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Last time I shared notes for Adavantages of Sole Proprietorship forn of business and today I am going to discuss some disadvantages
Inspite of so many advantages sole proprietorship does have some drawbacks. The following are the Disadvantages/Demerits of sole proprietorship form of organisation.
1. Limited capital: The sole trader has limited physical and financial resources. He raises capital from his personal savings or borrowing from friends and relatives. He may find it difficult to raise loans from banks and financial institutions. So it is obvious that the financial resources of a single person will be insufficient for business growth and expansion. Thus, limitation of finance is a major handicap for his sole trading business.
2. Unlimited liability: The liability of the procreator for debts of his business is unlimited. The creditors have a right to recover their dues, even from the personal property of the proprietor in case of business assets are not sufficient to pay their debts. He cannot even take calculated risk due to the fear of unlimited liability. This hinders the expansion of sole trading business beyond a certain limit.
3. Limited managerial ability: The business operation of his sole trading organisation are mostly managed, supervised and controlled by his sole trader himself. However, one person cannot be an expert in each and every field of business such as purchasing, selling, accounting etc.
4. Limited life: The life of sole trading business linked to its owner that is the sole trader. Thus, sole trading business is constrained by the limited existence. If the sole trader dies or is incapable of doing business and has no legal heir to continue with the business operations, then his business comes to an end.
5. Hasty decision’s: In the case of a sole trading concern, a sole trader is the only decision maker. He centralises all major as well as routine decision’s to himself and does not consult his subordinates before arriving at the decision’s. Due to this, there is a great possibility of hasty and wrong decisions.
6. Lack of specialisation: The sole trader has to undertake all the works relating to business himself right from planning to its execution and control. He is a Jack of all traders, but master of none. He cannot afford to avail the services of experts and consultants due to the limitation of resources. Due to all these constraints, is sole trader cannot avail. The benefits of division of labour and specialisation.
7. Limited span of supervision: A sole trading concern, being a ‘one man show’, a sole trader, generally has to tackle varieties of business related problems on his own. Therefore, it becomes difficult for him to supervise the work of his employees. The problem becomes even more acute in the case of large sole trading concerns. Thus, a sole trader can supervise only a limited number of employees.
8. Uneconomic size: Due to the limitation of resources, he cannot take advantages of the economies of large scale buying, production and distribution. This increases his overall cost of production and distribution and thereby the price of goods.
9. Uncertainty: The life of the soul trading business is uncertain and unstable. It depends upon the life of the sole trader. Being small in size, it also gets affected by the changes in the external environment such as tastes and preferences of the customers, changes in fashion and technology and government policy as well. If the sole trader fails to cope with these developments than he may suffer a loss.
10. Weak bargaining position: A sole trader has a weak bargaining position, both as a buyer and seller. A Sole Trader has limited financial resources and commands only a small part of the total market demand. Therefore, he finds it difficult to dictate his terms in the market. At the same time, he can become a an easy victim of a sudden changes in the market or a rise in the number of competitors.
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ReplyDeleteShares cannot be purchased by the general public in private limited companies governed by the Companies Act of 2013. Unlike sole proprietorships, sole proprietorships are taxed according to the Income Tax Act, 1961, which treats their income as individual income.
ReplyDeleteLearn More: conversion of proprietorship into private limited company under companies act 2013