Everything you need to know about the disadvantages of sole proprietorship. Any person is not equipped to own and competent enough manage a business.
Often it is difficult to save enough money to start a business and carry it on. It is very difficult, at times, for a single person to cover the costs of inventory (raw materials), insurance, advertising, rent, computers and so on. There are other disadvantages also.
Some of the disadvantages of sole proprietorship are as follows:
1. Limited Capital 2. Unlimited Liability 3. Limited Managerial Ability 4. Conservatism 5. Doubtful Continuity 6. Lack of Scale 7. Ease of Replication
8. Absence of Specialization 9. Hasty Decision 10. Weak Bargaining Position 11. Limited Growth Potential 12. Dependence on Paid Assistants 13. Lack of Trust 14. Lack of Systems.
Disadvantages and Limitations of Sole Proprietorship
Disadvantages of Sole Proprietorship – 12 Major Disadvantages: Unlimited Liability-The Risk of Personal Losses, Limited Financial Resources and a Few Others
Any person is not equipped to own and competent enough manage a business. Often it is difficult to save enough money to start a business and carry it on. It is very difficult, at times, for a single person to cover the costs of inventory (raw materials), insurance, advertising, rent, computers and so on. There are other disadvantages also.
These are the following:
Disadvantage # 1. Unlimited Liability – The Risk of Personal Losses:
A single-owner firm has unlimited liability, that is, any debts or damages incurred by the business are his (her) debts and he must pay them, and, if necessary, by selling his home, car, or everything else he owns. This is a serious risk—the risk of going totally bankrupt. Complete recovery from such a situation is extremely difficult, or even virtually impossible not just due to financial loss, but due to the mental shock one receives after the event.
Disadvantage # 2. Limited Financial Resources:
Another disadvantage of this type of business is the strict limitation on its ability to acquire capital for expansion. Finance is restricted to the amounts which the entrepreneur is able to provide from his own sources and whatever sums he can borrow on his own security. By comparison, partnerships and corporations have a greater chance of gathering (or acquiring) much more funds needed to start and equip a business and carry it on.
Disadvantage # 3. Management Problems:
A business can be efficiently run by professional managers. They perform specialised functions such as keeping inventories, accounting and maintaining tax records. Those who are skilled sales persons are not so skilled in keeping records. Sole proprietors cannot afford to employ qualified employees at high salaries and various fringe benefits to run their businesses efficiently.
Disadvantage # 4. Huge Time Commitment:
Sole proprietors have little time to do anything else in life due overwhelming time commitment. There is no one with him to share the work load. The owner of a grocery shop, for example, may put in 12 hours a day at least six days a week— almost twice the hours worked by a non-supervisory employee in a large company. Thus this type of business becomes a way of life.
Disadvantage # 5. Few Fringe Benefits:
The sole owner of a firm loses the fringe benefits which often come with working for others. There is no medical benefit, no pension, no terminal benefits (such as provident fund and gratuity), no leave travel concession and no house rent allowance. So there is lack the incentive to work hard but constant pressure to save money for personal profit and security.
Disadvantage # 6. Limited Growth:
Expansion of a single-owner firm is slow and sporadic (not spontaneous). The reason is that such a firm relies on its owner for most of its creativity, business know-how and funding.
Disadvantage # 7. Limited Life Span:
If the sole proprietor dies, becomes physically unfit, or retires the business ceases to exist (unless it is sold to an outsider or taken over by the heirs of the sole proprietor)
Disadvantage # 8. Lack of Specialisation:
Since the same person performs all the functions which are essential for the successful conduct of a business the benefits of specialisation cannot be derived. Moreover, the same person may not be able to perform all the business-related functions due to incompetence and/or inefficiency as also deficiency of imagination and limited willpower. After all, a jack of all trades is the master of none.
Disadvantage # 9. Decision-Making Errors:
Since the sole trader takes all business decisions without consulting others, there is, at times, excessive pressure on him. So he is likely to commit decision-making errors. And a wrong decision may at times become damaging for the firm. This may not only affect current and future profit prospects but because of this, the very survival of the firm may even be threatened.
