Question

A sole proprietor has total control of the decision making over the business. Selling and transfer the business can take place at the readiness of the sole proprietor. Sole proprietorships have no corporate tax payments and have minimal legal costs when forming. There are few formal business requirements for creating one.

However, a sole proprietor is fully liable for the debts and obligations of his business. The risk includes any liabilities incurred as a result of acts committed by employees of the company. Every responsibility and business decision is in the hands of the sole proprietor. Investors are not prone to invest in sole proprietorships because the risks sometimes outweigh the financial rewards. discuss

Answer 1

Before discussing the statement, let's understand what a sole proprietorship is and its basic features.

Sole proprietorship is one man army. The entire business is owned, controlled and managed by one person, therefore the name 'sole proprietorship'.

The features of sole proprietorship are:

1. Single business entity: No distinction is made between the business and the owner. They are one and same.

2. Unlimited liability: this implies that, in case a business suffers losses, the private assets of the proprietor can also be used to discharge the debts of third parties.

3. All Profit/Losses go to the proprietor: As the proprietor is the sole owner, manager of the business, he enjoys all the profits but also suffers the losses incurred.

4. Simple form/less formalities: sole proprietorship can be started with less formalities. There is no need of registering in the initial phase.

Thus, these are basic features of sole proprietorship.

Let's now discuss the statement, "Investors are not prone to invest in sole proprietorships because the risks sometimes outweigh the financial rewards."

Sole proprietors usually start their business from personal funds such as saving. Due to the structure of the business, sole proprietors generally aren't able to attract funding from investors.

Investors usually invest in businesses or organizations whereby they would get a stake in equity in exchange. But, if more than one person get ownership right, then the business no longer remains sole proprietorship.

Investors, banks and other lending institutions are much hesitant in finding sole proprietorship. Unless,a business has a proven record of success, it is difficult to get funding.

Also, there are other problems like single business entity. If anything happens to the sole proprietor, then the viability of the business comes at stake. With the death of proprietor, the death of business too comes into the picture.

There is a lot of risk involved. As the size of the business grows, so does the risk. Large size may also require more staff and if the staff is negligent, then the business suffers.

Thus, there is more chance of risk than reward.

I hope the statement is clear. For more queries, pl comment. Thanks.