Question

Although most new firms start out as sole proprietorships, few large firms are organized this way. Why is the sole proprietorship such a popular form of ownership for new firms? What features of the sole proprietorship make it unattractive to growing firms?

Answer 1

When the firms are new and are generally of smaller size, Sole proprietorship is the most preferred form of ownership of firm for variety of reasons as given below:

1) Easy formation: Formation of sole proprietorship firm is very easy and relatively hassle free.

2)Full Control: Control on the business of the proprietor is absolute.

3) Quick decision making: When the business is in initial stage of growth, quick decision to seize the opportunities must be taken which the sole proprietorship provides.

4) Easy Dissolution: Dissolution of sole proprietorship is as easy as its formation which aids in closing the business easily when it becomes economically redundant.

For growing firms, sole proprietorship is an unattractive form of ownership due to following reasons:

1) Limited Resource: Since there is only one owner of the business, the resources required for growth of the firm is limited.

2) Unlimited Liability: The owner has to pay from his personal assets to the creditors.

3) Limited management abilities: One person owner has to take all the managerial decisions. He may not be good at every kind of management decisions. Thus biggers firm have different form.of ownership where there are professional managers to take managerial decisions.

4) Time commitment: If a firm grows and has different branches, then a single owner cannot go to every branch and monitors everything efficiently.