Risks in Sole Proprietership

Among some new entrepreneurs, especially those who consider themselves fairly well educated or already knowledgeable in their business, the temptation to “go it alone” can be strong. It can allow ease of starting up, since only minimal licenses are required, as well as of operation, so tax simplicity and other factors may be a consideration as well. In reality, however, a majority of enterprises either start off or transition into other kinds, and we will see why below.

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1. Unlimited Liability:

The first and most important disadvantage of a Sole Proprietorship is the unlimited liability that can be claimed by creditors against the proprietor. This arises from the fact there is no distinction between the business and the individual himself. Thus, if the business is unable to fulfil any and all of its outstanding financial obligations, these can and will be demanded from the proprietor, in exactly the same way as any other individual who had incurred debts and was unable to pay them off.

2. Raising Capital is difficult:

Another difficulty many proprietors face is that of raising capital from private equity, Angel investors and other such ventures. The proprietor relies almost entirely on his capital and on borrowed funds to grow the business, as well as reinvested equity from retained earnings. Even banks do not generally lend much to proprietorships as such, and subject them to a more rigorous screening process than they would most corporations. This creates difficulties once the business is grown, and gradually as pressure mounts these factors impel the proprietor to convert his business into a partnership or corporation.

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3. Lack of Financial Controls:

Typically, a proprietorship is managed in a less rigorous manner than other companies. The looser structure of a proprietorship won’t require financial statements and maintaining company minutiae as a corporation. The lack of accounting controls can result in the owner being lax about financial matters, perhaps falling behind in payments or not getting paid on time. This can be a serious issue if financial controls are not strictly managed.

4. Growth Potential is less:

This is the other side of the coin when it comes to working alone or almost alone, especially if business is carried out without an office and from home. Without any less-skilled employees to delegate most of the day to day work to, an immense workload is placed on the proprietor. He may have to work all through the day, have little time off for family, vacations etc. Moreover, some routine tasks which require effort throughout the day may be better suited to lower-skilled employees.

5. Lack of continuity:

Since for all purposes and intents, the business is considered to be practically identical to the person himself or herself, proprietors suffer from lack of continuity in the event of sickness, death, default or disinterest among a variety of other factors that can lead to its simple discontinuation. Sometimes, a married couple starts a proprietorship, with one person assuming liability, and in the event the original owners are not interested anymore in carrying on the business, it is either left to heirs, or in some cases may be sold.