Disadvantage # 10. Loss of Potential Economies of Large Scale:
This is the age of large-scale (or mass production). However, since a sole trader operates on a small scale, he fails to derive the advantages of large-scale production in various areas of business such as making bulk purchase of raw materials, selling goods in different markets (both domestic and foreign). In short in such a business there is loss of potential economies of scale.
Disadvantage # 11. Uncertain Future:
The future of a sole trader is uncertain. There are various reason for this.
Disadvantage # 12. Lack of Stability:
Finally, sole proprietorship is not a stable form of business for various reasons, as noted above.
For all these reasons many sole proprietors choose to find partners to share the load. This is how a partnership business is started.
Disadvantages of Sole Proprietorship – 14 Main Disadvantages: Limited Capital, Unlimited Liability, Limited Managerial Ability, Conservation and a Few Others
1. Limited Capital:
The amount of capital that a person can invest in a business is limited. Moreover, he cannot get unlimited credit. Thus, the scope of growth is limited and the business will remain smaller.
2. Unlimited Liability:
If a businessman takes a loan and is not able to repay the loan because he suffered a loss in business, the creditors of the proprietary concern can take over his private property and sell it to recover their dues. Thus, there is a possibility that the proprietor may become a pauper because of one single mistake in business.
3. Limited Managerial Ability:
An individual has limited capabilities. He may excel in some areas and may understand other areas quite well, but he is not the best at everything. He can handle only limited number of situations at a given time. Since he has to lake all the decisions, he may be stressed and might take decisions that are not optimal.
The underlying principle behind an enterprise is the willingness to take risk. The proprietor should be able to think differently and experiment with new ideas. However, the fear of losing everything might make him risk averse and conservative.
5. Doubtful Continuity:
The business is heavily dependent on the proprietor. Any uncertainty in the personal life of the proprietor has an adverse impact on the business. Moreover, his family may not be interested in the continuation of the enterprise. The business may die an untimely death.
6. Lack of Scale:
The amount of capital that can be invested by a single person is limited. The amount of work that can be managed by one person is limited. Normally, the business is restricted to a local area. Hence, the size of a sole proprietary business is small.
For example, the number of units the sole trader may purchase (for sale) at any point in time will be small. Consequently, the sole trader will not be able to benefit from “economies of scale”. In other words, he will not be able to get better terms because the scale of his operations is small.
7. Ease of Replication:
It is very easy to replicate the business model of a sole proprietary concern. For example, if a businessman opens a shop selling alternative medicine (homeopathy, Unani, Ayurvedic medicines) and it is successful, it is very easy for another person to also open another shop selling the same. Many a time, the staff that has worked in a proprietary concern often start their own enterprise in the same line. This increases competition amongst small businesses, which is not good for any of them.
8. Absence of Specialization:
The Sole proprietor is responsible for everything. He has to manage the finances, marketing, production, accounts, correspondence etc. He is over burdened with activity. However, he is unable to avail of the services of specialists, as he cannot afford the related costs on account of his limited scale. The benefits of division of labour are not available.
9. Hasty Decision:
The sole proprietor is the sole decision maker. He does not have to consult or convince any other person. He has many responsibilities and needs to take all the decisions. Many times, the decisions taken by him could prove to be hasty. Such hasty decisions could result in losses. There is no system of checks and balances.
10. Weak Bargaining Position:
The sole proprietor is in a disadvantageous position in negotiations with buyers and suppliers on account of his small size. He does not enjoy the advantage of scale and hence, is unable to influence the market.
11. Limited Growth Potential:
The Limitations of capital and managerial Ability, Coupled with market realities such as stiff competition, restrict the growth prospects of the business. The business may eventually have to change its form in order to have continued growth.
12. Dependence on Paid Assistants:
The sole proprietor has to depend on staff for carrying out various operations. While the scale of operations does not permit the employment of specialists, the staff available cannot be expected to have the same standard or efficiency. Moreover, there is no motivation as they do not have any share in profit or say in decision making.
13. Lack of Trust:
The sole proprietor is very secretive about he is doing. He does not trust his staff also, as he fears that they may start another business in competition with him. Since he does not share everything with anybody, it is very difficult to understand why a particular decision has been taken. This can give rise to many problems, particularly if the sole proprietor becomes suddenly unavailable for any reason.
