What is sole proprietorship? A sole proprietorship is also called the one-man business. It is the type of business that owned and run by one person. This person starts the business by himself and controls everything about the business. A person who is engaged in sole proprietorship is called a sole proprietor or sole trader. Sole proprietorship is oldest and simplest type of business. Examples of sole proprietorship include petty traders, mechanics, electricians, carpenters, independent musicians, freelance journalists and writers, restaurant owners, pub owners, etc.
What are the advantages and disadvantages of sole proprietorship?
Advantages of sole proprietorship
- Owner gets to keep all profit: One of the biggest advantages of sole proprietorship type of business is that the owner or sole trader does not share profit generated from the business with any other person. The sole proprietor gets to keep all profit to himself.
- It is very easy to start: Sole proprietorship or one-man business is the easiest and fastest business to set up. Virtually anybody can set up a sole proprietorship.
- There is no documentation or complex procedure to follow: Setting up a sole proprietorship business does not require any procedures to follow unlike other types of businesses such as partnership and companies which require the following of rigid procedures before they can be started. The sole trader does not need any documentation to start his or her business. An example is a petty trader who does not need any documentation before he or she can sell something. No registration is required in sole proprietorship.
- Small capital needed to start the business: The capital needed to start a sole proprietorship business is not huge. Depending on the type of business one wants to go into, one needs only just a little amount of money to start it.
- Decision making is fast: The decision making and implementation process is extremely quick unlike in the case of a company where this can be extremely slow.
- Total freedom: There is a lot of freedom for the sole trader. Since the business is his, he has the total freedom to do whatever he wants pertaining to the business. He does not account to any superior. He is in charge of everything. The sole proprietor decides when to open for business and when to close.
- Supervision is easy: Sole proprietorship is also quite easy to supervise. The reason this is so is because of the fact that it a one-man business is usually a small business. Supervision is at its peak here.
Disadvantages of sole proprietorship
- There is a lot of pressure: The pressure can sometimes be overwhelming. Since the sole trader is the only one in charge of the business and sees to the daily affairs of the business, sometimes he comes under a great deal of pressure.
- Decision taking problem: Decisions made can sometimes not be the best. There is a saying that two heads are always better than one. The wisdom in this old adage applies here. Since the sole trader often makes all the decisions by himself, he or she stands a great risk of sometimes making wrong decisions which in the affect the growth of the business or kill the business.
- The risks can be quite huge: Sole proprietorship can be quite a risky form of business. The reason it can be risky is because of the fact that all losses and risks are carried by no one but the owner of the business. The sole trader carries all losses alone and shares them with no one.
- The absence of limited liability: This is one of the biggest dangers associated with sole proprietorships or one-man businesses. Since there is no limited liability, the sole trader can be held liable for all debts that the business enters into. So for instance, if the business runs into great debt and the assets of the business cannot fully pay all the debts, then the personal estate of the owner of the business can be sold to pay the debts.
- Continuity issues: Problems associated with continuity of the business. The death of the owner of the business more often than not brings the entire business to a halt. But this is not the case in other types of businesses.
- Growth issues: One-man businesses find it very difficult to grow rapidly like other forms of businesses mainly because of the limited capital they have access to. For example, it is more difficult for a one-man business to secure a loan from a bank. But this is not the same for a company. This is one of the reasons why majority of one-man businesses end up not seeing the light of the day.