Disadvantages

This is probably the most important disadvantage of a sole proprietorship. Since you own and operate the business, make all the decisions, and take all the profits, you and the business are viewed as one entity. There is no legal distinction between you and the business, and therefore you are liable for all its debts. If, for example, one of your vehicles is in an accident, seriously injuring someone, all of your assets are at risk. Only by having adequate and expensive insurance to prevent this from happening.1

In short, the company’s debts are the owner’s debts. Laws vary from one state to another, but most states require creditors to leave the failed business owner a minimum amount of equity in a home, a car and some personal items.2

2. Difficulty in raising capital.

All businesses need money to operate and to grow. Some may also need a great deal of money to purchase inventory for seasonal variations. For example, the Christmas season may account for 90 percent of your store’s year sales. Thus you will have to spend a great deal of money to accumulate inventory in anticipation of seasonal sales because the money to cover these purchases will only be generated at the end of the peak selling period It may be extremely difficult for a single person to already have, or to borrow, a large sum of money. Because only you can raise money, the amount of funds available is strictly dependent upon your assets. If you are not already wealthy, your ability to borrow is restricted.

3. Maintaining the overall direction of your business.

As the business expands, it becomes more complex and therefore quite difficult for one person to retain overall control in order to provide the necessary direction.3

4. Lack of continuity

If the proprietor dies, retires, or becomes incapacitated, the business automatically terminates. Unless a family member or employee can take over, the business could be in jeopardy. If no one is trained to run the business, creditors can petition the court to liquidate the assets of the dissolved business to pay outstanding debts.

5. Limited Skills and Ability.

A sole proprietor may not have the wide range of skills running a success business requires. Each of us has areas in which our education, training, and work experiences have taught us a great deal; yet there are other areas in which our decision-making ability is weak. Many business failures occur because owners lack skills, knowledge, and experience in areas that are vital to business success. Owners tend to push aside problems they do not understand or do not feel comfortable with in favor of those they can solve themselves. By the time an owner decides to ask for help in addressing these problems, it may be too late to save the company.4

6. Feelings of isolation.

Another factor to be considered is one’s own need for affiliation. This personality characteristic has been found by researchers to be dominant in most entrepreneurs. The high need for affiliation is common for entrepreneurs regardless of the type of enterprise. It can be very lonely running one’s own accounting business without some form of peer affiliation.5

Since there is no one to turn to for help in solving problems or getting feedback in a new idea, most small business owners know that they have nowhere to turn for advice or guidance. The weight of each critical decision rests solely on the proprietor’s shoulders.6

1 Small Business Management: a planning approach - Joel Corman and Robert N.Lussier

Times Mirror Higher Education Group, Inc. Company (1996) P.28-29

2 Effective Small Business Management : an entrepreneurial approach (Seventh Edition) - Norman M. Scarborough, Thomas W. Zimmerer

Upper Saddle River, N.J. : Prentice Hall (2003) P.67-72

3 Small Business Management: a planning approach - Joel Corman and Robert N.Lussier

Times Mirror Higher Education Group, Inc. Company (1996) P.28-29

4 Effective Small Business Management : an entrepreneurial approach (Seventh Edition) - Norman M. Scarborough, Thomas W. Zimmerer

Upper Saddle River, N.J : Prentice Hall (2003) P.67-72

5 Starting and Building Your Own Accounting Business (Third Edition) - Jack Fox

John Wiley & Sons, Inc. (1999) P.33

6 Effective Small Business Management : an entrepreneurial approach (Seventh Edition) - Norman M. Scarborough, Thomas W. Zimmerer

Upper Saddle River, N.J. : Prentice Hall (2003) P.67-72

P.14