What is are the Disadvantages and Advantages of Sole Proprietorship? Stay Informed Group business team has put together all you need to know about sole proprietorship business and whether or not you should start one.
Every day we come across small, medium or large-scale businesses. We may see them close-up in our neighbourhood or distantly near online while scrolling through our social media feeds. Whatever the case may be, these businesses exist in either of the three common forms of business ownership: the Sole Proprietorship, Partnership and Corporation.
WHAT IS A SOLE PROPRIETORSHIP?
Sole proprietorship on its own refers to ‘single ownership’. A business entity refers to a business owned by a single person where this person bears all the risks and enjoys all the profit. Hence, a business establishment in which a single person owns, controls and manages all the business activities is a sole proprietorship form of business ownership.
The person who owns and runs this type of business (sole proprietorship business) is called a ‘sole proprietor’. A sole proprietor is self-employed, carries out the day-to-day responsibility of running the business. He organizes the resources and controls the activities with the sole aim of earning profit.
Sole proprietorship business is the oldest form of business ownership. It is easy to start and operate as it requires no legal filings to start the business. It is also the most common form of business ownership.
A good example of a sole proprietorship business is a small vegetable store, nail salon or convenience store that is owned and managed by a single person down your neighbourhood.
Continue reading as we discuss the disadvantages and advantages of sole proprietorship
and other things you need to know.
FEATURES A SOLE PROPRIETORSHIP BUSINESS
Before we move into the Disadvantages and Advantages of Sole Proprietorship proper it is important that you understand the features of a sole proprietorship business extensively. Below are the features you need to know:
- Single Ownership
- One-man’s Capital
- Unlimited Liability
- One-man Control
- No sharing of Profit and Loss
- Less legal formalities
Single ownership
In a sole proprietorship form of business, the individual owns all assets and properties of the business, and he alone bears all the risk of the business. Hence, the business of the sole proprietor comes to an end when the owner decides to or upon his death.
One man’s capital
The capital required to start the business is totally brought in by the sole proprietor. The capital is gotten either from his personal resources like a savings account or by borrowing from friends, relatives, banks or other financial institutions.
Unlimited liability
The responsibility of the sole proprietor is limitless. This simply means that in the case of loss occurring in the business, the assets of the business along with the personal properties of the proprietor will be used to pay the business liabilities or debt. This is because the business is not separate from the sole proprietor.
One man’s control
The sole proprietor is the only person vested with the authority of taking decisions in the business, even if they are other employees in the business. The proprietor alone takes all the decisions involved in running the business and only consults the opinion of another when deciding based on his own discretion.
No sharing of profit and loss
All the earnings in the sole proprietorship business go to the owner of the business. If any loss was recorded in the business, the sole proprietor takes full responsibility for it. Hence, the profit and loss of the business are not shared with anyone.
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TRAITS OF A SOLE PROPRIETOR
- Risk-taking
- Self-motivated and reliant
- Focus
- Confident and passionate
- Resilient
Risk-taking
The ability to invest one’s own money and time when the return on investment is far from guaranteed is one characteristic of a sole proprietor. He should be able to see an opportunity in the market space and go for it. Instead, they make all the decisions in the business and carry the burden of its result.
Self-motivated and reliant
A sole proprietor should be able to motivate himself as he cannot rely on anyone to get him going like a place of paid employment. The ability to stay motivated by constantly reminding himself that the business fails or succeeds based on his hard work or input is key. A sole proprietorship business succeeds based on the motivation of the owner to continue the business.
Focus
A sole proprietor should be able to set goals and concentrate on achieving them one step at a time. Focus is a very important trait of a sole proprietor as it helps move the business from point a to point b. This counts for short, medium and long term goals.
Confident and passionate
A sole proprietor should be able to meet someone on the street and single-mindedly explain what he/she does and why without shame and with all enthusiasm. They should be zealous about their business and confident about its output.
Resilient
A Sole proprietor at one point or the other in the business will experience a setback; resilience is what will help the sole proprietor to keep pushing and keep going as it is not easy dealing with setbacks.
