by ARC IDEA CO

Created on: December 20, 2008

Understanding Sole proprietorship
Sole proprietorship is also in a simpler term known as proprietorship is actually a business that in legal perspective co-exist with the sole proprietor which is the business owner. In some countries, sole proprietor is also known as sole trader and he or she has no partners. The business will only comes under one owner and one name and that individual is not a corporation which enjoys the limitation of liability like the Private Limited or Liability Limited Company (LLC) in United States of America. The registered person as the sole proprietor will be essentially responsible for all company's debts.

The disadvantages of Sole proprietorship
1. Difficulty in raising capital
Sole proprietorship being a business owner a person's legal name will more likely to experience the difficult in raising capital for the business as the company shares is not allowed to be sold as compared to LLC or Private Limited Companies.

Apart from the inability to raise capital through public or private offering, this type of business will also encounter the difficulty in getting loans from Banks or Financial Institutions. Being registered as sole proprietorship is not allowed to be granted a floating charge which is a vital requirement for loans and financing.
2. Difficulty in hiring
Apart from the level of difficulty in place to raise fund for the business, getting employees can also offered some barrier for sole proprietor as this type of business will enjoy unlimited liability, so when the business is sued, the proprietor will personally answers for it in financial sense. So employees which are generally looking for stability could think twice before join a company that is sole proprietorship based as the business life is uncertain as the business could wind up anytime when the owner felt that there is a need to cease the business or the owner passed on, the business will not exist when the owner is gone.

3. The risk of business growth
When the business under a sole proprietor is doing well, it tends to grow and accompanying it is business risks. The risks of sudden tightening of cash flow can led to insolvency and debts and the risks will all goes to the sole proprietor. In order to minimize such risks, it is usual for sole proprietor to form a corporation. In United States of America, the sole proprietors can have that option to form a Limited Liability Company (LLC) while in some jurisdiction, corporation is known as Private Limited Company. Being a LLC

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