Sole Proprietorship Disadvantages – Top 12 Demerits

Sole proprietorship advantages are not enough to take decision of starting business, another side of coin is sole proprietorship disadvantages. If you are starting a business with small or huge finance, you may need to be very clear with facts. One wrong decision can disturb cash inflows.

Lack of Capital

As financial resources of one man are generally limited there is always deficiency of capital in this form organization. He cannot produce goods in large scale due to limited capital. Furthermore he cannot enjoy economy in any sector. When there is limited capital it means limited profit. But this problem does not rise in the joint stock company.

Unlimited Liability

Sole trader is liable for all the obligations of business to the full value of his assets that he possesses. This is a great drawback of this form of business house. If his business becomes unsound at any time his private property is also liable to pay the business debts. But each shareholder in Joint Stock Company has limited liabilities.

Lack of skilled persons

Two factors i.e. technical and administrative necessary for the smooth and successful running of the business. But the one man may not hire the services of qualified and experienced persons for indefinite period of time due to his limited sources. Therefore he cannot achieve the maximum benefit from its financial and capital sources.

Lack of continued existence

There is lack of permanence in the life of sole proprietorship. His business may come down after his death if there is no experienced heirs to control his business. The operating life of his business may adversely be affected in case of suffering from some physical or mental disease. But Joint Stock Company possesses continued existence in its life.

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Limited chances of growth

It is not possible for one man to increase his business volume due to the following factors:

  • Unlimited Liabilities
  • Limited Life.
  • Lack of managerial and technical abilities.
  • Lack of capital.

Therefore his business remains limited and the business cannot earn handsome profit due to limited activities. But other forms of business house are not faced with these hindrances.

Entire Loss

As one man is the owner of the organizations, he has to pay all the expenditure, losses and obligations of the business himself. Nobody will share with him in this regard. If there is heavy loss, his business may come. But in case of partnership and joint stock company, entire loss is distributed among the number of persons; as it would be mentioned in partnership deed.

Management Problems

One man cannot perform all types of management and business activities effectively. If he is goods technician, he may not be a good administrator. If he is a good accountant he may not be a good purchaser. So one man cannot possess all types of abilities at one time, therefore, several problems may be arisen in the supervision and conduct of the business. On the other hand partnership and company enjoy the combines abilities of several heads.

Unsuited for large scale industry

This type of organization is quite unsuited for those industries where:

  • Large capital is required.
  • High production is needed.

Skilled managerial and technical abilities are to be employed. Therefore large size of business may not be conducted by one man.

Lack of public confidence

Public shows less confidence on this type of business due to following reasons.

  • There is no legal regulations to control the sole tradership
  • No rules for transfer of the ownership of business.
  • No legal principal for winding up the business.
  • No compulsion for audit of the accounts.
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Chances of Fraud

Generally goods are supplied on credit to retailers. But proper record of these transactions are not maintained. Relevant vouchers are not prepared and documents are not kept for future references. This irregularity or negligence in preparation of accounts and other record create the chances of fraud for dishonest workers. Thus sole trader cannot known the actual result of his performance and of debts.

Psychological Complexity

As the Joint Stock Company and partnership enjoy the economy in the large scale production, distribution and management, it is possible for them to earn large profit. But in sole proprietorship one man has to face certain troubles in business activities. He works hard without any vacation, but earns minor profit comparatively. He thus feels much strain on his health and suffers form inferiority complex.

Lack of Inspection

As there are no rules and no boss to supervise one man business therefore, sometimes he is found in illegal activities regarding money i.e. smuggling, black marketing, boarding and speculating. Absence of fear of inspection brings unnecessary drawing wasting, expenditure and excessive withdrawal of profit which leave behind the adverse result on business.

Due to the foregoing reasons one man control is not considered best in the business organization and this type of business is not liked and preferred to other forms of business organization.

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