The Challenges and Prospects of Sole Proprietorship

The Challenges and Prospects of Sole Proprietorship

This chapter discusses the relevant literature under the following sub-headings:

Nature/Definitions of sole proprietorship

Advantages of sole proprietorship

Disadvantages of sole proprietorship

Challenges of sole proprietorship

Prospects of sole proprietorship

Nature/Definitions of Sole Proprietorship

Some call it sole proprietorship while other say it is one-man business. Some defined it as an owners founded enterprise, whether industrial, commercial, or service oriented that employees fewer than N500 workers investing not more than N30, 000 and it is not dominant, in its industry. According to the Central Bank of Nigeria, it is any business whose annual sales volume and turnover is less than N50, 000 and employing less than 10 workers due to its single ownership and loan character.

Nwana (2002:15) in his fundamentals of small scale business management quoted that small scale business Act of 2000, passed by Congress of United States fo America, which defined small business as “one which independently owned and operated, not dominant in its field of operation”.

Eeifedigbo (2014:9) in his introduction to business management defined sole proprietorship as the oldest form of business organization and it is simple to organize.

The following terms are therefore emphasized in all the definitions:

1. Ownership
2. Financing
3. Policy control

They rest on one individual, the entrepreneur himself in other word, the sole proprietor is directly responsible for ownership, financing, policy formation, management and to a very good extent, personal involvement in actual operations of the business system and procedure and he does this by trial and error which is most cases results in taking irrational decisions that impact negatively on their business ventures.

Small scale business in Nigeria is dominated by sole proprietorship. Sole proprietorship operates on the principle of the capital economy, competing among themselves and with other forms of business organizations.

Adams Smith (2002:30) in his wealth of nation observed that “an economy is best regulated by the invisible hand of competitor”. According to him competition among firms would ensure that consumer gets the best possible produce and prices since the less efficient producers would eith gradually fizzle out of market place or they work hard to improve in order to survive.

Therefore, there is need for services planning before an entrepreneur start his business, lack of adequate planning can easily lead to a complete collapse just like any other business.

Effectively planning presumes realistic forecast of profit in a relatively sufficient time period considering the adequacy of investment input. In planning a sole proprietorship business therefore, the entrepreneur must have a clear account recording, merchandizing, plans, business location, potential customers, recruitment of the best but cheapest local workforce, material mobilization, formulation, advertising and promotion, strategies, inventory valuation methods and general method of operation. A comprehensive business plan is therefore ideal for a vision of his proposed firm before operation starts.

Baum Back (2003:4) in his book, basic small business management, describes area of activities of most sole business as follows:

1. Industrial concerns which includes: farming, mining, block industries/furniture, engineering and construction.
2. Commercial concerns such as: Banking, insurance, retailing.
3. Service industries such as: Health services, educative, hair dressing, entertainment, accounting and other professional services.

According to Ezeifedigbo (2004:9) sole proprietorship is characterized by the following. In this type of business:

1. The proprietor provides all the capital required to carry on the business.

1. The proprietor provides the initiative, controls all the business and retains all the profits arising from the business.
2. The owner takes all the risks and bears all the losses sustained in any bad year.

• Advantages of Sole Proprietorship

Ezeifedigbo (2004:9)

1. It is easy to start with minimum cost and no legal intricacies.
2. All profits made belong to the entrepreneur just as losses are borne by him.
3. Sole trading business pays no tax; unlike statutory the owner only pays personal income tax.
4. The business can be liquidated easily if problem arises just as it was stated.
5. Decisions can be taken quickly since the owner does not need to consult anybody.
6. The owner enjoys privacy in the matter of his business affairs.
   • Disadvantages of Sole Proprietorship in Business Organization are:
7. There are unlimited liabilities of the owners.
8. The business lack originality in that the owners may not be able to get expert ideas that may be needed I running a modern business.
9. There is no continuity in the business as it may die with the owner in that there may be nobody who can carry on the business after the death of the owner.
10. Insufficiency of capital is one of the major drawbacks of this form of business.
    • Challenges of Sole Proprietorship

Unlimited Liability: Sole proprietorship has faced responsibility for the business. If the company incurs substantial debts or legal issues, the owner is personally liable. If the business goes down, the sole proprietor risks losing personal assets like houses, cars or bank accounts.

Assuming multiple roles: Although many owners enjoy the complete control of a sole proprietorship bring some initially overlook the challenges of assuming multiple role, finances, advertising and promotion, operations, scheduling and more all up to the owner.

This requires steller organization and multitasking ability.

