Advantages of Sole Proprietorships

Advantages:

Easy to form and wind up:
A sole proprietorship form of business is very easy to form. With a very small amount of capital you can start the business. There is no need for any legal formalities. (Except for those businesses which require a license from local authorities or health department of government etc.) It is also very easy to wind up the business. It is the owners decision to form or wind up the business at any time.

Direct motivation:
The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between the effort and the reward. If he works hard, then there is a possibility of getting more profit and he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard.

Quick decisions:
In a sole proprietorship business the sole proprietor alone is responsible for all decisions. He is free to take any decision on his own. Since no one else is involved in decision making it becomes quick and prompt action can be taken on the basis of the decision.

Better control:
In sole proprietorship business the proprietor has full control over each and every activity of the business. Since the proprietor has all authority with him, it is possible to exercise better control over business.

Maintenance of business secrets:
Business secrecy is an important factor for every business. It refers to keeping the future plans, business strategies, etc., secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands.

Close personal relation:
The sole proprietor is always in a position to maintain good personal contact with the customers and employees. Direct contact helps the sole proprietor to know the individual likes, dislikes and tastes of the customers. It also helps in maintaining close and friendly relations with the employees and thus, the business can run smoothly.

Encourages self-employment:
Sole proprietorship form of business organization leads to creation of employment opportunities for people. Not only is the owner self-employed, sometimes he also creates job opportunities for others. Thus, it helps in reducing poverty and unemployment in our country.

But, just as there are advantages, there are also disadvantages of Sole Proprietorships! You need to understand both the "advantages" and "disadvantages" before making your decision...

Disadvantages:

Limited capital:
In a sole proprietorship business, the owner arranges for the required capital for the business. It is difficult for a single individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business’s growth and expansion. Venture capitalists and banks generally do not lend money to sole proprietorships.

Unlimited liability:
In case the sole proprietor fails to pay the expences arising out of business activities, his personal properties may have to be used to pay for those. This generally discourages the sole proprietor from taking risks. He thinks cautiously while deciding to start or expand the business activities.

Lack of continuity:
The existence of a sole proprietorship business is dependent on the life of the proprietor. Illness, death etc. of the owner brings an end to the business. The continuity of business operation is therefore uncertain.

Limited size:
There is a limit beyond which it becomes difficult for a sole proprietor to expand the business activities. It is not possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.

Lack of managerial expertise:
A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be weak in marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management.

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