As at 2015 it was recorded by bigideasforsmallbusiness that about 73% of all the businesses in the United States are sole proprietorship enterprises. This clearly shows that sole proprietorship is one of the most preferred form of business in the world. It is very beneficial and that is why many people like it. However, this does not mean that sole proprietorship is without disadvantages too because anything that has advantages also has disadvantages. Consequently, in this article i will briefly highlight the advantages and disadvantages of sole proprietorship. Coupled with that, we will look at some of the reasons for the continued existence of sole proprietorship business.
Sole proprietorship may be defined as a form of business enterprise owned, financed and managed by one person with the primary aim of maximizing profit. The sole proprietorship, also known a one-man business is the oldest and most common type of business organization.
It can also be seen as an unincorporated business unit owned by one person who provides the capital, ruls the business and undertakes the risks and profits of the business alone. Examples of a sole proprietorship are in primary industries like farming, fishing etc. It is also in secondary industries like small scale menufracturing, printing, etc. And majorly in tertiary (or services) industries like lawyers, doctors, tailors, barbers, musicians etc.
I highly recommend you to watch the video below for a clearer and detailed explanation of how sole proprietorship works.
Table of Content
Features of sole proprietorship
1. It is owned and managed by one person known as the sole proprietor
2. It is usually a business that is aimed at making profit from the public
3. The sole proprietor has unlimited liability
4. It is not a legal entity as the owner is not separate from the business
5. Sole proprietorship businesses are usually set up and managed with the capital of the proprietor
6. The life span of the business largely depends on the owner. This means that the enterprise can fold up at any time.
Now that you know the meaning and features or characteristics of sole proprietorship, lets move to the crux of this work by explaining the advantages and disadvantages of an sole proprietorship.
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Advantages of sole proprietorship
Below are the advantages or merits of sole proprietorship:
1. All profits belong to the owner of the business
Since sole proprietorship is owned by just one person, all the profits from the business belongs to the owner of the business. This is so because all the capital invested on the business also came from him.
2. There is privacy in conducting business activities
Another wonderful advantage of sole proprietorship is the fact that there is privacy in conducting business activities for the sole proprietor. This is unlike a partnership business where more than one person knows everything about the business and may also be capable of making decisions that will hurt the business.
Thus, in a sole proprietorship business the owner is a liberty to keep everything concerning the business to himself or to disclose it.
3. It involves small capital to start up
Sole proprietorship is a wonderful idea because it is far easier to start up with very little capital. The sole proprietor is at discretion to start his business will as little as he has but that may not be possible in a partnership business since more than one person has to contribute to the business.
4. Quicker decision making
In a sole proprietorship enterprise, just one person can make decisions on matters that concerns the business. It light of this, there is usually faster decision making than a partnership business.
This about it this way, if one man is allowed to deliberate on an issue and make decision, the whole process will be much much more faster than where more than one person is required to make decision on the same matter. In the latter case, there will be delay because all the decision makers have to reach a concensus.
5. There is a closer relationship between the owner and employees
In a one-man business the workers are personally known to the owner because he may have been the one who interviewed and employed them. This makes supervision easy and ensures effectiveness of business operation.
6. There is effective planning
Another merit of sole proprietorship business is the fact that the sole proprietor can embark on effective planning and formulation of policies alone and these will guide him in the smooth running of the enterprise by way of taking promt business advantages. E.g in sales and purchase.
7. There is a close relationship between owners and customers
Over the years it has been proven that sole proprietorship businesses usually give space for a closer relationship between owners and customers. This close relationship between the owners and customers allows the former to give special attention to the latter. Also, he can easily find out the special requirements of customers and satisfy them.
8. It can thrive in all business environment
Sole proprietorship has the ability to thrive in any environment, be it urban or rural environment as long as the sole proprietors concentrates on his business. This is a plus to this form of business enterprise because some business does not have a static environment for operation.
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Disadvantages of sole proprietorship
We have discussed the advantages of sole proprietorship, highlighting the benefits of that form of business. As we continue, i will take you through the disadvantages of sole proprietorship. Below are the disadvantages or demerits of sole proprietorship:
1. Problem of continuity
One of the major problems or disadvantages of sole proprietorship is the fact that its continuity for a long time is not assured. In the event of the death of the owner, the business may also die with him, especially when there is no successor to take over from him.
2. Inadequate capital
Between a business where there is just one person funding every of its activity and another where many persons are contributing to ensure the growth of the business, which will be faster in growth?
Of course, the latter will be faster in growth because more persons are contributing to the business. It is a major problem of sole proprietorship businesses. The sole proprietor is always faced with inadequate capital because of the small size of his business and his inability to source funds outside his business.
3. The sole proprietor bears all risk alone
The risk required in operating the business is borne solely by the owner. If the business is borne solely by the owner. If the business is successful, he rejoices but when it fails, he suffers it all alone.
Accordingly, in the event of business failure, his assets and properties have to be sold to pay his creditors because the business has unlimited liability.
Also see: 21 Leading cases in the law of contract
4. No separate legal entity
In the law a contract, it is required that for a contract to be binding, parties to the contract must have contractual capacity. Accordingly, where there is a breach of contract between a person and another person who is working under a company/business, the aggrieved part must sue the company and not the person.
This is not so in a sole proprietorship business because the law does not see sole proprietorship business as a legal entity. In other words, the business cannot sue or be sued in its own right.
5. Lack of specialization
Unlike a partnership where many people, with different skills and areas of specializations come together to form a business, there is no specialization in a sole proprietorship business enterprise. The owner is the person involved in every section of the business business.
He works very hard; he may not take public holidays, and scarcely has rest. In most cases, when he is absent, the business may close down temporarily. All these also contributes to the slow growth of sole proprietorship businesses.
6. Limitation in growth and expansion
The sole proprietorship suffers limitation in growth an expansion both in idea and business as a result of inadequate capital.
Despite these disadvantages of sole proprietorship, some persons still feel it is better to start up a sole proprietorship business enterprise than a partnership business. The question which may now arise is why sone people prefer sole proprietorship. Well, the reasons are not far-fetched.
Reasons for sole proprietorship businesses
Below are some of the reasons for sole proprietorship:
1. Easy and small capital requirement
The small scale business requires small capital to set up so because who do not have large capital always prefer it. More so, the small scale business unit are easy to set up or established since no formalities are required.
2. Low risk and overhead cost
Sole proprietorship business outfit usually involves low level of risks. Again, the overhead cost involved in the business is usually very low.
3. Ability to change policies
The policies of sole proprietorship can be easily and quickly changed to meet the changing needs of the customers.
4. They enjoy customer’s loyalty
Sole proprietorship business unit always enjoy customer’s loyalty and good relationship, which ensure continued patronage.
5. The meet the special needs of customers
Small scale business meets the peculiar needs of customers by keeping variety of goods from which customers can choose.
All the above are the reasons why some people still considers sole proprietorship to be the best when compared to partnership.
So far, i have discussed the meaning, advantages, disadvantages and even the reasons for the continued existence of sole proprietorship businesses. I strongly believe that this article has done justice to this topic but if you have contributions to make, don’t hesitate to drop them at the comment box.
Edeh Samuel Chukwuemeka ChMC, is a Law Student and a Certified Mediator/Conciliator in Nigeria. He is also a Developer with knowledge in HTML, CSS, JS, PHP and React Native. Samuel is bent on changing the legal profession by building Web and Mobile Apps that will make legal research a lot easier.