14. Lack of Systems:
There are no properly designed systems in place. Activities are largely unorganized. Vital information is often missing. Controls are inadequate and there is great scope for fraud and misappropriation.
Disadvantages of Sole Proprietorship – Limited Finances, Limited Managerial Skill, Unlimited Liability and Uncertainty of Duration
Some of the limitations and drawbacks of this form of organisation are given below:
1. Limited Finances:
The individual’s proprietor suffers from the limitation of financial resources. He can depend only on his own savings, and it is neither safe nor easy for him to borrow much money from banks or other financial institutions. Therefore, the size of the firm must remain small. He cannot take advantage of a possible expansion in business which may bring him substantial economies.
2. Limited Managerial Skill:
The managerial ability of the proprietor is limited. Modern business is full of complications specially due to the ever-changing nature of market, and the various laws that are being enacted. An individual may not be an expert in all matters and therefore, sometimes his decisions may be unbalanced.
3. Unlimited Liability:
The liability of the owner is unlimited. Not only the assets of the business, but also his private assets will be used to pay off the firm’s debts. Therefore, when a man starts a business he may not really know the extent to which he is committing his private property. Unlimited liability also discourages the expansion of business.
4. Uncertainty of Duration:
The proprietary business comes to an end if anything happens to the proprietor. If the business is rendering useful service to the society the closure of such a business will be a social loss. Similarly, with the death of the proprietor, the business may pass on to successors who may not possess the same degree of self-reliance, derive and ability.
Disadvantages of Sole Proprietorship – 4 Main Limitations: Small Size, Skills, Talent, and Expertise Open to Doubt, Unlimited Liability and Growth Prospects
A sole proprietorship suffers from the following limitations:
i. Small Size:
By its very nature, proprietary concerns cannot grow big. They have limited means. They cannot expand operations in a big way. As a result, they do not enjoy the economies of scale. Customers, in the final analysis, do not gain from such miniscule concerns in the long run.
ii. Skills, Talent, and Expertise Open to Doubt:
The proprietor lacks the professional skills, talent, and expertise. He has limited knowledge and does not have the ability to see the big picture. His overall knowledge of the market, competition, products, tastes of customers, changes in fashions, and trends, general trends in economy, danger from global firms, etc., is relatively poor. As a result, he might take inappropriate decisions in a hurry, looking at things from a narrow perspective.
iii. Unlimited Liability:
In the marketplace, ignorance is the ‘kiss of death’. You pay a penalty for everything. If the owner fails to run with the times and offer quality at an affordable price—competing with bigger firms—the business will collapse within no time. Errors of judgement may bring down a business sooner than expected. The liabilities of a firm might eat away the accumulated wealth of the owner almost instantaneously. The risk of unlimited liability forces many a sole proprietor not to expand operations beyond a point.
iv. Growth Prospects:
Business cannot go beyond a point for a variety of reasons— limited capital, owner lacks needed skills and competencies required to run the show on a large scale. Unlimited liability compels many owners to remain small. The proprietary concern, therefore, does not grow to an optimum level and enjoy the economies of scale.
Disadvantages of Sole Proprietorship – Limited Resources, Limited Life of a Business Concern, Unlimited Liability and Limited Managerial Ability
Sole proprietorship also suffers from the following limitations:
1. Limited Resources:
The resources of the proprietor are limited to his personal savings and borrowings.
The borrowing capacity is also limited as banks and other lending institutions may hesitate to extend long-term loan to a sole proprietor. Due to lack of resources, sole proprietorship is generally of small size with low growth rate.
2. Limited Life of a Business Concern:
In the eyes of the law, owner and the business are considered one and the same. So, sole proprietorship does not enjoy continuity of life. Illness, death or insolvency of the proprietor affects the business and can lead to its closure.
3. Unlimited Liability:
The proprietor has unlimited liability, i.e. he is liable for all the debts of business. If business fails or debts exceed the business assets, then creditors can recover their dues not only from the business assets, but also from the personal assets of the proprietor. This fear of unlimited liability adversely affects the innovation and expansion of business as a wrong decision can create serious financial burden on the owner.
