This is the single ownership form of business. A sole proprietor runs his/her business as an entrepreneur and is personally responsible for all business outcomes, which includes personal obligation for all liabilities.
It means a creditor can raise the claims against a sole proprietor, as his/her liabilities are unlimited. When a sole proprietor chooses to carry out business under a different name of his/her firm after the formal registration, it cannot immune himself/herself from the personal obligations/liabilities.
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Thus, sole proprietorship is the most common form of business organization.
Advantages of Sole Proprietorship:
1. It is relatively easy and less expensive to form and administrate.
2. It enjoys maximum managerial control
3. It enjoys tax advantages, as the business income is taxed as the personal income of the sole proprietor
Disadvantages of Sole Proprietorship:
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1. It cannot raise adequate capital, required for business expansion. This is primarily for the reasons that a sole proprietor is considered more as an individual than a separate business entity, unlike in other forms of business
2. A sole proprietor suffers from the problem of unlimited liability
3. A sole proprietor cannot easily transfer the ownership
4. A sole proprietorship firm has limited life, as with the demise of the owner, the firm dissolves
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As the sole proprietorship firm is owned and operated by an individual, this type of organization ensures highest managerial control. When the size of a sole proprietorship organization is small, the owner personally get involved in all aspects of business functions like, purchase, inventory control, manufacturing/production or operations, accounting and finance, human resource management, customer relationship management and all other general management issues.
When it grows, owners may find it difficult to lay hands in all aspects of the business. In such cases, owners are required to hire helping hands to share the control of business activities. Some owners, however, by nature do not like to share the control of business, even in cases when they become large, resulting in disruption of business activities.
Since a sole proprietorship organization is owned by a single individual, the business gets restricted for the obvious problem of availability of financial resources, which may stand against the growth and business diversification.
In today’s competitive market, even a small sole proprietorship organization requires building of capital for the purchase of all the required fixed assets like, landing, equipments, etc., and to meet the operating expenditures like wages, salaries, payment of electricity bills and payment to suppliers or vendors.
Paucity of funds may restrict a sole proprietor to scale up his business activities, which virtually put him into a resource-crunch situation because self-financing ability may not be always strong enough to cater to rising business investment and expenses and also borrowing money from intermediaries to finance the business activities may not always be cost-effective. All these hinder the business expansion plan of sole proprietors and force them to scale down their activities.
Another major constraint in such type of organization is its limited life-span. In India, many well-known sole proprietorship organizations have to wind up with the death of the promoter, i.e., the owner of the organization.