Sole Proprietorship Disadvantages
Sole Proprietorship Disadvantages in India
A sole proprietorship is one of the most common types of business entity in India. The lack of procedure for Sole Proprietorship Registration and minimal compliance requirements make sole proprietorship an ideal entity for small business in India. However, with the introduction of LLPs and OPC in India, increasing legal awareness and organisation of industries / businesses in India by the Government, more and more entrepreneurs are opting for LLP or Private Limited Company or One Person Company. In this article, we review some of the major disadvantages of a sole proprietorship firm in India.
A Sole Proprietorship is owned and managed by the Proprietor. The Proprietor alone is responsible for management of the sole proprietorship and is responsible for all business transactions of the proprietorship firm. Transfer of ownership or passing down of business as a going concern to his/her legal heirs is also a cumbersome process in a Proprietorship as many of the licenses or registrations in the name of the proprietor cannot be transferred.
In a sole proprietorship firm, there is no distinction between the capital of the proprietorship firm and the proprietor’s funds. Therefore, the funds of the proprietor and proprietorship are one and the same. Sole proprietorship’s also cannot raise equity capital or have partners. Also, banks and financial institutions lend to proprietorship only after a thorough due-diligence as there is no distinction between the assets of the business and the assets of the proprietor. Therefore, the fund raising ability of a business run as a proprietorship firm is severely limited.
A sole proprietorship firm is not considered to be a separate legal entity. The assets and liabilities of the sole proprietorship and the proprietor are considered one and the same. Therefore, the proprietor is held personally liable for the liabilities of the sole proprietorship firm. This exposes the Proprietor to unlimited liability from the business, whereas in a LLP or a Private Limited Company or One Person Company, the liability of the Proprietor is limited to the capital.
A proprietorship business doesn’t have continuity as it legally comes to an end with the death or incapacitation of the proprietor. Therefore, the business continuity or duration of a sole proprietorship firm is limited unlike a LLP, Private Limited Company or One Person Company.