4. Limited Managerial Ability:
The proprietor has to assume responsibility of all affairs of business. However, managerial ability of the single owner is limited as he cannot possess all the qualities and not likely to be an expert in all matters of the business. Also, due to limited resources, the owner cannot use services of professional and expert people, which affects the working of his business.
Although sole proprietorship suffers from various shortcomings, still it is chosen by many entrepreneurs due to its inherent advantages. It is best suited for businesses which are carried out on a small scale and where customers demand personalized services.
Disadvantages of Sole Proprietorship – 5 Major Drawbacks: Limited Financial Resources, Unlimited Liability, Uncertain Life, Limited Managerial Ability and a Few Others
There are some limitations of sole proprietorship which are as follows:
1. Limited Financial Resources:
Sole proprietorship has limited financial resources. This limitation is in two forms. First, the owner’s funds are provided by a single owner which are limited. Second, because of limited owned funds, the borrowing capacity of the sole proprietor is quite low.
2. Unlimited Liability:
Sole proprietorship has unlimited liability. As a result, the sole proprietor has personal liabilities towards business. The fund providers, including trade creditors, may recover their dues from the non-business assets of the sole proprietor if the business does not work as anticipated. This may affect the sole proprietor adversely.
3. Uncertain Life:
The fate of sole proprietorship is tied with the sole proprietor. Thus, in the case of non-availability of the sole proprietor for any reason, like his death, insanity, ill health, etc., the business has to be closed.
4. Limited Managerial Ability:
Sole proprietorship has limited managerial ability as management input is provided by a single individual. He cannot employ professional managers because of low volume of business. Thus, there is possibility of unsound business decisions.
5. Non-Availability of Economies of Large Scale:
Sole proprietorship is run on small scale. Therefore, economies resulting from large-scale business operations are not available.
About the sole proprietorship, W.R. Basset has commented as follows- The one-man control is the best in the world, if that one man is big enough to manage everything.
Disadvantages of Sole Proprietorship – Limited Resources, Limited Life of a Business Concern, Unlimited Liability and Limited Managerial Ability
1. Limited resources – A sole proprietorship form of business suffers in terms of limited resources. The total investment in business is restricted to the personal savings of the sole proprietor and his capacity to borrow from others.
2. Limited life of a business concern – A sole proprietorship form of business lacks a stable existence. Any event like the death, insolvency or illness of a proprietor creates an adverse effect on the business and can lead to its closure.
3. Unlimited liability – A sole proprietor is usually less inclined to assume greater risks in business. This is because if the business plan does not work, his personal assets may also be utilised to settle the claims of business towards the third party.
4. Limited managerial ability – The success of a sole proprietor form of business organisation primarily depends upon the managerial skills of the sole proprietor himself. It is usually observed that not many people possess multiple skills and are proficient in all spheres of business. Besides, due to limited resources, it may not be practically possible for a sole proprietor avail the services of professional employees.
Disadvantages of Sole Proprietorship – Limited Resources, Limited Life of a Business Enterprise, Unlimited Liability, Limited Managerial Skill and a Few Others
1. Limited Resources – Sole proprietor’s resources are limited to his personal savings and borrowings from others. Even banks and other financing institutions hesitate to extend a long term loan to him.
2. Limited Life of a Business Enterprise – Owner and business are considered as one and the same. Their entities are not separate. His death, insanity, imprisonment, physical ailment or bankruptcy leads to the closure of the business firm.
3. Unlimited Liability – If business liabilities exceed the business assets, then creditors can recover their dues not only from the business assets, but also from the personal wealth of the proprietor. Due to this reason the sole proprietor hesitates to expand his business because a wrong decision can create serious financial problems for him.
4. Limited Managerial Skill – The proprietor has to perform all management functions such as purchasing, selling, advertising, financing, planning, organising, directing and controlling etc. It is difficult for a person to possess all the expertise required to take sound managerial decisions.
Moreover, due to inadequate resources, the owner may not be able to avail of the services rendered by management professionals and experts. He is overburdened because all the functions have to be performed by the sole proprietor himself. It results in business bottlenecks.
