Question

Demerits of a sole trading concern. Explain.

Answer 1

1. Limited capital: The resources of a sole proprietor are limited. He depends only on his personal resources and his borrowing capacity. The borrowing capacity depends on his assets and creditworthiness. The financial resources of a single person will be insufficient for business expansion. Therefore, the size of the firm remains small.
2. Limited managerial ability: The managerial ability of a sole trader is limited because a person may not be an expert in every field of business such as purchasing, selling, accounting etc. The sole proprietor may not be able to use the service of experts for want of resources. The limited managerial capacity may hinder the growth of the business.
3. Unlimited liability: The unlimited liability of a sole proprietor may affect his enthusiasm and restrict introducing novel ideas in business.
4. Short life: Anything which affects the personal life of a sole trader affects his business also. Prolonged illness or death of the sole trader brings the affairs of his business to a standstill. If his children are interested and efficient to run the business, the sole trader business can be continued. Otherwise, it will be closed. The closure of a business will cause inconvenience to the consumers and may also result in social loss.
5. Hasty decisions: Decisions arrived at, – after deep deliberations and discussions are sure to be better than that of a decision taken by one man. The chances of wrong decision-making are quite high in a sole trader business. This is because of the fact that the sole trader takes all decisions of the business himself without any assistance. This may lead to wrong decisions which may result in loss and affect the sole trader.
6. Lack of specialization: The sole trader has to undertake all the work relating to business himself such as buying, selling, accounting, financing, advertising, etc. It would be difficult to avail the services of experts in his business because of small resources. So, the benefits of division of labour and specialization cannot be obtained in this type of business.
7. Uneconomic size: Because of limited capital and skill, the sole traders have to work on a small-scale basis. Thus he is deprived of economies of large-scale operation.
8. Lack of consultation: He has no one else to consult before taking any important decisions except his family members. This may result in a heavy loss if his decisions go wrong.