Question

what are the advantages and disadvantages of the sole proprietorship form of organization?

Provide specific examples.

Answer 1

A sole proprietorship is a business that can be owned and controlled by an individual, a company or a limited liability partnership. There are no partners in the business. A sole proprietorship can have multiple people operating the business, but it must have one sole owner.

ADVANTAGES OF SOLE PROPRIETORSHIP

Easy to Form: Proprietary concerns can be formed easily and quickly. Very few legal formalities need to be fulfilled. A person becomes a sole proprietor simply by running a business.

Full Control: In sole proprietorship the owner maintains 100% control and ownership of the business

Promptness in Decision-Making: An individual entrepreneur need not consult others while deciding the affairs of his concern.

Keep the Secrets Close to Heart: The proprietor need not place all his cards on the table. Nor is he required to share any information with anyone else.

Quicker Tax Preparation: As a sole proprietor, filing your taxes is generally easier than a corporation. Simply file an individual income tax return (IRS Form 1040), including your business losses and profits. Your individual and business income are considered the same and self-employed tax implications will apply.

Keep the Business Simple, Dynamic and Flexible: The sole proprietor can own the business for as long as he or she decides, and can cash in and sell the business when they decide to get out. The sole proprietor can even pass the business down to their heir, a common practice.

DISADVANTAGES OF SOLE PROPRIETORSHIP

Small Size: By its very nature, proprietary concerns cannot grow big. They have limited means. They cannot expand operations in a big way.

Unlimited Liability: If the small business owner fails, he has to swallow all losses. The liabilities of a firm might eat away the accumulated wealth of the owner almost instantaneously. For example, if you go bankrupt and owe your debtors $100,000, then that money will have to come out of your own wallet even if there is no money left in the business.

Lack of Skills and Talent: The proprietor lacks professional skills, talent and expertise. For example: He has limited knowledge and does not have the ability to gauze competition, changes in fashions and customer tastes and preferences, trends in economy etc. He cannot run the show in a professional way.

Limited Shelf Life: Small businesses have limited life spans. For example,You never know when a big Mall will come nearby and kill all small players.

Difficulty in raising capital: Imagine your business in five years. Will it still be a business of one? Growing your small business will require cash to take advantage of new markets and more opportunities.