Sole Proprietorship Disadvantages and Limitations; A sole proprietorship is the simplest and most common legal structure someone can choose. It’s an unincorporated business owned and run by one individual in which there is no distinction between the business and the owner. If you own a sole proprietorship, you are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities. Also learn, How to Explain, What is Sole Proprietorship?
Learn and Study, What are the Limitations or Disadvantages of Sole Proprietorship? Explaining are, Easy Point, Trade, Multipoint!
In other words, the owner remains personally liable for any losses or debts that the sole proprietorship incurs. They can also, held legally responsible for violations committed by the business or its employees. A sole proprietorship can best sum up by the phrase, “You are the business”. Also learned, What are the Advantages of Sole Proprietorship?
Easy of the Limitations or Disadvantages of Sole Proprietorships:
Forming a sole proprietorship does involve some risks, mainly to the owner of the business, as legally speaking they are not treating separately from the business. Some limitations or disadvantages of sole proprietorships are:
Liability:
The business owner will hold directly responsible for any losses, debts, or violations coming from the business. For example, if the business must pay any debts, these will satisfy the owner’s own personal funds. The owner could sue for any unlawful acts committed by the employees. This is drastically different from corporations, wherein the members enjoy limited liability (i.e., they cannot hold liable for losses or violations)
Taxes:
While there are many tax benefits to sole proprietorships, the main drawback is that the owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health insurance premiums for employees
Lack of “continuity”:
The business does not continue if the owner becomes decreasing or incapacitating since they are treating the same. Upon the owner’s death, the business is liquidating and becomes part of the owner’s personal estate, to distribute to beneficiaries. This can result in heavy tax consequences on beneficiaries due to inheritance taxes and estate taxes
Difficulty in raising capital:
Since the initial funds are usually providing by the owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks or other money-generating investments like corporations do
So, while sole proprietorships do not necessarily create more liabilities, they do expose the business owner to a risk of being sue. Lawsuits can file against the business owner for legal violations, as well as to collect any outstanding debts.
Business; Proprietorship form of ownership suffers from some disadvantages or limitations also.
The important ones are:
1. Limited Resources:
A proprietor has limited resources at his/her command. The proprietor mainly relies on his/her funds and savings and, to a limited extent, borrowings from relatives and friends. Thus, the scope for raising funds is highly limited in proprietorship. This, in turn, deters the expansion and development of an enterprise.
2. Limited Ability:
The proprietorship is characterized as the one-man show. One man may be an expert in one or two areas, but not in all areas like production, finance, marketing, personnel, etc. Then, due to the lack of adequate and relevant knowledge, the decisions take him imbalanced.
3. Unlimited Liability:
The proprietorship is characterized by unlimited liability also. It means that in case of loss, the private property of the proprietor will also use to clear the business obligations. Hence, the proprietor avoids taking the risk.
4. Limited Life of Enterprise Form:
The life of a proprietary enterprise depends solely upon the life of the proprietor. When he dies or becomes insolvent or insane or permanently incapacitated, there is every likelihood of closure of enterprise. Say, the enterprise also dies with its proprietor. The Steps of Manpower Planning with Features!
Disadvantages of sole trading include that:
- You have unlimited liability for debts as there’s no legal distinction between private and business assets.
- Your capacity to raise capital is limited.
- All the responsibility for making day-to-day business decisions is yours.
- Retaining high-caliber employees can be difficult.
- It can be hard to take holidays.
- You’re tax as a single person, and.
- The life of the business is limited.
7 best Limitations or Disadvantages of Sole Proprietorship:
The following limitations and disadvantages below are;
(i) Limited Resources:
The resources of a sole proprietor are limited. He makes investments from his family source only. There is a limit to which a single person can invest. He tries to raise finances from financial institutions also. These institutions want securities for their loans. The sole trader cannot offer much security, so he does not get much help from financial institutions. The capacity for expanding business operations is limited for want of resources, even when there is a scope for expansion. Other forms of ownership are better than the sole proprietor for raising financial resources.
(ii) Limited Managerial Ability:
One person may not be an expert in every function of the business. He will not be able to devote sufficient time to all types of activities. He will have to depend on paid employees. The employees may not take as much interest as the owner himself can take. What is the Process of Manpower Planning?
The managing capacity of the proprietor is limited. In the present competitive world, the complexities of managerial jobs are increasing every day. The sole proprietor may not be able to use the services of experts for want of resources. So one person will not be able to survive effectively. On the other hand, his limited resources will not allow him to use the services of professional people. Limited managerial capacity will hinder the growth of the business.
(iii) Unlimited Liability:
The liability of a sole proprietor is limited. His private property can also assign to meeting business obligations. A loss of business may deprive him of his private assets also. Unlimited liability also restricts his work. He tries to be cautious in taking the risk. It acts as a detriment to the growth of business activities.
(iv) Uncertain Continuity:
The business continues as far as the sole proprietor is there. In case of his mobility or death, the business is discontinuing. The successors of the sole proprietor may not have an aptitude or ability to continue in the business. The closure of a business will cause inconvenience to the consumers. It will also result in social loss.
(v) Limited Scope for Employees:
A sole trader cannot attract trained and qualified persons for reasons of limited career opportunities. Moreover, the continuity of sole trade business being uncertain the employees also remain under psychological pressure. A sole proprietor cannot offer financial incentives to employees because his activities are on a small scale. The employees will try to join good concerns whenever an opportunity arises.
(vi) No Large-Scale Economies:
A small-scale concern cannot economize in the purchase, production, and marketing. A large-scale enterprise will be able to have favorable terms for purchasing and selling of goods. In a sole trade concern, overhead expenses are also more. So this type of concern cannot enjoy the benefits of large-scale economies.
(vii) More Risk Involved:
A sole proprietor is to take all decisions by himself. So there is a possibility of taking wrong decisions. In other forms of organization, the decisions are taking by more than one person. So the possibility of mistakes and wrong decisions is minimizing. Lack of counseling may create difficult situations.
Reference!
1. Easy and business Points – //www.legalmatch.com/law-library/article/advantages-and-disadvantages-of-sole-proprietorships.html and //www.yourarticlelibrary.com/sole-proprietorship/sole-proprietorship-features-advantages-and-disadvantages/40806
2. Trade Points – //www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/sole-proprietorship-advantages-and-disadvantages
3. Main/Multipoint – //www.yourarticlelibrary.com/business/advantages-and-disadvantages-of-sole-proprietorship/42037
