Sole proprietorship is the most common and simplest form of the business and is own by one person. In this form of the business the owner invests capital and uses his skills and experience to deal with business affairs. He owns the entire business and is entitled to all of the profits. He is responsible for all liabilities and losses of the business. It’s important to learn about both the advantages and disadvantages of sole proprietorship, In order to avoid unpleasant results.
Advantages of Sole Proprietorship
In the developed and developing countries of the world including Pakistan, the biggest part of the business is carried on by sole proprietors. It is so because the sole proprietorship has the following advantages over other forms of business organizations.
1. Easy Formation
Sole proprietorship is easy to form. No legal formalities are required. If a license is required for setting up a particular business, it can be obtained from the concerned department. In case of a company or partnership a set of documents is required to prepare and submit them to government bodies.
2. Retention of all Profits
One of the advantages of sole proprietorship is that the owner keeps all of the profit. While in case of company and partnership the profits are distributed among owners.
3. Tax Advantages
Sole proprietorship enjoys tax advantages compare to other forms of business. In this form of business income tax on owner is imposed once. The owner does not pay any super or double tax. On the other hand, income tax is imposed twice in case of corporation. First on the corporation’s profit, and then on the dividend of the shareholders. In addition, a corporation must pay corporate tax while there is no such obligation in sole proprietorship.
4. Full Control of Business
In this form of business the owner has full control and decision making power over the business. He makes his own decisions to overcome complicated problems and to manage a business, there is no headache of getting approval from others. This freedom promotes initiative, self-reliance and save time. In additions, this freedom of action enables the owner to avail business opportunities.
5. Minimum Legal Restrictions
A sole proprietor has to follow least government rules and regulations. On the other hand, company and partnership are governed by specific laws, rules and regulations that they must comply with.
6. High Secrecy
Secrecy is another advantage of sole proprietorship. A sole trader is not bound to reveal or publish his accounts and supply any information regarding business to anyone. He can maintain secrecy in all matters. But in the company secrecy of business and accounts and cannot be maintained because all these affairs have to be printed so that they can be distributed to all shareholders, bankers, and stock exchange.
7. Credit Standing
The liability of the sole trader is unlimited. It means the creditors can recover the claims from the business and the personal property of the owner. Therefore, the creditors willingly offer credit to sole trader and feel secure.
8. Low Start-Up Cost
Here the start-up cost is very little because of small operation. In case of a company, the company has to spend a lot of money to meet heavy formation cost and market standards.
9. Easy Dissolution
Its dissolution is also easy like its formation. No much time or cost is required to dissolve it. Also there is no need to get permission from anyone to liquidate it. While in case of a corporation, the corporation must get permission from shareholders, the registrar and the court of law for dissolution.
Disadvantages of Sole Proprietorship
Some of the disadvantages of sole proprietorship are following.
1. Unlimited Liability
One of the pitfalls of this form of business is the burden of unlimited liability. In case, the claims of the creditors against a business exceed the value of its assets, the personal property of the sole trader will be utilized to fulfill business obligations. There will be no legal distinction between personal and business assets.
2. Uncertain Duration
This form of business organization has uncertain duration. The business comes to an end when the sole trader becomes inefficient or dies. In case of company or partnership, the business does not close after resignation, death or disability of shareholders, managers or partners.
3. Difficulties in Raising Capital
A sole trader offers initial capital to business and it can be quite difficult to raise capital because this form of business does not issue shares or bonds to raise capital like corporations do.
4. Limited Managerial Capability
Every business requires managerial skills to run it. A single owner cannot perform all the duties and functions of management efficiently. In addition, he cannot afford costly services of high qualified personnel. Therefore, he faces difficulties in running the business smoothly.
5. Limited Expansion
Generally, a sole proprietor finds it difficult to grow a business to a high level due to limited capital resources and limited managerial ability.