5. Limited Scope of Expansion – Due to limited financial resources and the managerial skill it is difficult to grow and expand. He is overburdened because all the functions have to be undertaken by sole proprietor himself. It may result in business bottlenecks. Therefore, sole proprietorship form of business organisation is suitable for only a small business enterprise which requires personal attention and limited capital like a grocery store, bakery shop, tailoring shop, a general store and health clinic etc.
Even though the sole proprietorship suffers from various limitations, still it is preferred by many entrepreneurs because of its inherent advantages. It is best suited for small scale businesses and where customers demand personal attention. Thus it is rightly said that — “Sole Proprietorship is the best form if that person is big enough to manage everything.”
Disadvantages of Sole Proprietorship – Explained!
(i) Limited Capital – In sole proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business for its growth and expansion.
(ii) Unlimited Liability – In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities.
(iii) Lack of Continuity – The existence of sole proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is therefore uncertain.
(iv) Limited Size – In sole proprietorship form of business organisation there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
(v) Lack of Managerial Expertise – A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be poor in marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management.
Disadvantages of Sole Proprietorship
(i) Limited Financial Resources – A single individual normally does not possess enough capital. His borrowing capacity is also limited. Therefore, a sole proprietorship firm suffers from lack of financial resources. Consequently, it has to confine its activities within a limited range.
(ii) Limited Managerial Ability – The limitations of managerial ability are as glaring as that of capital. An individual, howsoever, capable and qualified may be, cannot manage all functions of the business. He is not supposed to possess knowledge of all the functional areas of the business.
Moreover, because of the small size of the business and limited financial resources available to him, he may not be in position to appoint expert managers. Thus, in the modern competitive world of business are different aspects are managed by experts; sole proprietor’s concern is likely to suffer from stagnation in the absence required managerial ability.
(iii) Unlimited Liability – The unlimited liability of the single proprietor is a great disadvantage to him; because business debts run against his entire property and not merely against the amounted invested in the business. This discourages the risk taking instinct of the entrepreneur.
(iv) Uncertainty of Continuity – Continuity of the sole proprietor’s business is difficult to maintain. When the proprietor dies there is no guarantee for the continuity of the business. Because there is no legal obligation to continuity the same concern. The legal heir of the proprietor may lack requisite qualities or may not have any liking for the same business.
With the result, the business may come to an end. There is also no legal obligation that once a business is started, it must be continued under any circumstances. Thus, the continuity of the business solely depends on the sole proprietor and his legal heir.
(v) Diseconomies of Small Size – A small scale firm cannot enjoy economies in purchase, production and marketing. In a sole trader’s concern, overhead cost is also more. Thus a sole proprietorship firm suffers from diseconomies of small scale and is not in a position to compete with the large scale organization having economics of large scale.
(vi) Limited Growth – Growth is a normal rule of life. A business firm is bound to grow in size; as it is a living body. Practically, due the limitations of capital and managerial ability as discussed above, the growth of the sole trader’s business is affected adversely; it is never in a position to bloom fully.
Disadvantages of Sole Proprietorship – 5 Major Drawbacks
The sole trading concern suffers from the following drawbacks:
1. Limited Capital – The resource of an individual is generally limited to his personal savings and the capacity to borrow. This factor sets a limit to the size of the business concern. Therefore, the chances for expansion is also limited and the business cannot avail the economies of large scale operations.
2. Unlimited Liability – Unlimited liability is the serious drawback of this type of business organisation. The sole trader has to bear the entire risk of his business. If the business fails, he may lose everything. It also discourages the expansion of the business.
3. Limited Life – If there is any material change in the business conditions, it makes it difficulty to continue the business. If the proprietor dies, the continuity of the business depends upon the willingness of his successors. Hence the life of the business is very much limited.
4. Limited Managerial Ability – The managerial ability of the proprietor is limited. The individual cannot specialise in all aspects of the business. He cannot avail the services of experts by employing them because of his limited finance.
With the result, he is not able to manage the concern property and efficiently.
5. No Economies of bulk Trade – In case of a sole trading concern, the scale of operation is less. So he cannot get the benefits of bulk purchase. Similarly he cannot increase his turnover beyond a certain extent.