Disadvantages and Advantages of Sole Proprietorship
having discussed some of the basic things you need to know about a sole proprietorship business, it is important you pay attention to the Disadvantages and Advantages of Sole Proprietorship discussed below. This will help you understand more about this concept.
ADVANTAGES OF SOLE PROPRIETORSHIP
- Easy to start and end
- Quick decision making and action taking
- Better control
- Closer customer relationship
- Work Flexibility
- Business secrets are safe.
Easy to start and end
A sole proprietorship business is very easy to start, given that a small amount of capital can start a small business, and there is no particular need to carry out any legal procedures before starting the business except for those businesses which require a licence from local authorities to operate, i.e. pharmacy. Also, ending the business does not require the approval of any other person other than the sole proprietor. Easy to start is one of the paramount advantages of a sole proprietorship business.
Quick Decision making and Action taking
The sole proprietor is singularly responsible for making all the decisions concerning the business. Hence, there’s quick decision making when it calls for it and immediate action, too, since no one else is involved in the decision-making process.
Better Control
The sole proprietor has full authority in the business, which he exercises over the business. He organizes, plans, coordinates, and manages the business as he sees fits, thus giving him better control of the business and the affairs of the business.
Closer Customer Relationship
The sole proprietorship business most times give room for the direct owner to client interactions. This helps in maintaining a healthy and good relationship with the customers while learning what they like, prefer and how the business can better meet their needs, thus leading to the growth of the business.
Work Flexibility
A sole proprietorship business can change at any time with little or no consequences. The nature, scope, size or location of the business can change based on the discretion or decision of the sole proprietor at any time.
Business Secrets is safe.
Special ingredients and recipes, especially in the food industry, can be a big deal, hence business secrecy. This is a very important factor in every business, which involves keeping strategies, plans, competencies, and some essential business requirements away from the public or any outsider. In a sole proprietorship business, the owner of the business is solemnly in charge; hence the secrets of the business are in his control.
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DISADVANTAGES OF SOLE PROPRIETORSHIP
- Capital constraints
- Limited business life span
- Unlimited liability for debts
- Lack of managerial assistance
- ALimited size
Capital Constrain
Capital, which is the amount of money or resources needed to run the business operation, is often too large for the owner to raise to start, continue or expand the business. As a result, the sole proprietor’s own funds, as well as borrowed funds, sometimes may become inadequate to meet the requirement of the business for its growth and expansion, thus hindering the growth of the business.
Limited business life span
This is one of the most notable disadvantages of a sole proprietorship. A sole proprietorship business ends upon the death, insolvency, imprisonment, or insanity of the owner. It is often only active and profitable only as long as the owner is active. Due to its uncertain limited lifespan, financial commitment from external sources is limited.
Unlimited liability for debts
The sole proprietor’s personal properties can be used to pay for the business debts and obligations should in case the sole proprietor fails to pay. This limits the sole proprietor from taking some risks while deciding to start or expand the business activities.
Lack of managerial assistance
A sole proprietor business most times requires the sole proprietors to carry out multiple management positions in the business; this may be because of financial constraint and the size of the business. Hence, the sole proprietor may serve as the sales, purchasing, marketing and accounting manager of the business even with little or no knowledge in the area. As a result, the business suffers both from a lack of professional management and the fatigue of the overworked sole proprietor.
Limited size
The possibility of one person to supervise more than a certain number adequately is almost impossible. This is one of the disadvantages of a sole proprietorship that directly affect the growth in the size of the business . The sole proprietorship business system of operation creates a system where there is a limit beyond which it becomes difficult to expand its activities.
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Conclusion: SUITABILITY OF SOLE PROPRIETORSHIP BUSINESS
In some cases, you need to overlook the Disadvantages and Advantages of Sole Proprietorship and focus more on the suitability of this business.
Despite the limitations of a sole proprietorship business, it is applicable and profitable to run in some cases. Two of the cases are listed below:
- Low capital investment
- Equipped to serve locally
Low capital investment
Small scale businesses that do not require huge capital or mass production can be conveniently carried out under sole proprietorship.
Equipped to serve locally
Businesses taking advantage of the availability of local raw materials can engage in a sole proprietorship business.
