In the present business world the entity which has been chosen least is sole proprietorship firm. There are many reasons to avoid a sole proprietorship firm out of which will discuss the top five in the current blog. People preferred Private Limited Company registration, LLP, OPC etc over the proprietorship firm because of the various disadvantages of such entities. Except for small businesses, sole proprietorship firms are not suitable for any kind of business. They are good for those businesses which are running in particular localities. Sole proprietorship firms are associated with the proprietor. The entire decisions of the firm are in the hands of the proprietor which sometimes proves fatal to the business. It is one of the reasons to avoid a sole proprietorship firm. In order to learn more about whether you choose proprietorship for your business or not continue reading this blog.
What is a Sole Proprietorship Firm?
A sole proprietorship is a business structure where a single individual oversees and manages the entire enterprise, holding exclusive control over its commercial matters which is one of the reasons to avoid a sole proprietorship firm. This form of business is commonly chosen by small-scale entrepreneurs who operate on a limited scale. Unlike personal companies, sole proprietorship firms are distinct entities tailored for specific types of businesses. Notably, the incorporation process is simple and quick, as no formal registration is required, making it exempt from regulatory legislation and restrictions.
In a sole proprietorship, there is only one owner who has complete authority over the business, and the assets are combined, encompassing both personal and business assets. Importantly, there is no obligatory registration, and the owner bears sole liability for the business operations. This business model is ideal for small enterprises with a localized focus, and its simplicity extends to paperwork and documentation, making it an accessible choice for individual entrepreneurs.
What are the Five Reasons to Avoid a Sole Proprietorship Firm?
Some of the top reasons to avoid a sole proprietorship firm are mentioned below. If you are thinking about starting your business as a sole proprietor you must be aware of the following drawbacks of such kinds of entities.
Unlimited Liability
In the sole proprietorship firms the entire business is in the hands of the proprietor. Proprietor is the owner of the business. As a proprietorship firm and proprietor are not having separate legal liability, the proprietor is responsible for all the liabilities of the firm. Proprietor is responsible for all types of creditors of the firm. Any loss of the firm will directly affect the proprietor as he or she is the one who is having the sole responsibility in its hand. There is nothing separate between the proprietorship firm and the proprietor of the firm. Whether it is profit or loss, it will go against the proprietor of the firm. Hence it has been suggested to avoid such kind of business registration.
Difficulty in Raising Funds for the Business
Every type of business requires funds in order to run in the market. Without having sufficient funds a business cannot survive in the market for a longer duration. There are many ways of fundraising like dividends, loans, investors, IPO etc. But most of them are not applicable on the sole proprietorship firms. Also due to the lack of reliability, credibility and transparency sole proprietorship firms are having very less trustworthiness hence people think twice before investing in such kinds of entities. This is one of the reasons to avoid a sole proprietorship firm.
Lacks in Management and Operations
In the proprietorship firms entire things are in the control of the proprietor. He has to look after everything with respect to the firm’s operation as well as management. This makes him overburdened. Due to overburdened nature it’s difficult for such kinds of entities to survive for a long term in the market among the competitors. As both the management and operations are in the hands of the proprietor of the business, it makes both of them deficient. These firms are lacking in the management and operational activities of the business. Lacking two of the most important things for the business makes their survival chances less in the market. Hence it has been suggested to avoid your business as a sole proprietorship firm.
Less Business
If you see the firms like Private Limited Companies, Limited Liability Companies, One person Companies, Public Limited Companies, etc, you come to know that these companies are more trustworthy and customers choose them over sole proprietorship firms because of their transparency. All the documents of such firms are available publicly. Not only documents but also the important information, that too on the Ministry of Corporate Affairs which is a government source. There is nothing like that with the proprietorship firms. Because of this it’s difficult for the customers to trust such entities and they will choose other types of business entities over sole proprietorship firms. All this ultimately results in less business. This is also among the key reasons to avoid a sole proprietorship firm.
Lack of Continuity
As mentioned many times above that sole proprietorship firm solely depends on the proprietor of the firm, its continuity also depends on the same. Business entities like Private Limited Companies, Limited Liability Companies, One person Companies, Public Limited Companies, etc, have perpetual succession. It means companies will survive for the time immemorial. If every single person of such entities dies, they will still survive. On the other hand in the sole proprietorship firms the day the proprietor dies the sole proprietorship firm will dissolve. That is why it has been said that sole proprietorship firms lack continuity. Due to this it has been suggested to the business owners to avoid running business in such a form.
Disadvantages of the Sole Proprietorship Firms
Some of the key disadvantages of the sole proprietorship firms are mentioned below. These are the key disadvantages which forms reasons to avoid a sole proprietorship firm:
- The proprietor is personally liable for all activities and debts of the business, with no legal separation between personal and business assets.
- Sole proprietorships face challenges in obtaining credit or loans due to the lack of formal registration and a separate legal identity.
- As the business is intricately tied to the proprietor, selling or transferring the business can be challenging, and the firm may cease to exist in case of the proprietor’s demise.
- Unlike registered entities, sole proprietorship lacks the transparency that comes with public registration, making it less reliable and credible in the eyes of consumers.
- Sole proprietorships are generally suitable for small, localized businesses, limiting their potential for expansion beyond a specific area.
Conclusion
Opting for a sole proprietorship firm comes with significant drawbacks, making it less favorable in the contemporary business landscape. The unlimited liability of the proprietor, difficulty in raising funds, management and operational deficiencies, limited business due to lack of trustworthiness, and the inherent lack of continuity are compelling reasons to avoid a sole proprietorship firm. Other forms like Private Limited Companies, Limited Liability Companies, and Public Limited Companies offer more reliability, transparency, and trustworthiness to businesses and consumers alike. As a result, entrepreneurs are advised to explore alternative business structures that provide better prospects for growth, sustainability, and long-term success in the competitive market.
