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Question
Write short answer of the following.
State the demerits of proprietorship.
Solution
The following are the limitations of a sole proprietorship:
i. Limited capital: The financial resources that are available to a sole proprietor are limited to his/her personal savings and the borrowings that he/she can raise from relatives and friends. Thus, the scope of enlarging its capital falls short.
ii. Limited managerial abilities: A sole proprietor manages all core functions by himself. Being the sole owner, he/she has limited skills, imagination and energy. As a result, he/she cannot perform all managerial functions single-handedly.
iii. Uncertain life: The life of the sole proprietorship business is uncertain as it is adversely affected in the event of death, insanity, bankruptcy or physical ailment of a sole proprietor.
iv. Unlimited liability: The liability of a sole proprietor is unlimited. If the proprietor fails to pay the debts of the business, his/her personal property can be used to pay the debts.
v. Unsound business decisions: A sole trader takes all decisions himself/herself. As a result, the probability of taking wrong decisions is quite high.
vi. Lack of specialisation: A sole proprietorship has limited resources. As a result, the proprietor may not be able to employ specialised employees to handle specific business operations.
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