Disadvantages of Sole Proprietorship

Disadvantages of Sole Proprietorship

Disadvantages of Sole Proprietorship

A person can undertake any lawful business activity for profit motive easily. The person has to develop an idea, set the goals and then develop it into a profitable operation. There are certain serious disadvantages which a sole trader has to face in operating the business. These limitations in brief, are as follow.

Unlimited Liability

Every business involves risk. If a firm suffers losses and the assets of the business are not sufficient to cover claims against the business, the personal property of the proprietor can be sold under the court order to satisfy the claimants. The proprietor in case of loss thus faces the risk of unlimited liability. This is a serious handicap to the proprietorship form of organization.

Difficulties of Expansion

An individual proprietor faces difficulty in expanding the business. Hence most of the capital which is invested in the business comes from the personal saving of the proprietor. The financial institution is reluctant to advance long term loan to owners of a sole proprietorship. As a result, the single owner of a business finds it difficult to expand the business and avail of the economics of large scale production.

Limited Managerial Ability

In managing the business, the sole trader has to rely upon his own skill and judgment for operating the business. Hence most of the proprietors do not possess all the management skill required for financing, marketing, purchasing, producing, and supervising of the business.

Lack of continuity

The continuity or permanence of a sole proprietorship is normally difficult to maintain. If the proprietor dies, falls sick, gets imprisonment, is disabled and there is no suitable successor to him, the business adversely affected. So the business may closed, sold or liquidated.

Operational Disadvantages

As the sole proprietor normally faces difficulty in acquiring capital, he has to face operational problems which are not so acute in other forms of business ownership. For instance, sole proprietors usually have inadequate buildings, substandard machinery, poor location and lay out of the factory, inability to purchase raw material in large quantity to avail of the discount etc.

Loss in Absence

A sole proprietorship has to suffer from the long illness of the proprietor. The business in his absence comes to a standstill.

Weak Bargaining Position

The sole trader both as a buyer and seller, has weak bargaining position compared to big business so units.

Unsuitable for a developing Business

When a business grows in size, it cannot meet the needs of expanding business.