Record Keeping: Sole proprietors frequently overlook the importance of maintaining organized financial records. They neglect to create an efficient system that tracks invoices, receipts and tax information, without this, the viability of the business record and retain spending control a more likely to have success.

Raising Capital: Sole proprietorship must generate enough finding to remain operational and to capitalize upon market developments. However, obtaining capital can be difficult for a sole proprietor. Lenders are often reluctant to finance this type of business because their investment could be lost if the owner dies or becomes disabled. Banks also provides loans to owners who can demonstrate positive business growth for a minimum of three to four years.

Health Insurance: Many sole proprietors lack adequate health insurance due to cost and changing plan structures. Also, premium cannot be deducted directly from business income; they are only partially deductible as an adjustment to income.

Free Time: Sole proprietors typically spend so much time running their business, minimal opportunities is left for recreational pursuits because a day to day proprietorship to schedule time off.

Decision: Sole proprietors are full in control of every aspect of the business. Sole proprietorship that don’t have managers or other employees to provide feedback may increase the chances that bad decisions can be made. If a sole proprietor is a struck making an important business decision in an area in which expertise is lacking, the business may suffer. Business that has multiple owners may consider multiple view points before reaching a final decision.

Tax Concerns: Sole proprietors may ne required to make estimated tax payments four times a year. If the sole proprietor fails to make their estimated tax payments, internal revenue service may penalize the sole proprietor. In addition, the sole proprietor will have to pay self employment taxes if the business earnings exceed.

Life: A sole proprietorship will automatically end if the owner dies, decides to retire or sell the business. This is in contrast to a corporation or an LLC (which may have unlimited life in the state of taxes. When the owner of sole proprietorship passes away, the business assets are included in the deceased owner as stated in the reference of business website.

Furthermore, transactions that occur where the sole proprietorship adds more owners will cause the sole proprietorship to automatically dissolve.

• Prospects of Sole Proprietorship

Prospects are those factors cum opportunities that help to accelerate the growth of sole proprietorship and catapult it to enviable height. These factors include:

Evaluation of ideas: New products ideas come from analysis of competition, company sources other than research development; consumer research, consumer suggestions. In order for a proprietor to sustain existence he has to continuously develop new ideas, in other to compete with others. Thus he/she has to achieve that by embarking of research always.

Motivation: Which is the drive to satisfy one need, and is one of the factors that will ensure the survival of business. The most important person to motivate of course is you. Motivation can grow and change to pottery just out of desperation to make a living and then ends up some years later with a highly successful outfit selling all kinds of products.

Resources: Which constitutes things one need e.g. equipment, materials, cash. These factors are the key ingredients of any business venture. In order to combine these factors into a business, one needs to plan to clearly identify the skills, resources and customers needed.

The Ability: The skills one acquires are relevant in starting a business. Also see whether the skills are relevant to your ideas. One has to be technical, i.e. being able to make and design your product, and managerial (i.e.) one has to be able to organize the shops, promote account for the business transaction and also keep it going.

• Other prospects of sole proprietorship could be:

3. There is the need for cooperation between government and individuals even though government may be the highest employee; the government cannot provide enough employment for all citizens.
4. Sole proprietors through their activities contribute to national development; as a result, the government will continue to support them so that they will continue their development activities.
5. Innovation is an important feature that brings about growth and development by bringing good life to the people. Thus every government will support any venture that could lead to the emergency of better ideas.
6. Various governments’ policies and programmes have been giving support and encouragement to sole proprietors. These include the Nigeria Enterprises Promotion Decree, the establishment of National Economic Reconstruction Fund (NERFUND), the National Directorate of Employment (NDE) among others. It is hoped that such support and encouragement would continue in future, this will result in a promising for sole owners.
7. With the policy of government to change the value system of Nigeria to prefer locally made goods to foreign ones, a growth in the activities of the sole proprietorship are envisaged.
8. The increase in bank capitalization, the problems of securing capital for entrepreneurial activities is reduced.
   • Summary of Literature Review

Sole proprietorship in business organizations has already been emphasized. Though it has been narrowed ot challenges and prospects of sole proprietorship in business.

The main focus of this research is to know the  challenges sole proprietors encounter, the prospect and the role it play in an economy, which has been briefly stated above.

The sole proprietorship is the oldest and simplest form of business operated by one person whose aim is to make profit. Most of present private business started as sole proprietorship due to easy formation, many types spring up everyday, and some grow just few weeks or months and collapse due to number of factors. Some grow into conglomerate which at last taking over to public cooperations.

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