Sole proprietorship advantages are not enough to take the decision of starting a business, another side of the 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.
There any unlimited cons of proprietorship business that includes personnel management, understanding business psychology, negligence to advertising campaigns, Lack of communication in supply chain management, Marketing, Purchasing, Financing, Accounting, Brand Management, Online activities and many more.
10+ Disadvantages of Sole Proprietorship
Lack of Capital
As financial resources of one man are generally limited there is always a deficiency of capital in this form organization.
The biggest Sole Proprietorship Disadvantage is that He cannot produce goods on large scale due to limited capital. Furthermore, he cannot enjoy the economy in any sector.
When there is limited capital it means limited profit.
Disadvantages of joint stock company are on another hand but this company does not face a capital shortage.
A 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 the 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 all types of 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 an 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 a lack of permanence in the life of sole proprietorship. His business may come down after his death if there are 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, this can cause business cycle from boom to depression.
But, advantages of Joint Stock Company is to possess continued existence in its life.
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 the business house are not faced with these hindrances.
The heaviest from all Sole Proprietorship Disadvantages is Loss. As one man is the owner of the organizations, he has to pay all the expenditure, losses and obligations of the business himself. Another main disadvantage of the sole proprietor is that nobody will share with him in this regard.
If there is a heavy loss, his business may come. But in the case of partnership and joint stock company, entire loss is distributed among the number of persons; as it would be mentioned in contents of partnership deed.
I personally feel the core difference between sole proprietorship and partnership is that one man cannot perform all types of management and business activities effectively. Other can be managed and hired as well.
If the businessman is a good technician, he may not be a good administrator.
If he is a good accountant he may not be a good purchase officer.
So, one man cannot possess all types of abilities at one time, therefore, several problems may arise in the supervision and conduct of the business.
On the other hand partnership and company enjoy the combines abilities of several heads as well as they can monitor the duties of employee are performed well or not.
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 the large size of business may not be conducted by one man.
Lack of Public Confidence
Public shows less confidence in this type of business due to the following reasons.
- There are no legal regulations to control the sole tradership
- No rules for transfer of the ownership of a business.
- No legal principle for winding up the business.
- No compulsion for an audit of the accounts.
Chances of Fraud
Generally, goods are supplied on credit to retailers. But a proper record of these transactions is not maintained. Relevant vouchers are not prepared and documents are not kept for future references. This irregularity or negligence in the preparation of accounts and other record create the chances of fraud for dishonest and non-skilled workers. Thus sole trader cannot know the actual result of his performance and of debts.
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 a large profit. But in a 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 from 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. The 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.