When entrepreneurs want to register a Sole Proprietorship Firm in India that time, they know about its advantages like low cost of the formation, easy to start & easy to close or very less annual compliance as compared to other legal entity but they don’t have idea about the ” Disadvantage of Sole Proprietorship Firm” so in this guide we discuss about the drawbacks or disadvantage of Sole Proprietorship Firm.
A sole proprietorship is a type of business where one person owners and operates the whole business. It is the easiest way and least expensive way to start a business compared to partnership and corporations. In a sole proprietorship, the person is not accountable to any boss as he himself is the boss of the sole proprietorship and has the total control over the business. Also, there is no or very low cost for starting up a sole proprietorship. He can also keep all the profits earned by him and there is no need for distributing the profits with others.
Disadvantage of Sole Proprietorship Firm in India
In the case of sole proprietorship, the owner has to bear all the expenses of the business. he owns the business so it is difficult for an individual to raise huge funds like a company or firm etc. sometimes his own funds including the borrowed amount of money become insufficient for the requirements of the business.
Unlimited liability and Personal and business assets are same:
The owner’s money and assets have been tied to his business in such manner that the finances of the owner and the business are one and the same. If there is any liability on the sole proprietorship then if he only has to pay the liability and if not recovered then his liability will be unlimited. Unlimited liability means that for paying the liability, his assets will be used to pay the liability.
Lack of continuity
The existence of the business depends on the owner. When he dies or is ill etc then the business can be jeopardy. Although his heirs can inherit the business but they can lack the understanding of business and can result in loss of business and customers. So its continuity is not certain.
The business which can be extended depends totally on a single person so there is a limit beyond which owner can not expand the business. A single person can manage the business but only up to a limited extent.
Lack of managerial expertise:
It is not necessary that the owner has all the expertise in the management of the business. He can be like that he is expert in marketing, planning but cannot be in financing or administrative etc. he may also lack the benefit of professional management and has limited financial resources.
As the owner is the one running the business he is paying the taxes also personally. Many tax benefits are not given to the sole proprietors like health insurance benefits for the employees etc.
Types of business:
All business cannot be done as a sole proprietorship but where the market for the product is small and local. Where nature of the business is simple and capital requirement is small and risk involved is not high.
So these are some main disadvantages in the Sole Proprietorship firm but if we talk about some untested business ideas then its doesn’t matter, You can start with the sole proprietorship firm to testing your business ideas then on later stage you can start another proper private limited company in India.