Major Problems Associated With a Sole Proprietorship
by servicesA sole proprietorship is a type of business that has only one owner who is legally and financial bound to all of the business’s decisions and obligations. Although sole proprietorship are easily and cheaply set up, they suffer legal, efficiency and financial disadvantages that are not always present in other company forms, such as limited partnerships.
Defining Sole Proprietorships
In its simplest sense, a sole proprietorship is a type of business under the management of a single person. Many smaller businesses have this type of legal structure as it is the easiest to set up. Sole proprietorship start-ups do not have any legal requirements, and unlike other types of businesses, the owner and the business are not taxed separately. They have little in the way of start-up costs, and the owner is able to make all decisions.
Legal Disadvantages
One disadvantage of sole proprietorships is that the owner and the business are legally a single entity. Any legal issues that may affect the business — for example, a lawsuit — will also involve the owner of the business. The business’s costs are also the owner’s costs, and the business’s profits are the owner’s income. When a government taxes a sole proprietorship, it is the same as taxing the owner’s income.
Efficiency Disadvantages
Because the business and the owner are regarded as the same entity, the owner is responsible for all obligations that pertain to the business. If the business faces any financial or legal hurdles, the owner must devote as much time as he can to addressing such hurdles if he wants to keep his business alive. This can have a strain on the owner’s personal life. Furthermore, if the owner suffers any personal mishaps, such as disability, the business will suffer or even cease to exist. Sole proprietorships do not exist indefinitely like that of other company structures.
Financial and Business Disadvantages
Sole proprietorships may find it difficult to raise capital to expand. This is because sole proprietorships tend to be rather small and have a relatively low level of turnover. Investors are cautious of investing in sole proprietorships as a single owner and manager may entail increased risks. Furthermore, a single owner limits himself with his own training and experience. Any new ideas and ventures must come from himself, and without any input from other owners or managers that other businesses may have.
