer Relations

The sole owner has a direct link with his customers. He has complete information about the likes and dislikes of the customers. So he tries to deliver those products and services which are in greater demand which makes his business more profitable.

Sole Proprietorship Advantages

Disadvantages of Sole Proprietorship

Apart from many benefits it has also some disadvantages as well.

Limited Resources

Sole proprietorships is owned and managed by one person. Since the resources of one person are limited, the business resources will also be limited. When needed expansion, it cannot take place that easy because the amount of capital that can be paid is restricted to the extent of his personal credit.

Business Life is Limited

It has no separate legal entity from its owner. The business life depends upon the owner life. In case of death, insolvency or any unpleasant event with the owner life, may end the life of business as well.

Unlimited Liability

The liability of sole trader is not limited to his invested amount. In case of insolvency, the business as well as the owner personal assets can be sold in order to satisfy the claims of the creditors.

Wrong Decisions Making

The sole trader takes all the decisions. He is all in all. His decisions are based upon individual judgment and skill. As a result he may take wrong decisions, which may have an adverse effect upon the projection of the business. For example a person might be good at accounting but not good enough in Customer Relations.

Lack of Borrowing and Government Support

The owner face difficulty in borrowing due to small size and limited business life. Financial institutions demand a good security for loan. He may not be in a position to offer a good security and he cannot enjoy the advantage of trading on borrowed capital. Similarly lack of government support is another drawback due to less contribution in government revenue.

Scale of Business and level of Expertise

This form of business organization is not suitable for large scale due to limited resources, limited managerial abilities and limited skills. Due to limited resources, owner cannot hire the services of qualified and experienced personals. Therefore, he is not in a position to achieve the goals and objectives of the business.