It is truly a herculean task to save enough money to start a business and sustain it, yet some achieve this great feat. If you want to get your business started quickly and with little cost, a sole proprietorship may be the answer.
It is simple to form, yes and doesn’t require the filing of any registration documents with federal and state governments-true, the owner retains all the profits and doesn’t have to answer to anyone for his decisions-most.
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But, it is very difficult, most times, for a single person to cover the costs of inventory (raw materials), insurance, advertising, rent, computers, manpower, and so on. Below are some common drawbacks to being a sole proprietor:
1. Uncertainty of Continued Existence
Sole proprietorship does not enjoy continuity of life. Illness, insanity, imprisonment, bankruptcy, death, or insolvency of the proprietor affects the business and can lead to its closure as in the eyes of the law, the owner and the business are considered the same their entities are not separate.
Or in the best-case scenario, with the death of the proprietor, the business may pass on to successors who may not possess the same degree of self-reliance, sacrifice, and ability.
2. Financing and Business credit are Harder to Procure
As a business entity, you may have a harder time securing financing and business credit than a corporation. Part of the reason for this is that an incorporated business has a legal distinction that a sole proprietor doesn’t.
Also, an incorporated business is eligible for government funding and can raise funds fairly easily whereas a sole proprietor is restricted to the amounts which the entrepreneur is able to provide from his sources and whatever sums he can borrow on his security.
Even financial institutions prefer to base their loans on a company’s financial statements rather than having to consider the assets of the owner.
Quite often, the credit rating of the owner is not sufficient to meet the lenders’ standards.
3. Huge Time Commitment
Sole proprietors have little or no time to do anything else in life due to overwhelming time commitment to their business.
For example, the owner of a Beauty shop may put in 12-15 hours a day at least six days a week— almost twice the hours worked by a non-supervisory employee in a large company.
The owner is usually the last person allowed to take a vacation or enjoy a holiday. Thus this type of business becomes a way of life.
4. Limited Managerial Ability
An individual has limited capabilities. He may excel very well in some areas and not so well in others. Professional managers perform specialized functions such as keeping inventories, accounting, and maintaining tax records.
Those who are skilled salespersons are not so skilled in keeping records and vice versa. Sole proprietors cannot afford to employ qualified employees at high salaries and various fringe benefits to run their businesses efficiently.
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5. No Specialisation
When the same person performs all the functions which are essential for the successful running of a business the benefits of specialization cannot be derived.
The Sole proprietor is responsible for everything because he is unable to avail of the services of specialists, as he cannot afford the related costs on account of his limited scale, and the fact is he may be incompetent in some areas.
After all, a jack of all trades is the master of none.
6. Prone to Errors in Decision-Making
After all, the sole trader takes all business decisions without consulting with anyone which is a lot of pressure. So he is likely to be guilty of decision-making errors. And the damage of a hasty decision gone wrong decision may be long lasting at times.
7. Ease of Replication
It is as simple as ABC to replicate the business model of a sole proprietary concern.
For example, if a businesswoman opens a shop selling provisions (soft drinks, bread, confectioneries, etc) and it is a successful, it is very easy for another person to also open another shop selling the same thing.
Many a time, the staff that has worked in a proprietary concern often start their enterprise in the same line. This increases competition amongst small businesses, which is not healthy for any such business.
8. Limited Growth Potential
The limitations of capital and managerial ability, coupled with market realities such as stiff competition, restrict the growth/expansion prospects of the business.
Decisions have to be taken by the sole proprietor himself which will invariably put him in a tight spot, therefore resulting in business bottlenecks.
The sole proprietorship form of business organization is suitable for only a small business enterprise that requires personal attention and limited capital like a provisions store, bakery shop, tailoring shop, a general store, and health clinic, etc.
A sole proprietorship business cannot go beyond a point for a variety of reasons—the owner lacks the needed skills, capacities, and competencies required to run the show on a large scale.
All these unlimited liabilities compel the business to eventually change its form from a sole proprietorship to a partnership in order to have continued growth.
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9. Weak Bargaining Position
The sole proprietor is in a disadvantageous position when it comes to negotiations with buyers and suppliers on account of his small size.
Sometimes he might give in to a lesser price just so to make sales. He does not enjoy the advantage of scale and hence, is unable to influence the market.
10. Future is Uncertain:
The future of a sole proprietor is from the unset, uncertain. There are many different reasons for this, such as conservatism.
The proprietor should be able to think differently and experiment widely with new ideas. However, the fear of a greater loss might make him risk aversive and conservative.
Conclusion
Conclusively, though a sole proprietorship suffers from countless limitations, it is the choice of many entrepreneurs because of its inherent advantages.
It is best suited for small-scale businesses and where customers demand personal attention. Truly it is the business for the one who isn’t frail-hearted.