Sole Proprietorships – Advantages and Disadvantages
Sole proprietorship is one of the various types of businesses that have been around for several millenniums. It has been successfully practiced by individuals because of the ease of setting it up, and because of the minimal financial requirement in most cases. This type of business is the highest employer of labours almost in all parts of the world.
Most partnership and Public Liability Companies we have today actually started as sole proprietorship and later transited as they grew larger and the financial demand became too high for a single person to easily cope with. There are so many individuals out there who have so successfully managed their personal businesses and turned them into a brand.
What is sole proprietorship?
Sole proprietorship is a business owned and managed by a single individual. The individual makes decisions alone, makes all forms of financial transactions and controls every aspect of the business without consulting anybody. It is usually referred to as a one man business or one man show.
Advantages of Sole proprietorships
There are several advantages that the sole proprietorship enjoys; and these advantages make it easier for people to run and be comfortable with the business. Some of the advantages include the following:
1. Minimal financial requirement: Most of the retail shops, business centres, restaurants, barbing shops, etc that you see around are examples of sole proprietorship businesses, and they do not require huge financial base to set up. Almost anybody can set up one form of sole proprietorship or the other because only minimal amount of money is required to do so.
2. Decision making: The sole proprietor makes his business decisions alone without having to pass through any vetoing or scrutiny. As a result, decision making is faster than in most partnership and public liability companies where it takes annual general meetings for a major decision to be reached.
3. Corporate tax exemption: The owner of the business does not pay a corporate tax on his business; instead his business is charged at the rate of personal income tax thereby enabling him to save more money in the long run.
4. Legal Cost: The legal cost of setting up a sole proprietorship is usually minimal as most economies encourage individuals to set up their own businesses without passing through harsh legal processes.
Disadvantages of sole proprietorship
Having looked at the advantages of one man business, it would also be wise for us to talk about the disadvantages of this kind of business. So, what are the disadvantages of sole proprietorship?
i. Continuity: One major problem of this kind of business is the lack of continuity. In the event of the death of the owner, this might just be the end of the business as any other person hardly has deep knowledge of the business. Since the owner took care of everything while alive, it is difficult for someone else to be able to successfully run the business after his death, because of a poor handing over system.
ii. Liability: In the event of business failure, the sole proprietor is held to pay the liabilities of the company. He has to settle the debts, mortgages, etc that the business incurred. In this case he might be left with nothing after selling off the business properties to service the debts. In some cases, he ends up in jail for inability to completely offset the debts. Besides, the sole proprietor could be sued for offenses committed by his personal employees, unlike what obtains in public liability companies where the owners are not liable for the offenses of the employees.
iii. Expansion: Sole proprietorship is hardly a good investment attraction for people who have the cash to invest since the business is run by a single person. This makes it difficult for the business to expand significantly.
iv. Poor decision: There is this saying that “Two good heads are better than one”. One poor decision by the sole proprietor could easily run the business aground. This is so because his decisions are not scrutinized by a third party before they are finally passed.
v. Lack of specialisation: The sole proprietor is a “jack of all trade” and usually “master of none”. Since one man runs all aspects of the business, it is difficult to develop any form of specialization, unlike in partnerships where there are division of labour and specialization. The sole proprietor could be the CEO, manager, secretary, accountant and messenger all at the same time.
The sole proprietorship has its own advantages and disadvantages. Before making a decision on what type of business to go into, you must weigh both sides of the coin. If the advantages outweigh the disadvantages in your own opinion, then it would be a good venture to go into.
I am sure there are still other things to talk about as far as this subject is concerned. Please share your own opinion with us. Do you think the sole proprietorship is a good business to go into? If yes, why do think so? And if No, why do you also think so? Remember to share this with your friends.