Hi I am preparing for CA exam. I want to know, What are the advantages and disadvantages of proprietary firms?
Easy Formation : Proprietary firm is easiest and economic form to create and operate as it can be started by any person without any legal formalities. Also there is no set limit of minimum or maximum number of persons to start the business as it can be started by a single person.
Advantages of proprietary firms: 1. Easy Formation : Proprietary firm is easiest and economic form to create and operate as it can be started by any person without any legal formalities. Also there is no set limit of minimum or maximum number of persons to start the business as it can be started by a single person. 2. Better Control : As the owner is the single person so he has full control over his business. His total authority over his business gives him the power to plan, organize, co-ordinate the various activities. The sizes of such firm are generally small which also makes it better to control. 3. Quick Decision Making : Being the only owner of the business the sole trader takes all the decisions himself. He evaluates all the opportunities available and finds the solution to problems which makes decision making quick. 4. Flexibility in Operations : One man ownership makes it possible to bring flexibility in the operations of the business. 5. Personal attention to customer needs : Due to the small geographical area it becomes easy for the sole proprietor deal with all its customers personally and knows their needs. Thus it makes easy for him to pay special attention to consumer needs. 6. Creation of Employment : Proprietor firm facilitates self employment and also employment for many others. It promotes entrepreneurial skill among the individuals. 7. Equal Distribution of Wealth : Proprietary firm is generally a small scale business. Hence there are many opportunities for individuals to start their own business enabling widespread dispersion of economic wealth. 8. No Legal Formalities required : A proprietary firm is not required to comply with all the legal and procedural formality. Disadvantages of Proprietary Firms: 1. Unlimited Liability : In such firms the liability of the owner is unlimited as the owner takes more risk to earn more profits and increase the volume of his business by supplying his personal assets to the business. 2. Limited Financial Resources : Being the single owner of the business, the availability of funds from various sources is limited. 3. No Legal Status : The existence of business is due to the existence of sole proprietor. Death or insolvency of the sole proprietor brings an end to the business. 4. Limited Capacity of Individual : An individual has limited knowledge, set of skills due to which his capacity to undertake responsibilities, his capacity to take quick decisions and bear risks are also limited. 5. Transferring of business is not easy in the case of Proprietary Firm. 6. Higher Taxes: As the sole proprietor is the direct person enjoying the profits thus he needs to pay higher taxes.