It is very important to choose type of business entity before starting a business. Sole Proprietorship is one of the most popular business type used in India. With features like independence, minimum licensing requirements, simplicity of taxation, minimum compliance and easy to manage, sole proprietorship can be a choice of many new entrepreneurs. However besides these features, Sole Proprietorship carries a bunch of disadvantages with it. It is always advisable to consider all these disadvantages before starting a Sole Proprietorship. In this article we will reasons to avoid Sole Proprietorship.
The most important disadvantage of Sole Proprietorship is that the liability of Proprietor is unlimited. The Sole Proprietorship and the Proprietor are treated as one and the same person. Income Tax Assessment of Sole Proprietorship is also done in the name of its Proprietor. Sole Proprietorship is not a separate legal entity. In case of losses, the Proprietor is liable to pay off the debts of Sole Proprietorship, unlike in a LLP, One Person Company, Private Limited Company or Public Limited Company where the liability of member is limited to the extent of his share capital.
Sole Proprietorship has to entirely rely on his personal sources of finance like owned capital or loans borrowed from friends and relatives. Banks are also not very keen on advancing loans to Sole Proprietorship now a day. It’s not possible for Sole Proprietorship to raise capital through Private Equity or Angel investors. As Sole Proprietorship has to run business with very limited capital, the chances of growth of business are also very limited.
Sole Proprietorship business is dependent on its Proprietor. In case of any unforeseen event or sickness of the Proprietor, it becomes very difficult to run the business. In case of death of the Proprietor the business cannot be transferred to any third person as all the business and tax registrations of Proprietorship are in the name of Proprietor. On such an event the business has to be closed.
Lack of Control
A Sole Proprietorship is managed by a single individual who is responsible for all the departments, like finance, sales, marketing, administration etc. Lack of knowledge on part of Sole Proprietor on any of the above department or over burden of work may result in leaving one or more departments unattended. This may result in losing business or creating complications.
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