Pakistan study notes for Matric, Intermediate, B.A, B.COM BSC, M.A, BCS. Free Pakistani Urdu educational school, colleges and University notes.

SOLE PROPRIETORSHIP ADVANTAGES AND DISADVANTAGES

SOLE PROPRIETORSHIP

 

Background

It is the oldest type of business ownership. When the mankind emerged out of the stone era he was referred to as ‘HOMO SAPIEN’ who started business in sole ownership. It provides for full ownership of profit, total control, and rouses personal interest.

 

Definition

It is the business which is owned by a single owner who is also referred to as sole proprietor. It enjoys many benefits which other ownership cannot. Secrecy and ownership of full profit are some of its chief characteristics. However, it inherently suffers some setbacks embodying uncertain life, limited capital, and difficulty in operation.

 

Following are the advantages of the sole proprietorship.

1. Ownership of All Profits

A sole proprietorship has only, a single owner and hence it has no concept of distribution of profit, and is wholly owned by him. On the other hand in company and partnership profits are distributed among owners.

 

2. Ease of Formation

It is quite easy to form a business as sole proprietorship. Its formation does not require any permission from the government. It does not incur any expenditure as is required in the formation of partnership and company. The formation of a company requires registration with the registrar of the government, drawing memorandum and articles of association. In addition, a prospectus must be issued.

 

3. Ease of Dissolution

Cit is quite easy to dissolve sole proprietorship. No much time or cost is required in bringing it to an end. But it is quite difficult to dissolve company. Its dissolution involves much time and money Permission of shareholders, the registrar, and the court of’ law must be obtained to liquidate a company.

 

4. Tax Savings

Sole proprietorship enjoys the advantage of saving various types of taxes. In this form of business income tax on owner is imposed only once, and there is no income tax on the form of business. But in the case of company the income tax is imposed twice. First on the company’s profit, and then on the dividend of the shareholder. This is so because in sole proprietorship the profit of the organization and the owner is treated as one, and in the company the profit of the organization and of the shareholder are treated separately. Moreover, the company must pay corporate tax which is not the case in sole proprietorship.

5. Personal Interest

In this form of business the owner takes personal interest and offers maximum of his services and energy for the growth of his business. But in the company the work is not carried out that energetically and enthusiastically because the whole operation of business is executed by the employees, who are not seriously interested in its development.

 

6. Minimum Legal Constraints

The company and the partnership have to follow many laws, rules, and regulations from which the sole proprietorship is exempted.

7. Secrecy

Secrecy is an important element of any business, which can easily be maintained here. But in the company secrecy of business and. accounts cannot be maintained because all these affairs have to be printed so that they can be distributed to all shareholders, bankers, and stock exchange?

8. Credit Standing

This type of ownership enjoys credit standing because its liability to pay off its debts is not limited to the investment (capital) of the owner. Hence, the lender willingly offers credit to it.

9. Freedom of Action

Sole proprietorship enjoys freedom of action. Hs owner makes his own decision without any pressure from anywhere. This freedom saves the business from complications and waste of time.

10. Low Cost

The formation of sole proprietorship does not involve any formation cost. On the other hand, the   formation of a company   involves heavy expenditure.

Disadvantages  

Following are the disadvantages of the sole proprietorship:

1. Unlimited Liability

It is one of the major disadvantages of this form of business organization. If the assets of this business are insufficient to discharge its liability the proprietor will have to resort to his personal property to make up any deficiency in meeting his business obligations.

 

2. Difficulties in Management

Since the form of business organization cannot afford the costly services of highly qualified personnel its management is in the hands of low or non qualified personnel. This fact causes difficulties in running the business smoothly.

 

3. Limited Size

The business usually does not grow to a high level because of limited amount of capital and non-availability of highly qualified personnel/

 

4. Lack of Opportunities for Employees

Sole proprietorship docs not offer career opportunities to its employees because of its limitation on size, put the partnership and company offer such opportunities.

 

5. Uncertain Life

The life of business depends on the efficiency or life of the single owner. If the owner is inefficient or dies the business will come to an end. But the company will not close down if its owners die.

 

 

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