What are the merits and demerits of sole proprietorship?

Easy to start and dissolve:

A sole proprietorship can be set up easily and quickly. No legal formalities and expenditure are involved in the establishment of a proprietorship. There is no need to associate others or to enter into any agreement.

Only a license may be needed in special cases. The proprietor can start business operations as and when he desires. Similarly, a sole proprietorship can be closed down very easily and quickly.

Motivation to work:

The proprietor alone is entitled to receive all the profits of busi­ness and he alone has to bear all losses. There is a direct relationship between effort and reward.

Therefore, there is an incentive to work hard. The proprietor is motivated to make the best possible use of his skills and resources to maximise profits.

Quick decisions:

The sole proprietor is completely free to take decisions and to imple­ment them. He need not consult others or seek their approval. Quick decisions and prompt actions help to improve the efficiency of business operations.

Independent control:

The sole proprietor enjoys complete freedom of action. No legal formalities are to be complied with and there is no government interference in day-to- day operations.

Retention of business secrets:

The sole proprietor can keep the secrets of his business to himself. These secrets are not known to competitors or others.

Personal contact:

A sole proprietor is in a position to maintain intimate contacts with his customers and employees. He-can cater to the requirements of each and every customer. Close personal touch increases the competitive strength of the business.

Flexibility:

A sole proprietorship is small in size and has a simple management struc­ture. Therefore, it can be adapted easily to suit the changing conditions in the market. The line of business can be easily changed or modified.

Economy:

The management of proprietorship is inexpensive. As the proprietor himself is the manager, cost of management is very low. Borrowing capacity is high due to the unlimited personal liability of the owner.

Social utility:

Sole proprietorship provides an opportunity for gainful self-employment to persons with limited money. It offers a way of earning an honourable living to those who do not want to work under others.

It also facilitates equitable distribution of income and wealth. It leads to the development of personal qualities such as self- reliance, initiative and responsibility.

Demerits:

Sole proprietorship suffers from the following drawbacks:

1. Limited capital:

The financial resources of a proprietor are very limited. His funds are not adequate enough to start large-scale operations.

2. Lack of specialization:

The managerial ability of the proprietor is limited. All the qualities such a judgement, wisdom, etc. required for success in business are rarely found in one person the proprietor is overburdened with too many tasks.

He may commit errors of judgement and his decisions may be hasty. Sole proprietorship cannot afford to employ professional experts. As a result, the benefits of division of labour are not available.

3. Unlimited liability:

The proprietor is personally liable for all the losses of business. Fear of loss of personal property due to failure of business makes the proprietor very cautious and conservative. As a result, the business may fail to grow and keep pace with new developments in its particular field.

4. Uncertain life:

Sole proprietorship does not enjoy continuity of existence. It is depen­dent on the life of the proprietor. Business may come to a standstill due to the illness, insolvency and death of the proprietor. His successors may not be capable enough to carry on the business successfully.

5. Limited scope for expansion. Due to limitations of capital and management, propri­etorship business cannot grow and expand to a large size. Its goodwill and bargaining position are also weak.

Thus, one man control is the best in the world provided the man is big enough to manage everything. But such a man is not available. Therefore, sole proprietorship is suitable only for small and simple businesses.