Question

Explain the merits and demerits of Sole Proprietorship form of business organization. 

Answer 1

Merits:

• Ease of formation and closure: Like sole proprietorship, the partnership business can be formed easily without any legal formalities. 
• More funds: In a partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amount of funds as compared to a sole proprietor and undertake additional operations when needed. 
• Sharing risks: The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners. 
• Secrecy: A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations.

Demerits:

• Limited capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form. 
• Lack of continuity of business: A partnership firm comes to an end in the event of death, lunacy or retirement of any partner. Even otherwise, it can discontinue its business at the partners. At any time, they may take a decision to end their relationship. 
• Lack of public confidence: There is no governmental supervision over the affairs of the business of a partnership and publishing accounts is also not necessary. Hence, public may not have full confidence in them.
• Unlimited liability: The liability of each partner is not limited to the amount invested but his private property is also liable to pay the business obligations.