Solution:

Disadvantages of Sole Proprietorship:

• (1) Unlimited Liability :

  • The unlimited liability of the single proprietor is a great disadvantage to him; because business debts run against his entire property and not merely against the amount invested in the business.

  • This discourages the risk-taking instinct of the entrepreneur.

• (2) Uncertainty of continuity :

  • Continuity of the sole proprietor’s business is difficult to maintain.

  • When the proprietor dies there is no guarantee for the continuity of the business; because there is no legal obligation to continue the same concern.

  • The legal heir of the proprietor may lack requisite qualities or may not have any liking for the same business.

  • With the result, the business may come to an end. There is also no legal obligation that once a business is started, it must be continued under any circumstances.

  • Thus, the continuity of the business solely depends on the sole proprietor and his legal heir.

• (3) Diseconomies of Small Size :

  • A small scale firm cannot economies in purchase, production and marketing. In a sole trader’s concern, overhead cost is also more.

  • Thus, a sole proprietorship firm suffers from diseconomies of small scale and is not in a position to compete with the large-scale organizations having economies of large-scale.

• (4) Limited Financial Resources :

  • A single individual normally does not posses enough capital.

  • His borrowing capacity is also limited. Therefore, a soil proprietorship firm suffers from lack of financial resources.

  • Consequently, it has to confine its activities within a limited range.

• (5) Limited Managerial Ability :

  • The limitation of managerial ability is a glaring as that of capital.

  • An individual, howsoever, capable and qualified may be cannot manage all functions of the business. He is not supposed to posses knowledge of all the functional areas of the business.

  • Moreover, because of the small size of the business and limited financial resources available to him, he may not be in a position to appoint expert managers.

  • Thus, in the modem competitive world of business where different aspects are managed by experts, sole proprietor’s concern likely to suffer from stagnation in the absence required managerial ability.

• (6) Limited Growth :

  • Growth is a normal rule of life. A business firm is bound to grow in size; as it is a living organism.

  • Practically, due to the limitations of capital and managerial ability as discussed above, the growth of the sole trader’s business is affected adversely; it is never in a position to bloom fully.

Suitability :

• The foregoing description reveals that sole proprietorship or one man control is the best in the world if that man is big enough to manage everything.

• But such a person does not exist. Therefore, sole proprietorship is suitable in the following cases:

  • (i) Where small amount of capital is required, e.g., sweet shop$, bakery, newsstand, etc.

  • (ii) Where quick decisions are very important, e.g., share brokers, bullion dealers, etc.

  • (iii) Where limited risk is involved, e.g., automobile repair shop, confectionery, small retail store, etc.

  • (iv) Where personal attention to individual ‘tastes and fashions of customers is required, e.g., beauty parlour, tailoring shops, lawyers, painters, etc.

  • (v) Where the demand is local, seasonal or temporary, e.g., retail trade, laundry, fruits sellers, etc.

  • (vi) Where fashions change quickly, e.g., artistic furniture, etc.

  • (vii) Where the operation is simple and does not require skilled management.